Should you be buying gold (NYSEARCA:GLD) right now? With all this crazy market volatility is it a good idea?
If you look at the monthly chart of gold, it's about to complete an inverted head and shoulders pattern. And if it does, we should see prices trend higher.
What's interesting about a break higher in gold is the effect it'll have on the US dollar (NYSEARCA:UUP).
Gold tends to have an inverse correlation with the dollar. If gold is trending higher, then the dollar is trending lower. And vice-versa.
The reason for that is that gold acts like the anti-dollar. It's a safe haven and inflation hedge. So when the dollar weakens, people start moving their money into gold because it's seen as a better store of value.
But for some reason, in this relationship between the two, gold actually tends to lead the dollar. So if gold breaks out here, we'll likely see a leg down in the dollar.
That would kick off a reflexive loop where a weaker dollar encourages even more investors to get into gold. And that'll fuel the gold rally even more, pushing the dollar down even further. And the cycle would repeat.
There're a few other factors working for gold here too, including the relative momentum of US equities (NYSEARCA:SPY) versus emerging markets (NYSEARCA:EEM). When SPY is stronger than EEM, gold tends to fall. But when EEM is stronger than SPY, gold tends to rise.
Right now EEM is outperforming SPY. And this outperformance between emerging markets and US equities over the last 2 years looks very similar to the 99'-01' period, which ended up being the start of a major bull market in gold.
If this analog holds, and emerging market stocks continue to outperform the US, then we should see gold start another bull market soon.
One of the vehicles we're looking at to play this trend is the South African miner AngloGold Ashanti (NYSE:AU). The gold ETF GLD is also an option.
Watch the video above for more details!