Gold Still Shines Despite Strong US Dollar
The latest price chart of gold shows that the precious metal still shines despite the strong US dollar. The month of February thus far has seen the price of gold pull back from its new 9-month high around $1326 that was reached on January 31. But the trend that goes back to August 2018 remains strongly bullish.
Gold Technicals Remain Bullish
The current gold pullback, in technical analysis terms, can be considered a shallow retracement within the long-term uptrend. For the time being, this retracement can also be considered a pennant chart pattern, which often resolves with a continuation breakout to the upside. Of course, a significant drop in price would invalidate this pattern. But as long as price stays near or above the key $1305-area support, this bullish pattern remains in effect.
Bullish trends, or uptrends, are usually characterized by consistent upside breakouts interrupted by relatively minor pullbacks, or retracements. Gold has been showing this bullish pattern for several months. The latest breakout was above the noted $1305 level, which has served as both major resistance and support since late 2017.
Also, as shown on the chart above, gold saw a clear ‘golden cross’ pattern in mid-January. This is a closely-watched bullish pattern marked by the 50-day moving average crossing above the 200-day moving average.
Falling Interest Rates Support Higher Gold Prices
One factor providing gold a tailwind has been the recent sustained fall in interest rates, as shown in the U.S. Treasury 10-year yield since November. When interest rates fall, non-interest-bearing gold has less competition from interest-bearing instruments. As a result, gold prices and demand for gold tend to rise.
Gold and the US Dollar
Since gold is most often denominated in U.S. dollars, gold and the dollar are generally inversely correlated. As a result, when the dollar rises in value, gold prices tend to fall, and vice versa.
Since the end of January, the dollar has been rising sharply against most other major currencies. This helps account for the current pullback in gold. Any further rise in the dollar could prompt additional pressure on gold. More likely, though, the dollar should soon see a turn back to the downside, as it’s currently well overbought. If this is indeed the case, gold could see another upside breakout extending the entrenched uptrend.
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Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.
Senior Market Analyst at The Technicals
A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart