US Dollar to Fade As Gold Heads Higher

By Sam Kirtley   Aug 16 2010 9:50AM www.skoptionstrading.com

One of the key technical signals we were looking for in anticipation of a new major rally in gold was a close above the 50 day moving average. Well, last week gold delivered that signal, twice.

Whilst we still need to see a close above $1220 to confirm this move, we are now very confident that a major rally in gold prices will begin in earnest in the next couple of weeks.

Last week we wrote that we were expecting a rebound in the US Dollar from oversold conditions. Sure enough, the rebound in the USD did eventuate, with the index rising from 80 to almost 83 in a matter of days.

However, we had thought that this rebound in the US dollar would cause gold prices to fall slightly, but this did not happen, instead we saw gold prices increasing with the USD.

This recent positive correlation between the USD and gold has caught our attention, since over the past few years the two have tended to have been negatively correlated, with gold moving inversely to the USD with some leverage factor.

By simply putting together some charts of gold versus the US dollar over the course of this gold bull market. it become clear that although the relationship is largely inverse, there are periods where the two move together.

We do not claim to be specialists in the field of market cycles, however it appears to us that after roughly four years of moving inversely, gold and the USD then began to move together for roughly seven months, before moving inversely again for another four years. They have now been moving together to approximately eight months, so if the pattern described above were to continue then one would expect the US dollar and gold to begin moving inversely to each other very soon, and for this negative relationship to continue for four or so years to come.

Since we are bearish on the USD and bullish on gold over the next few years, this general cyclical analysis fits with our current outlook.

In conclusion, although the inverse relationship between gold and the USD does not always hold, this has not affected our gold price forecasts. We think gold will make a new all time high before the end of the year, and probably challenge $1300.

Got a comment then please add it to this article, all opinions are welcome and appreciated.

Sam Kirtley

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