Gold has been quite subdued since June with some conflicting economic pressures containing it to a relatively tight range. The main aspect impacting the price of Gold undoubtedly is the US dollar. Gold and the US dollar have had an inverse relationship for the past six months or so with weakness in the greenback pushing bullion higher and vice versa. Looking at the US dollar Index, which measures the value of the US dollar against a basket of six other major currencies, we see that it’s trading at critical levels. Two broader patters are obvious in the chart below.
Now looking at the gold chart independently of the Dollar index, we see a wedge formation with a series of higher lows and lower highs constricting the relative price movement in Gold. Although the marginal bias in a pattern like this is to break in the direction of the prevailing trend it’s by no means a forgone conclusion. The only real conclusion that can be made is that Gold is likely to break one way or the other with quite a degree of velocity.
Two trains of thought are evident at this juncture;
- The rise in equity markets have come too far too soon with underlying earnings unable to support the inflated share prices that we’re currently seeing. Equity markets roll over and the US dollar benefits from a flight to safety. This is a bearish scenario for gold which is likely to break below key support of $930 an ounce with a move to $880 likely.
- Equity markets continue to be bullish with the signs of economic recovery filtering through to company earnings supporting higher equity prices. At this stage, traders look towards the fundamentals of the US dollar and view the large quantitative easing strategy (printing money to buy debt) as a negative for the greenback. The US dollar breaks support increasing the appeal of gold as a store of value. Gold is then likely to trade above $1000 an ounce before year end.
Option one is supported by the majority of market commentators – Option two would therefore be going against the crowd – sometimes its better the tread your own path!