Gold and the US Dollar – the Big One is upon us
Clive Maund
As most everyone knows, the gold price is inextricably linked to the value of the US dollar. So if you want to figure the outlook for gold, it’s never a bad idea to look at the dollar. As is so often the case in markets, the truth lies not in complexity, but in simplicity, the kind of simplicity that in several months time will have countless people saying “It was so obvious – why didn’t I see it??” With that in mind, I decided to make a direct comparison between gold and the US dollar, using a three-year chart of each. These two charts are placed together here so that you can make a direct comparison.
There is an old saying in the markets “Let the trend be your friend” which just comes down to common sense; if you bet against the trend, you’ve got far more chance of being buried. Now take a look at the charts presented here, where the direction of the major trend is glaringly obvious, down in the case of the dollar and up in the case of gold, indicated by the direction of the red line on each chart, the long-term 200-day moving average. But that’s not all we can see. These charts tell us most of what we need to know to extrapolate the outlook for these markets. We can also see that the dollar has now fully unwound the oversold condition that had developed by May-June of this year. Compare and contrast this chart to gold where we can immediately see that gold has held up remarkably well during this counter trend rally by the dollar, and has also fully unwound the overbought condition that existed early in the year. Turning again to the dollar we can see that it is now approaching classic sell territory, getting very close to major resistance from the trading range that developed back in the spring, and also getting very close to the steadily falling 200-day moving average. Back to gold again we see close support from the rising 200-day moving average, and we also see that we are in the very late stages of an up-sloping symmetrical triangle formation – breakout must come soon, in fact it is imminent. Symmetrical triangles most often resolve in the direction of the trend that preceded their formation and in this case an upside breakout is rendered more likely by the fact that this triangle is tilted upwards. Other factors indicating the likelihood of an upside breakout include an attempted breakout last week, despite the strength of the dollar, which was a most encouraging sign, the support of the steadily rising 200-day moving average not far beneath and the positive action of gold stocks in recent weeks which have been moving ahead in justified anticipation of an upside breakout.
Someone made the point last week to me that the dollar had broken out of its downtrend channel. That’s true, it did, and I have taken that into account, but dismissed it as an adjustment of what was probably an oversteep downtrend. This idea is supported by the fact that the lower boundary of the dollar trend channel is actually parallel to my adjusted trend channel, which still contains the dollar. In any case, I would not like to use that trendline break as a justification to play against an established downtrend and close overhead resistance. There are always people who like to bet against the major trend, the graveyards of Wall St are full of them, but I am not one of them.
To conclude, I believe that there is a very high probability of a resumption of the major US dollar downtrend, and, simultaneously, a major breakout by gold, which should lead to a steep advance towards the high $400’s. I arrived at this target by drawing a parallel line to the lower line of the triangle, which is standard TA, and I find it very interesting that this line, when projected back, reaches back to touch the peak attained in May-June last year – a nice bit of symmetry. Despite gold stocks having to some extent discounted this move, I believe they will vault to much higher levels, which, I suppose, is only to be expected if gold rises by about $120 within a few months. I believe this major breakout and advance, which should coincide with a slumping dollar, is now IMMINENT.
Clive Maund, Diploma Technical Analysis
clive.maund@t-online.de
www.clivemaund.com
Kaufbeuren, Germany, 20th August 2003
No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.
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