Dollar to Launch Gold

Gold's correction in late 2011 has been credited to a strong US dollar. Now that the dollar is overbought and wildly popular and is due for a sell-off that will likely launch gold and drive it to new highs.

Friday, 13 January 2012
Adam Hamilton, CPA
Gold Seek

Since rocketing to new all-time highs last summer, gold has weathered a major correction. While that selloff was healthy and necessary given the excessive optimism that catapulted gold to very-overbought levels, a strong US dollar accelerated gold’s swoon. But with the dollar now as overbought and wildly popular as gold was in August, this currency itself is due for a major selloff that is likely to launch gold.

Thinking about the US dollar as a major gold driver brings back a lot of dusty memories for long-time gold investors and speculators. Gold bulls have three stages, and back in the early 2000s the entire gold story was the devaluing US dollar. Gold moved in lockstep opposition to this dominant currency. But by mid-2005, gold’s secular bull was transitioning to its second stage where global investment demand took over as its primary driver.

Gold had finally escaped its restrictive dollar shackles, and started powering higher in all major currencies simultaneously. So where my earlier analyses focused on the dollar’s overpowering impact on gold in the early 2000s, investment demand usurped it by the late 2000s. So regressing back to the old gold-moving-inverse-to-dollar paradigm this week feels pretty strange, no matter how temporary it proves.

But the charts don’t lie, in the past half-year or so the US dollar has regained its throne as the dominant force moving gold prices. This first chart explores this rekindled relationship, looking at gold versus the US Dollar Index. The USDX is the widely-followed flagship benchmark for our currency, expressing the dollar’s value relative to a euro-dominated basket of a half-dozen major foreign currencies.

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