Gold traders eyeing the dollar

By David Morrison  |  11/01/2018 15:48

This article considers the recent price action on gold and looks at the metal's relationship with the US dollar

China halts T-Bond purchases?

Gold prices were steadier today following Wednesday’s sharp rally which ended a bout of profit-taking from earlier in the week. Just a few days ago it looked as if gold was about to experience a significant pull-back. However, sellers were stopped in their tracks by yesterday’s report from Bloomberg suggesting that China was considering halting, or even reversing, its purchases of US Treasury bonds. The news led to a rally in yields, a sudden sell-off in equities and other risk assets and a rush into safe havens such as gold and the Japanese yen.

“Fake news”

Much of the risk-off move was subsequently unwound as traders hurried to “buy the dip” in equities – a strategy that has proved reliably profitable for over eight years now. It worked this time as well after China’s State Administration of Foreign Exchange (SAFE) declared the Bloomberg report to be "fake news." SAFE insists that its investment in US government bonds is based on market conditions and its needs. It added that it always diversifies its investment of FX reverses. Gold pulled back from its highs, but not by much. It is currently ranging between $1,310 and $1,320 which suggests that it may be consolidating following a sharp run-up in price since mid-December.

Year-end rally

Gold tacked on 6% while silver added close to 10% between 12^th December and the New Year. So far silver has failed to break and hold above $17.20 which roughly marks the 61.8% Fibonacci Retracement of the Sep-Dec 2017 sell-off. It is currently hovering around $16.90 which is the 50% retracement of the same move. While this offers some mild support, $16.60 looks of greater significance and this looks likely to be tested should the dollar continue to rally. As stated earlier, gold has found support around $1,310 on the downside – a level which marks its own 61.8% retracement of the Sep-Dec sell-off. However, a pull-back towards $1,300 can’t be ruled out, particularly as this level has offered resistance in the past as well as marking the 50% retracement of the Sep-Dec sell-off.

Gold and the dollar

With the explicit caveat “all other things being equal” a rising dollar is bad for dollar-denominated assets while a falling dollar is generally positive for them. We saw this dynamic play out quite dramatically in 2017. Going into that year, gold was trading at a ten-month low while the dollar was at a fourteen-year high against the euro. Gold (when valued in dollars) rallied close to 20% over the next nine months while the EURUSD rose around 17%. Then we saw gold fall 8% until mid-December and the EURUSD lose 4.5% over the same period. So it’s fair to say that the dollar should have a large influence over where gold heads next. In this regard it’s important to keep a close eye on both the EURUSD and the Dollar Index. Both are close to significant technical levels with the EURUSD once again testing resistance around 1.2100 and the Dollar Index closing in on support near 91.00. If these levels are broken convincingly then we can expect the dollar to weaken further and gold to strengthen. 

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