Gold finally saw a bounce this week, finishing higher by 2.5% or $29. The final trade as of the close on the New York COMEX futures exchange on Friday afternoon was $1,213.
Still, as we referenced two weeks ago, the gold price is being largely influenced by the US dollar these days. That is to say – gold and the US dollar are moving with a strong inverse correlation.
Movements in the dollar, strongly influence the price of gold. When the dollar moves lower, gold raises due to investors looking to hedge against their market investments.
Conversely, when the dollar rises, gold tends to fall. This is not a 1:1 direct correlation, but the relationship is valid often, at least over the short and intermediate timeframe… so it behooves us as investors to pay attention to trends which are thus impacting the US dollar.
What Has Caused the Recent Dollar Surge?
The series of events which have unfolded in recent weeks which have led to a stronger US dollar include:
- Panic selling in the Turkish lira due to unsustainable debt →
- Contagion weakness in the euro due to European bank exposure to Turkey →
- Flight to safety in the US dollar →
- Inverse selling in gold
Agree or Disagree with the Market
It may seem illogical that as two fiat currencies decline (Turkish lira and euro) gold itself falls, but the gold market is primarily focused on the US dollar strength at this juncture. When the dollar value rises, gold tends to have a negative outcome.
We may indeed disagree with this price action (and we do over the long-term: weakness in the pan-European currencies should be positive for the 5,000-year store of wealth, gold, as such demonstrates that no fiat currency is intrinsically safe)… yet the bottom line at this point is the market itself cares more about US dollar strength than anything else.
The market – the sum of all participants currently buying, selling, and trading US dollars – perceives weakness in the euro to be beneficial for the dollar… which is in turn perceived as negative for gold.
This is the reality of the market that now exists in front of us.
We must either learn to live with the market as it exists, or we must move on to other markets.
Here we will stay the course, and attempt to navigate these diverse twists and turns in the precious metals markets as they arise.
US Dollar Long-Term Perspective
It is important now that we pay attention to the long-term perspective of the US dollar. The currency index since 1980 is shown below:
Points to consider:
- The dollar broke its long-term 1985 – 2014 downtrend (magenta color) in Q3, 2014 (red callout). This surge corresponded with the worst of the precious metals decline from 2014 onward.
- Since 2008, the dollar has formed a rising parallel channel (blue). This channel has featured a series of higher peaks and higher lows. The upper boundary of the channel hit around 104 on the index during the 2017 peak. While the lower boundary hit near 88 on the recent 2018 low.
- This rising primary channel must be respected until proven otherwise. It would take a break of the lower boundary below 88 to show us that this channel has been negated and a more sustained decline for the US dollar is underway.
Market Patterns of Instability – Expanding Megaphone
Since the 2015 peak for the US dollar, the price action for the world’s reserve currency has taken the shape of an expanding megaphone pattern. The shape of this pattern is highlighted in green on the dollar chart.
The expanding megaphone derives its name from the resemblance to the loudspeaker seen above: that is, an initial straight handle with a narrow-to-expanding cone shape throughout time.
Expanding megaphones show instability within a market, as the pattern features a series of higher-highs and lower-lows, the sum of which results in the broadening shape.
Higher-highs with lower-lows shows us that neither buyers nor sellers are truly sure of who is in control of a market. There is much indecision as sentiment becomes more and more extreme, both positively and negatively, at each successive new peak or new trough. This is an inherently unstable pattern which tends to result in strong moves in one direction or the other when it finally resolves.
The majority of expanding megaphone patterns, especially when they appear after multi-year advances as was seen in the dollar from 2008 – 2017, are complex topping patterns. They represent final terminal gasps in a market before a reversal occurs. Such would be strongly positive for the precious metals beyond 2019.
In very rare instances, expanding megaphones can represent continuation patterns. In such cases, multiple swings of indecision on both sides terminate with a new trend in favor of the buyers. Megaphone continuation patterns are rare, but they do exist.
Takeaway on the US Dollar Long-Term
The takeaway point is that the dollar is now within the midst of a 3.5-year expanding megaphone pattern, following a 9-year advance. This is an unstable market, as we see positive sentiment for the dollar because the Federal Reserve is raising interest rates to swing to negative sentiment following Trump’s tariff policies followed by positive sentiment again as the dollar returns to a safe-haven status on the breakdown of the Turkish lira.
Seeing this indecision, it is too early to predict which way the dollar will ultimately turn. A break of either the upper expanding megaphone boundary at 106 or the lower channel boundary at 88 will be necessary to resolve this directional battle for good. For the week, the dollar closed toward the middle of the range at 95.
This wide expansive range is what makes the pattern so unstable.
We caution both gold and dollar currency traders that remaining nimble in the present environment will be important. The dollar is still in a rising primary channel, yet showing unhealthy megaphone-type indecision since 2015. This pattern is set to resolve within the next 12 months. Its decision will be key for precious metals in 2019 and beyond.
Christopher Aaron, Bullion Exchanges Market Analyst
Christopher Aaron has been trading in the commodity and financial markets since the early 2000’s. He began his career as an intelligence analyst for the Central Intelligence Agency.
Christopher Aaron specializes in the creation and interpretation of pattern-of-life mapping in Afghanistan and Iraq. His strategy of blending behavioral and technical analysis has helped him and his clients to identify both long-term market cycles and short-term opportunities for profit.
This article is a third party analysis and does not necessarily match the views of Bullion Exchanges. Do not consider Bullion Exchanges as financial advice in any way.
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