I was asked during the MarketWatchers LIVE program today about my thoughts regarding Gold v. Dollar and particularly, why I'm bearish on Gold right now. I'll explain.
The chart for Gold is bearish on many counts. First there is the PMO with its "bear kiss" of the signal line and continued decline. The chart pattern that is forming is a bearish double-top. The pattern will be confirmed when price breaks down below the neckline. The minimum downside target is calculated by taking the height of the pattern and extending from the neckline lower. In this case we can see that the target would put price between two areas of support at 1240 and 1260.
I've also added the premium/discounts for PHYS. It's a closed end fund so when investors purchase, they are getting it at a discount or premium depending on the price of the hard assets it is holding. I look at this as a way to measure Gold sentiment. It is considered bearish when you get deep discounts and given sentiment is contrarian, that would be good for Gold. We're just not getting the type of discounts we saw at the end of December so it's just not bearish enough to start looking for a breakout above the last two tops.
As far as the Dollar, I thought it would be interesting to look at the correlation between Gold and the Dollar. As you can see, they are typically in a high inverse correlation; meaning they travel mostly opposite each other. However, there are times when Gold and the Dollar "decouple" from that correlation. Right now they are in a high inverse correlation which means I should expect a rise in the Dollar to result in a drop in Gold. Remember that Gold is tied to the Dollar because its value is in Dollars, so the Dollar can affect Gold. It doesn't work the other way around.
It's pretty easy to see the inverse correlation right now given that Gold is forming a double-top and UUP is forming a double-bottom. Expectation would be a break above the neckline and minimum upside target around $24.15. UUP has a strong PMO that already experienced a bull kiss and continues to rise. Given that, I do expect to see a breakout and execution of the double-bottom on UUP.
Conclusion: Right now the Dollar and Gold are showing a high inverse correlation. Given the bullish Dollar chart, we should expect Gold to continue to fall.
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