Gold flashes a warning signal for currency markets

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July 10, 2019 10:37am NYSE:GDX NYSE:GDXJ

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  • Gold breaks out of a long-term trading range
  • Gold has been appreciating in all of the leading currencies since the early 2000s
  • Currencies are losing value after years of dovish monetary policies

Gold traded in a wide range last week with the August futures contract on COMEX trading between $1384.70 and $1441.00 per ounce. The price settled last Friday at $1400.10, which was closer to the low because of the jobs report that injected a degree of doubt over a rate cut at the July FOMC meeting. The dollar index rose on the week, putting additional pressure on the yellow metal. 

Meanwhile, gold has been shining since the June meeting of the US central bank when Chairman Powell and the other members of the committee took a more dovish approach to monetary policy that lit a golden fuse and sent the price to the highest level since 2013. 

 

Gold breaks out of a long-term trading range

As the price of gold was moving to the upside in June, it faced two formidable levels on the upside. First was the 2018 double-top high at $1365.40, and then the critical level of technical resistance stood at the 2016 post-Brexit peak at $1377.50 per ounce: 

 

 

 

 

 

 

 

Source: CQG.com

 

The monthly chart highlights that the price of gold blew through both levels following the June FOMC meeting. The prospects for lower short-term interest rates sent the dollar lower, which ignited the gold market. Gold had been in a $331.30 trading range since 2014 before it made its move and broke out to a new high in what could be the next leg in a bull market that began a decade and a half ago. 

 

Gold has been appreciating in all of the leading currencies since the early 2000s

 

In 2011, the price of gold found a bottom at $255 per ounce: 

 

 

 

 

 

 

Source: CQG.com

 

 

The chart displays the ascent of the precious metal in US dollar terms:   

 

 

 

 

 

 

Source: CQG.com

 

 

At the same time, gold has moved significantly higher in euro terms:   

 

 

 

 

 

 

Source: CQG.com

 

 

In Japanese yen, gold is within 1% of a new all-time peak: 

 

 

 

 

 

 

  Source: CQG.com

 

And, in Australian dollars, it traded at a new record level in June as it did in the Canadian dollar, Russian ruble, Chinese yuan, and many other currencies. While the path of least resistance of gold tends to be highly sensitive to moves in the US dollar, the rally since the turn of this century has been in all fiat currencies. 

 

Currencies are losing value after years of dovish monetary policies

The various currencies of the world issued by governments all have one thing in common. Values are a result of the full faith and credit of the countries that stand behind the legal tender and print the banknotes. Gold is the world’s oldest currency dating back thousands of years with more than a few prominent mentions in the old testament of the Bible. Gold has been a means of exchange and a store of value long before any of the foreign exchange instruments in circulation today ever existed. Considering that the US dollar is the world’s reserve currency as the USA celebrated its 243-birthday last week, gold has had a lot more staying power than any other financial asset. Moreover, central banks around the globe continue to hold the yellow metal as part of foreign currency reserves, and they have been net buyers over recent years. 

Gold is flashing a bright and shiny warning signal when it comes to the currency markets. It is telling us that the value of currencies is declining, and the price action is a continuation of a trend that began near the turn of the century. The currency markets validate the beginning of the next leg of the bull market in the market that is part currency and part commodity; a hybrid, unlike no other asset the world has ever seen. 

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About the Author 

Andy Hecht is a sought-after commodity and futures trader, an options expert and analyst. He is a top ranked author on Seeking Alpha in various categories.  Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.  Over the past decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities. Aside from contributing to a variety of sites, Andy is the Editor-in-Chief at Option Hotline.

 


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