The dollar index has been on a bullish tear since January 31 as it has posted gains in nine of eleven sessions and rose from a low at 94.875 to a peak at 97.12, a move of 2.4 percent over the past two weeks. The move to the upside in the greenback is a significant gain in a currency over such a short period.
A stronger dollar tends to be bad news for commodities prices. The dollar is the world’s reserve currency and the benchmark pricing mechanism for most raw materials. The price of gold has historically had a strong inverse correlation with moves in the dollar. A stronger US currency tends to weigh on the price of the yellow metal.
In mid-August 2018, the dollar rose to a new peak for 2018 at 96.865. At the same time, gold dropped to $1161.40 which was a new low for last year. Gold declined under the weight of a stronger dollar.
Meanwhile, since last summer, the price relationship between the dollar and the yellow metal has changed.
The dollar made a higher peak in mid-December of last year at 97.705. During the same week, gold traded to a low at $1234.10, which was $72.70 above the level in August when the dollar was at a lower level. The strength in gold at the end of last year was impressive.
On Wednesday, February 14, the dollar index probed above the 97 level again which threatened a Saint Valentine’s Day massacre in the gold market. The yellow metal retreated to a low at $1304.70 and recovered to the $1315 level when the dollar index retreated to settle the session at 96.805. Gold held $1300 per ounce on Wednesday in another sign of strength for the precious metal.
The daily chart of gold shows that the price trend has been higher since last summer as the yellow metal has made higher lows and higher highs. Short-term technical support stands at the January 24 low at $1281.50 to keep the bullish trading pattern intact.
On the upside, short-term resistance is at the January 31 high at $1331.10. Above there a double top formation from January and April 2018 at $1365.40 stands as a roadblock to the critical resistance at the 2016 peak at $1377.50 per ounce which is the line in the sand on the upside for the gold market. Gold’s price action in the face of a strong dollar has been impressive, so far. When the price of an asset should move lower, but it does not, it often exposes underlying strength that often leads to higher prices.
A strong dollar is not a bullish factor for the price of gold, but the yellow metal has been ignoring the greenback over the past six months. If gold holds above its support level and the dollar makes a higher high, we could see the price of the precious metal move a lot higher than most market participants believe in the coming weeks and months.