As of March 21, April Gold futures are trading between $1343 and $1328, with the June Dollar Index hovering between 80.38 and 80.19. Over the past five days there has been a trend reversal which is showing an upward trend in the dollar and downward pressure in gold. In the gold market, there are also signs of a “Golden Cross” forming as the 50-day moving average approaches the 200-day moving average.
The DX/GC historical dance
If you are in search of the perfect inverse correlation signal, good luck. However, historically and over the past 10 years, gold and the dollar have displayed a fairly solid inverse relationship. This does not change that, as shown by the graph below, this relationship breaks down every so often. For the most part, this seems to happen in times of global market distress and when the U.S. Government is troubled.
As the debt crisis was first emerging in 2007, the dollar was taking a beating while gold was in a strong uptrend. In contrast, in early 2008, when the rest of the global financial markets were under pressure, the dollar started to rally, with gold following suit later in the year.
Going into September of 2013, the world was faced with growing concerns over escalating unrest in Syria. During times of actual or potential geopolitical unrest, Gold, along with the U.S. dollar, typically goes through a rally phase.
The overall consensus appears to be that in the face of global turmoil, gold, as well as the dollar, are safe havens to store value. So any time global investors are faced with geopolitical risk and large-scale global uncertainty, look for a breakdown in that inverse relationship. As an investor, you better go with where the money is actually flowing.
A recent example of that safe haven mentality breaking down is the fiscal cliff debacle we encountered in late 2013, with the safe haven that is the United States normally not looking so safe anymore. With Congress struggling to pass a budget and both the public and markets losing confidence in the U.S. political process, the dollar tanked and gold rallied.
Having seen that “normal” relationships between two markets like gold and the dollar, can break down, an important related lesson is that markets can act and stay “irrational” longer than investors can stay solvent. Don’t follow relationships to the death, but do try to take advantage of them when the opportunity presents itself.
The “Golden Cross”
With gold prices around $1,334, on the morning of March 21, the 50-day MA crossed the 200-day MA, forming a “Golden Cross”. This type of cross was last successfully followed by a rally in the gold market back in 2009, when we saw a 100% move to historic highs, topping at $1,933.20. Gold attempted another rally after a cross in late 2012, but to no avail. This time around, gold bulls can only hope that we will test and break the current resistance level of $1,382.90 and continue the current up trend.