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This is what it looks like when the dollar goes from bearish to bullish

Commentaries & Views

The U.S. dollar has been on a virtual roller coaster ride when we look at the relative value of the dollar index from the end of 2016 until current pricing. In December of 2016, the dollar index rose to a high just above 103. Of course, the dollar index is literally a measurement of the United States dollar relative to six other currencies, which include the euro (57.6%), the Japanese yen (13.6%), the British pound (11.9%), the Canadian dollar (9.1%), the Swedish Krona (4.2%) and the Swiss franc (3.6%).

As you can see in chart 1, a line chart of the dollar index from December 2016 to current pricing, after reaching a high in December of 103, the dollar index fell to just above 88 in January, mid-February, and March 2018. The three lines represented in red magenta and green represent simple moving averages with the 50-day moving average, as the short-term green line, the 100-day moving average drawn in magenta, and the long-term 200-day moving average in red. From its fall from 103 to 88, you can see these three moving averages, for the most part, in full bearish alignment. This occurs when the order of the averages puts the 200-day as the highest value, followed by the 100-day in the middle and finally the 50-DMA as the lowest value.

After hitting the lows in March and April 2018, the dollar index began a slow and methodical climb to a higher value, and you can see the relative points between April and July 2018 when the moving average has moved into full bullish alignment. The exact opposite of bearish alignment, you have the 200-day moving average on the bottom, followed by the 100-day moving average in the middle, and finally the 50-day moving average on top. Although there are points in which the 50-day moving average crosses below and then back above the 100-day moving average, for the most part, they stayed in bullish alignment up until May 2020. By July of last year, the three moving averages moved back into full bearish alignment and maintained their respective positions up until this last week.

Chart 2 is an enlargement showing the most current data. At the beginning of this year, the dollar index had still been spiraling lower until reaching a low of 89.42 in January and then moving higher to its current pricing of 92.73. That means that the dollar index gained over 3% in value in the first quarter of this year. More so, for the first time since June 2020, it appears as though the shortest-term moving average (50-day) is about to cross above the 100-day moving average. On a technical basis, this would be the first strong signal that the prevalent bearish market sentiment that has existed since March 2020 has subsided and could be signaling a shift in market sentiment from bearish to bullish.

The obvious reason this is so important to market participants involved in gold is that the precious yellow metal is paired against the dollar, which means that there are two major factors changing the daily price of gold. The first, of course, is market sentiment, whether market participants are actively buying or selling. The second is dollar weakness or strength. Chart 3 is a line chart with gold (gold) overlaid against the U.S. dollar (green). It is clearly visible that since the beginning of 2021, we have seen dollar strength and concurrently weakness in gold pricing.

Whether or not this trend will remain will be dependent on the timeline for the United States to have an economic recovery taking it from the recession caused by the pandemic in March of last year to the strong economy that occurred prior to the pandemic.

The answer to the question posed above not as easy to answer as one might think. While it is clear that we have made incredible headway from the worst of the recession, many unknowns still exist as to how long it will take for the United States to make a full economic recovery.

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Wishing you, as always, good trading and good health,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.