Did Gold Stop Responding To The U.S. Dollar?

gold AAAPrzemyslaw Radomski, CFA: The recent week was tough for the U.S. currency. Investors avoided the dollar as uncertainty over the U.S. government shutdown and the upcoming debate on the debt ceiling weighed on sentiment. The shutdown, with its suspension of funding for government workers and some programs, could hamper U.S. growth and delay tapering. Therefore, some investors buy gold as a safe haven or alternative to the U.S. dollar on the view that it will outperform other assets during political or economic turmoil. However, looking at chart of gold, it seems that these circumstances have had a limited effect on the gold market.

“(…) Sentiment remains hesitant towards gold, which has been reflected in the market positioning. While the temporary U.S. government shutdown has not proved to be a positive driver for prices, the risk of a debt ceiling breach holds scope to spark interest, in our view, given gold’s response in 2011,” Barclays noted.

In our previous essay on gold price in October 2013 we wrote that the debt ceiling issue came up in 2011. Back then, an agreement was reached only in the last minute and gold hit an all-time high of $1,920 an ounce, in part because of the uncertainties surrounding the deal.

Taking the above into account, investors are focusing now on the U.S. government shutdown and its impact on the dollar, and probably wondering where the final bottom of the current corrective move will form. When we take a look at the chart, we see that the dollar dropped to its new eight-month low in the previous week. What’s interesting, at the same time we didn’t notice a sharp increase in gold. This relationship between the U.S. dollar and gold has encouraged us to examine the US Dollar Index once again (from many perspectives) and the medium-term gold chart to see if there’s anything on the horizon that could drive gold prices higher or lower shortly. We’ll start with the USD Index very long-term chart (charts courtesy by http://stockcharts.com).

Very long-term US Dollar Index chart

The situation in the long-term chart hasn’t changed much recently and all of what we wrote in our essay on the dollar and gold is still up-to-date.

The long-term breakout above the declining long-term support line was not invalidated. (…)However, since the medium-term breakdown (below the support line marked with red) is visible also from this perspective, we could see some short-term weakness anyway. It seems that the long-term support line will stop the decline – that is, if the USD Index gets that low. Therefore, from the long-term perspective, it seems that the downside is still quite limited.

Now, let’s examine the weekly chart.

Weekly US Dollar Index chart

On the above chart, we see that the USD Index reached the upper edge of the target area (marked with a black ellipse), so the bottom might be in. However, the situation is unclear, because even if the dollar moves three index points lower, it still will be in the target area.

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