Is Gold Heading to $3,000? The Dollar Is Key

Gold meanders below $1,300, after gaining over eight percent in January.

Bullion.Directory precious metals analysis 3 February, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

Gold has been range bound, following January’s eight-plus percent gain. This marks the best start for gold in three years amid a backdrop of worrying US – and global – economic data. So does gold really have what it takes to hit $3,000?

Hmmm. Not sure to be frank.

However, a recent article was published by Dr. Carl Thomas, or a.k.a Dr. Stoxx, touched on a forecast for $3,000 gold that was issued by Bank of America in 2012. Thomas believes that the original forecast has merit, but it was a matter of timing. Timing is one of the most important factors when trading or investing, yet it often eludes most market participants.

Essentially, the 2012 forecast that called for $3,000 gold in early 2014 was effectively the top in gold just prior to the three-year correction.

This just further supports my idea that forecasting the unknown a year or more in advance is nonsense. You’ll end up with a track record like the Fed, or, worse, the IMF.

So, does gold have room to move? Thomas outlined his reasons in believing there is much more room for the yellow metal to run. Please, feel free to click on the link to read the short multi-point narrative as I’ll only touch on the dollar.

Thomas believes the dollar is overextended, and it is. But, this is a prime example that the markets can remain irrational longer than most can remain solvent.

The dollar index has pulled back roughly two percent since making decade-highs at 95.50 because of varying reasons. It is not enough to approach everything technically. The primary reason why the dollar seen such momentum was largely hinged to the idea that the Federal Reserve would be the first of major central banks to tighten monetary policy.

This would be the first time since 2006 that this would happen, but the current state of the economy, piling in with a global slowdown, will likely push that assumption further back.

As market participants became giddy over a few months of accelerating data points last October through December, there was a bandwagon idea that the Fed would tighten in December or January.

That did not happen, so it was pushed back to sometime in the second quarter of 2015. Since then, we have seen a collapse in crude prices and economic data. In fact, the US Macro Surprise Index has indicated that data misses in January were the worst since 2009.

The proprietary index, developed by Citi,  measures how much the data falls below or exceeds the general consensus. And, there have been a lot of surprises.

The performance of the dollar amid fundamentals are also a bit worrying. As mentioned in “US Dollar Rally: The Beginning of the End,” the 20 percent move seen in the dollar index is not normal. It has also been a canary in the coalmine.

If the dollar rolls over due to a lack of faith in the Fed and projected economic growth, it could be something to watch out for. Since the publishing of that article, the dollar price action is looking to the downside. Not to say a top has been called, but the stilts propping the dollar up will begin to crack under the weight.

The dollar is likely the key needed to unlock further gains in the “premier” currency. We have seen gold bull markets versus the Canadian dollar, euro, pound, and yen. There have also been a rush to gold in terms of the ruble and yuan.

Near-term price action looks shaky for DXY:

The rush to gold amid global financial warfare (as one central bank tries to outdo the other), gold remains attractive. You don’t buy gold within a currency crisis, you buy it ahead of a currency crisis.

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