Gold’s strength in the face of a rising dollar is telling us that gold is receiving some of the “risk off” trade as speculative positions are unwound. This has been the nearly the exclusive role of the dollar in the past due to its assumed safety and also because many of these speculative trades require dollars to unwind. This unwinding requires an additional supply of dollars which shifts the supply into scarcity. Gold is now acting as the dollar used to act as a safe haven. It is acting like a global reserve currency. It is acting like gold will act when Freegold becomes a reality.
The “risk aversion/slowing global growth” trades have resulted in a huge unwind of carry trades over the last month. This unwind is bringing upward pressure on the funding currencies of choice, not the least of which has been the US Dollar due to the ultra low interest rates here in the US.
This continued exodus from risk has pushed the US Dollar firmly above its 50 day moving average and put it into position to actually challenge its 100 day moving average, a critical technical level on the price charts. While there is not the least bit of fundamental support for strength in the US Dollar, these technical factors which are driving it cannot be ignored by traders/investors. How much longer the Dollar can benefit from being the “NOT the EURO” trade is unclear but it is coming quite close to the region marked on the chart which will give us a clue as to its direction over the coming summer months.
Note on the chart the two horizontal lines drawn that form a zone between 77.00 – 76.70. Note also that the downward sloping 100 day moving average line falls right into the middle of this zone.
If the Dollar rally is going to fail, it will fail near this zone. If it does not, then there exists a very good chance that the risk trade unwind will push the Dollar upwards toward the 200 day moving average and the region near 78.
What is most interesting however is how gold is responding to this bout of strength in the Dollar – it is not breaking lower but is moving steadily higher. I referenced this in my earlier comments from today where I spoke to the strength in both Euro priced and British Pound priced gold. What these charts are telling us and what this price action is crying is that gold is trading as a currency with its own virtues in a time in which there is a growing lack of confidence in the monetary authorities of both Euroland and the US, as well as other nations around the planet.
Keep in mind also that the summer time is generally not a season during which gold exhibits a great deal of strength on an historical basis. Should we see the kind of resilience continue in gold over the summer that we are currently seeing, I think it will be an early indicator that we are going to see a new record high price in the yellow metal sometime during the 3rd quarter of this year. Stay tuned on this one.