Hawaii Six O - Gary Wagner
Gold attempts a relief rally as the dollar falls from its highest value since May 1, 2002
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Since May 2021 gains in the U.S. dollar can be best described as parabolic. The dollar index was trading at approximately 89.60 in January 2021, and in one year nine months have moved from just below 90 to 114.745 a total gain of 24.745 points. In other words, the dollar index when compared to a basket of six foreign currencies gained 21.91% in value. The last time the dollar index was strong occurred in May 2002 as seen on the chart below labeled - Chart 1 - Monthly dollar index. The first time the dollar index closed above 114.75 was in October 2000 approximately 22 years ago.
The highest level the dollar index reached occurred just after the "great inflation" which began in 1979 and ended in 1983. During that time period, the United States had the highest level of inflation in history at approximately 14%. By 1983 aggressive action by the Federal Reserve headed by Chairman Paul Volker was able to take double-digit inflation down to an acceptable target of approximately 3.6%.
The chart above titled - Chart 2 – Three Month dollar index shows the highest level available in our database for the dollar index which was at 128.894 in November 1985. However, our database does not go back to February 1985 when the dollar index hit its highest value ever at 164.72. To view the dollar index at its all-time high we need to view a chart created and sourced from Stooq.com that can be seen below.
The point of viewing three extensive charts of the dollar index is to illustrate that its current value at 112.635 is most definitely at a 20-year high but far from the highest level ever seen in the dollar index.
Since gold is paired against the dollar index today's decline of 1.24% in the dollar index was highly supportive of moving gold substantially higher. As of 5:34 PM EDT gold futures basis, the most active December futures contract is currently trading almost 2% higher (1.97%) which amounts to a net gain of $32.30 and is fixed at $1668.50.
Chart 4 (above) is a Japanese candlestick chart in which each candle represents three days of trading. We have created a basic Fibonacci extension from the low of $1170.50 that occurred on August 15, 2018, up to the record high of approximately $2088 that occurred on August 6, 2020. We have highlighted two key retracement levels; the 38.2% Fibonacci retracement at $1737.10 as well as the 50% retracement level at $1628.90. We have also created a red horizontal line at $1680 which we believe is a key and critical level of former support that was taken out last week. Today's strong $32 move in December gold took pricing from the low one dollar above the 50% retracement at $1622.20 and closed just off of the high today of $1671.60 at $1660.50.
Based on the technical studies we presented in charts one, two, and four we have derived the following support resistance areas for both gold and silver. First, December gold currently has support at the 50% retracement at $1628.90. We believe that any rally could easily be short-lived if as I believe the dollar will only briefly decline before returning to a rally mode. Therefore, we see the first level of resistance at $1680 with major resistance at $1737 which is based upon the 38.2% Fibonacci retracement as seen in chart four. The 61.8% in the retracement set of the chart occurs at $1515 which I believe would be an unlikely point that gold would find support. It seems more likely that gold will find support between $1600 and $1620.
Although the dollar index is at a 20-year high as seen in the charts we have presented on a technical basis it could go much higher. Therefore, our technical studies indicate that major resistance occurs just above 120 in the dollar index based upon the highs first seen in October 2000.
Today's respectable gain in gold is most probably a relief rally based upon short covering and those market participants believing gold is so oversold that this is an opportunistic time to buy the dip. However, since gold prices are so deeply correlated to dollar strength or weakness, likely, further rate hikes or increases at the next two FOMC meetings this year could reignite dollar strength taking it passed its current high just below 115.
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Wishing you as always good trading and good health,