The US dollar appears to be set up for a more extended upwards rally after bouncing for the third time from 14 year support. Over time the dollar trades inversely to gold so the chart set up in the US Dollar index is no big surprise here given yesterday’s analysis of gold futures.
Fed Defends the US Dollar
The 14-15 year long term support line appears to have held up successfully. This now opens the door to the possibility of the dollar finally moving on to do at least a 23% upwards retracement of its decline from the January 2002 peak, or between the 90 to 92 area. It has been long overdue and if it materializes could be the start of a long cause building process that eventually allows the US dollar to break this all important 14-15 year support line. I believe eventually this long support line will eventually be broken, but only after having developed the necessary cause I just mentioned. How long will it take for the cause to develop? This is unknown at this time. The degree of upwards retracement will be a hint as to how weak or strong the dollar really is. Similarly as I mentioned in yesterdays posting, gold futures ability to hold price relative to the US dollar rally will be another hint about how long this whole consolidation process will take.
Basically what we are dealing with here in summary is an upward correction in the US dollar and a downward correction in the gold price. What this really means is that there will come a point in the future that should be a very very attractive entry (buy point) in the metals area. But again, the exact timing of this inflection point is unknown at this time. More price work is needed.
US Dollar Inverse to Gold
The second US Dollar chart here to the left again shows clearly a bullish monthly MACD crossover. This is the exact opposite of what is occurring in gold futures right now. The arrow I drew pointing to the 92 level on the US Dollar index is the likely first stop and test. The 92 level would be slightly greater than a 23% upwards retracement. Obviously this is going to take some time assuming it does happen. We could be talking about 1 to 3 years of corrective sideways action in the US Dollar. It will be very interesting to see how gold does during this time. If the dollar does rally very strongly it is probably wishful thinking to believe that gold will just move sideways or not correct much.
If this does play out as I have briefly outlined above, it will indeed bring forth the mother of all buying opportunities in the metals themselves and plenty of USA based mining stocks. What you will likely see is total and utter despair and fear about the gold market, and perhaps somewhat bullish ramblings about the US Dollar. The noose is tied so tightly around the US dollars neck at this point that even with a 38% upwards retracement, the longer term pattern and trend for the US Dollar index is down.
TC