Typically these two asset classes trend opposite one another… when the dollar is weak, gold is strong (and vice versa).
This strong inverse correlation, like all inter-market relationships, ebbs and flows. By watching for shifts in the correlation, along with potential turning points in each market, I’m able to see tops and bottoms as they’re forming.
Right now, I’m watching for a bottom in gold, and a short-term top in the U.S. dollar. Here are three reasons why:
First, gold is just above a very significant support zone – $1,525 to $1,575.
Second, the U.S. Dollar Index is bumping up against a potential resistance zone – 82.50 to 83.50. This zone is based on Fibonacci retracement levels (61.8% and 76.4%) that tend to act as resistance, and major peaks in the dollar dating back to 2012.
And the final reason I expect a reversal in the current gold and dollar trend has to do with their correlations. You see, the U.S. dollar and gold moved in tandem (both down) from mid-November through early February. This is atypical, so I’ve been expecting the two to revert back to their inverse correlation, which began about a month ago.
With the inverse correlation now restored, I’m watching closely for a bounce higher in gold, and a downward correction in the dollar. In fact, I’m expecting gold to rally to $1,700 to $1,745 and the dollar to pullback to just north of 81.00.
I’m not expecting these moves to be long-term in nature. They’ll more likely be short-term countertrend moves against our long-term forecasts for weak gold and a strong dollar.