It was do or die for the yellow metal a couple of weeks ago.
Gold chose “do.”
Buyers sprang into action, defending a critical former support level while driving prices higher.
That valiant effort may have only prolonged the inevitable: a period of sustained weakness.
Don’t get me wrong. I’m not playing the role of a Debbie Downer this week.
I still believe gold is in the early innings of a new secular bull run.
Why?
It’s pretty simple. All we have to do is switch the denominator to any other global currency.
Gold has already broken out versus every currency in the world – except the US dollar.
And that, folks, is the crux of the problem.
The US dollar!
Yes, overhead supply remains intact for these shiny rocks and their associated stocks.
Demand for gold must absorb supply before we witness new all-time highs, no question.
I just can’t envision that happening if the dollar continues to rise – which it is.
Check out the overlay chart of gold futures and the US Dollar Index $DXY inverted:
I flip the DXY chart to highlight the significant negative correlation between the US dollar and gold (dollar up, gold down, and vice versa).
Ignoring gold’s resilience against a rising dollar last year is challenging. In fact, it’s one of my few bullish talking points for gold: resilience.
(That should say it all.)
Don’t be surprised if precious metals continue to hang tough while the DXY rallies. But I highly doubt we’ll see a breakout in gold under those conditions.
I’m shifting my focus from “if and when gold breaks out” to “how deep will the coming correction be.”
I stand by the previous commodity supercycle peak as a crucial level to track. But gold will likely undercut those former highs in the coming weeks if the dollar rally picks up momentum.
This weekly chart of gold futures sums it up:
Gold trades within a potential multi-year basing formation as it contends with formidable resistance.
Today’s resistance will bleed into tomorrow’s selling pressure as the dollar strengthens.
So, how low will gold go? I have no idea.
If it slips below 1,900, 1,800 represents a logical support level:
It doesn’t mean it will break down.
Regardless, selling weakness below last month’s lows is a viable trade for a seasoned swing trader.
While shorting a breakdown in gold makes sense, I prefer hunting elsewhere.
Cotton, cocoa, and sugar futures come to mind. And it’s no secret I like energy. Heaps of excellent trading opportunities reveal themselves every day.
That day will undoubtedly come for gold.
Meanwhile, a rising dollar paints precious metals as pain and opportunity costs – two experiences I strive to avoid.
