Gold Weakens As The US Dollar Strengthens…Again

U.S. dollar has become the world’s safe haven.  This has driven the dollar higher. And the dollar’s up-move has kept downward pressure on gold.

Taking a look at the big picture, however, you’ll see this relationship more clearly.

Chart 1 shows gold and the dollar since 1972 when their relationship really started. Note, they tend to move in opposite directions, and the major trends are up for gold and down for the dollar.

BUT, there are contra-trends, which is where we are today.  The red arrows show the two times, in 1980 and 1995, when gold fell and the dollar rose for about five years.

The current dollar rise and gold decline have been going on since 2011.  It’s been three years in the making.  And the sharp dollar jump in recent months has reinforced this contra-trend. This was further emphasized today when the Fed halted its QE stimulus program.

So will this contra-trend last another year or two?  It could. Could the dollar rise more than gold falls? Yes, it certainly could.  But one thing is clear, the U.S. cannot bear a consistently long lasting strong dollar.

In fact, no country wants a strong currency…and the U.S. is not an exception. This tells us the dollar could turn down sooner rather than later. Perhaps next year will likely be the time for a gold turnaround. In any event, once the dollar resumes its decline, it’ll be very bullish for gold.

GOLD SHARES: Bombed out

It’ll also be a very good sign for gold shares. On a bigger picture basis, gold shares are extremely oversold, the most in years. 

A good example is shown on Chart 2, which compares gold shares to gold.  This ratio continues to bottom at the lower side of a 45 year down-channel!

This is a massive bottom formation and once complete, we should see gold shares explode upward versus gold.

But now that silver and gold shares have broken down, it’s time to revisit our strategy. 

This means, should we ride it through at this point? Should we sell now? Here’s our take on it…

GOLD STRATEGY PLAN

The metals and gold shares have fallen into a good value area based on the big picture.  The bear market is in charge, however, which means we have to stay cautious. 

It’s dangerous to catch a falling knife, but with gold holding at the December lows, while the metals markets are clearly oversold, we’re keeping our positions. 

Gold is our guide for this universe.  If it falls clearly below $1180, which is its final support level, then we’ll lighten up on our positions. Depending on how the market unfolds during this fourth quarter, we’ll adjust our positions accordingly, by either selling some and/or buying more.

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