Gold To Retest $1,130 As Dollar Strengthens

Dollar sends gold to three-month lows

Bullion.Directory precious metals analysis 11 March, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Nobody can ignore the greenback gorilla in the room any longer as one percent moves seem to be a natural occurrence. The unprecedented drop in the euro, yen and Swiss franc is forcing the dollar index higher, causing dollar-priced commodities to decline lower.

There is a striking pattern with the Swiss franc and gold. For many years, both assets have traded alongside each other. In 2011, gold reached its top of $1,923 per toz. It is also when the Swiss National Bank (SNB) implemented its euro-franc peg. Following the SNB’s decision to shock the world in January and, potentially, break away from the paradigm of policies announced well in advance, the franc steadily began to sink lower. And gold’s impressive run this year ended.

Some traders may feel that the Federal Reserve is only a few months away from hiking the key benchmark rate, many still believe the later half of 2015 is more likely. Even so, the perceived policy divergence between central banks is moving the dollar higher . The Fed still has yet to tighten monetary policy because they must remain “patient.”

Nevertheless, gold is now at a three-month low, while the dollar is at the highest level since the mid-2000s. Gold is hovering at about $1,150 per toz., and price action is looking to retest last year’s low of $1,130. Before this can happen, gold will have to close below the narrow demand zone on the daily chart of $1,144/41. In reality, it could only take another one percent push on the dollar index. Former support levels of $1,163 and $1,175 will be the nearest levels of resistance. The 50-day EMA has crossed underneath the 72-day EMA, confirming bearish sentiment.

If the lows are taken out, it could potentially get out of hand if the dollar continues to strengthen as it has. I recently published a piece on a wedge forming in silver, and if one were to look on the weekly chart for gold there is a wedge forming as well. Price action has made a series of lower lows and lower highs, while the price range is narrowing. Theoretically, the descending wedge is a bullish reversal pattern, but there is no rule on how far prices could drop.

The wedge support shows that potential support below $1,130 would sit at $1,110/00 depending on where price action could make contact with the descending support trend. Price action support would sit at $1,095 and $1,045, if the wedge is broken. The volume has been large and heavily to the downside. Momentum looks to be picking up to the downside on the weekly chart. The ADX is beginning to tick back up, corresponding to the – DMI pushing higher.

The dollar rising is worrying. It is not particularly the fact that it is strengthening, but it is strengthening at a pace not seen in nearly four decades. The dollar has increased 10.68 percent since February. The move is not normal, but it is reality. As mentioned previously, it will likely get a lot worse before the party runs out of drugs and the music stops.

The strengthening dollar has hurt commodity prices, but it is also taking a toll of those record profits US companies have been raking in since the Fed implemented ZIRP. Equities are volatile and diverging from the dollar. Those bearish on gold during the S&P’s golden years are now making a case for holding gold. Times are changing.

When the dollar’s momentum may wane is unknown due to the ongoing currency war, but one this is certain: a strengthening dollar will rip off the Fed’s band-aid, and the underlying economic rot will be seen for what it is.

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