Gold Trades Tick-For-Tick With The Dollar
Summary
- An inverse relationship between the greenback and yellow metal.
- The long-term trend suggests a rise above technical resistance for gold soon.
- Higher lows will give way to a higher high.
- Gold is set to shock on the upside.
- An eventual rise to new all-time highs.
Gold reached its most recent high at $1364.40 per ounce on the active month COMEX futures contract on February 16. Gold put in a higher low for 2018 on that date, on January 25 the yellow metal had peaked at $1370.50, which was only seven dollars below its 2016 high.
Gold made a lower high and then dropped to a lower low of $1303.60 on March 1, as it briefly traded below $1309 per ounce, the February 8 bottom on the April COMEX futures contract. In both 2016 and 2017, the low from the first week of the year was the bottom price for those years. To keep that pattern intact on the weekly and monthly charts, gold needed to hold the $1304.60 level which was the nadir on the active month COMEX contract in early January. On the first day of March, gold moved to a level that was $1 below that nadir. Meanwhile, gold has been trading in a pattern that is almost a one-hundred percent negative correlation with the price path of the U.S. dollar index.
The inverse relationship between the greenback and yellow metal
At the very beginning of January 2017, during the week of January 3 the U.S. dollar index futures contract traded to a peak of 103.815 which was the highest level since 2002. The fifteen-year high in the dollar turned out to be the pinnacle of the bullish trend that began at the early 2008 low at 70.805; the index moved higher by 46.6% over the nine-year period.
In early January 2017, while the dollar was at its high, COMEX gold futures traded to a low of $1146.50 per ounce. On Friday, March 2, 2018, the March dollar index futures contract was at 89.93, 13.4% lower than the highs from early 2017. At the same time, April COMEX gold futures were trading $1324 per ounce, 15.5% higher over the same period.
The dollar is the reserve currency of the world and the benchmark pricing mechanism for most commodities, including gold. Even though London is the hub of the international gold bullion market, dealers quote the price in dollars. When the dollar moved to the upside, gold's price tends to decline, and when the greenback drops, gold often rallies on a historical basis. Recently, the relationship between the yellow metal and U.S. currency has strengthened, and gold has been trading almost tick-for-tick with the dollar.
A long-term trend suggests a rise above technical resistance for gold soon
The dollar has been falling since the early 2017 high, and it reached its most recent low one year later in January 2018.
Source: CQG
The pattern in the index on the quarterly chart since 1985 suggest that we are at the beginning of a bear market trend that could take the U.S. currency lower for another six years. The index fell from 1985-1992, for seven years. A nine-year rally followed until 2001 at which point the dollar declined for another seven years until 2008. The most recent rally that took the dollar index to its January 2017 peak lasted for nine years and if history repeats, we could see a trend to the downside that continues until 2024. Meanwhile, gold has been making higher lows on the weekly chart since December 2015. At first, the pattern in gold ran contrary to the dollar as it worked its way to highs, but recently the historical pattern of trading realigned.
Higher lows will give way to a higher high
Gold fell to a low of $1046.20 per ounce at the end of 2015, and the price has never tested that level which turned out to be a bottom for the yellow metal. 
Source: CQG
As the weekly chart illustrates, gold has made higher lows since the bottom in late 2015. The high came in July 2016 at $1377.50 per ounce following the Brexit referendum in the United Kingdom. While gold failed at that level and fell to lows of $1123.90 in late 2016, it established a higher bottom and has not returned anywhere near that level. After making higher lows, COMEX April gold futures traded to a high of $1370.50 on January 25, which was a day when the dollar index fell to a lower low. At the late January high, gold came within $7 of the 2016 peak, and a correction followed as the dollar index bounced back to the 90.855 level on the March futures contract. Last week when the dollar was on the highs, April gold futures hit their bottom at $1303.60 per ounce.
Gold is set to shock on the upside
It may not be long before gold puts in a higher high and trades up to the $1400 level as the dollar continues to languish near its recent low. Since the dollar has declined to oversold territory, it is possible that we will see another correction in gold before it begins to climb. However, on the monthly chart, the trend in the precious metal remains higher. 
Source: CQG
The monthly pictorial shows that gold has been leaning higher since the December 2015 low and it is chipping away at the upside working its way towards a challenge and eventual rise above the technical resistance level at $1377.50. Above there, the March 2014 peak at $1392.460 will stand as the next level for technicians, and if the yellow metal can climb above the $1400 per ounce level, $1428 was the August 2013 pinnacle for gold.
If the dollar's historical pattern repeats and the U.S. currency continues to put in new lows, gold could suddenly shock on the upside as a break above the $1377.50 could trigger trend following buyers that may overwhelm selling in the market. I would not be surprised to see a sudden sharp spike to the upside in the price of gold in 2018, and if that occurs, we could see a challenge of the 2011 record high in the yellow metal.
An eventual rise to new all-time highs
If the moves in cryptocurrencies in 2017 taught us anything, it was that when a market catches fire, it can surprise even the most bullish market participants. Bitcoin moved from $1000 at the start of 2017 and peaked at around $19,000. Gold has been around a lot longer than digital currencies, and during periods of fear and uncertainty in markets, and at times when inflationary pressures are rising, lots of market participants are likely to go for gold. 
Source: CQG
The long-term quarterly chart of gold futures provides the most compelling bullish technical picture for the yellow metal. The price has been rising with increasing open interest and volume. The higher levels of open long and short positions in the gold futures market and increase in trading volumes alongside a rising price trend is typically a validation of the bullish scenario in the gold market at this time.
Moreover, the fact that we could be at the beginning of year two of a bear market in the dollar could be the trigger that sends gold roaring on the upside to a level that is eventually higher than the 2011 peak at $1920.70 per ounce. I would not be surprised to see the price of gold above $2000 per ounce in the next two years based on the trading pattern on the long-term chart, the bearish trajectory of the dollar, and the fears over rising inflationary pressures.
Gold has been trading tick-for-tick with the U.S. dollar, and that is just one factor that could lead to a new high in the precious metal above the 2016 peak sooner rather than later.
IAU is a gold ETF product that does an excellent job replicating the price action in the gold futures market.
Source: Barchart
IAU has net assets of $11.3 billion and trades around 11.5 million shares each day. The unleveraged gold product is likely to trade with the dollar, but the prospects for the future of gold and IAU is shiny and could add lots of luster to your portfolio in the months ahead.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.
He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Disclosure: Long precious metals and their miners!