The US Dollar Index $DXY is clinging to the 100 level, refusing to let go despite new 52-week highs for the British pound and a steady rise in the euro.
I was struck over the weekend by the resemblance between the commercial position in gold and DXY.
Check it out…
DXY sits up top with the commercial or smart money position in gold in the lower pane:
I don’t know why this strong positive relationship escaped me in the past. But the correlation between these two charts makes sense.
Smart money buys gold as the dollar rises.
Remember, a strong dollar weighs heavily on the price of gold and other precious metals. Gold goes on sale as the dollar strengthens, and commercials take advantage of the bargain prices.
On the flip side, commercial hedgers unwind their long position as the dollar strength wanes and the value of gold rises. This scenario best describes the current environment.
Unfortunately, the charts lack a clear divergence to clue us in to the next directional move. But the relationship still offers plenty of insight.
Notice commercial positioning in gold tends to lead DXY at inflection points. It even posted a negative divergence leading up to DXY’s 2002 peak.
Can we apply the same analysis to last year’s lower high in commercial longs, as the DXY printed a higher high?
Perhaps that’s a bit of a stretch. Nevertheless, commercial hedgers’ attitudes toward gold suggest a falling dollar.
That’s the story.
The intermarket landscape points to a weakening dollar and declining interest rates, yet both refuse to roll over. You can add commercial positioning in gold to the long list of supporting evidence.
Meanwhile, the markets are messy. These choppy conditions will pass, of course. But your capital must remain intact.
Stick with the trades that are working, and clamp down on risk.
Better trading conditions lie just on the horizon.
