Gold has had some precarious price action as of late and the media is all over it. Moreover, the recent acceleration to the downside has many confounded and attempting to catch a falling knife. Usually this signals capitulation and screams for a contrarian play. However, analyzing Gold's move in relation to the USD points to more pain for goldbugs.
Gold is priced in USD, and like most other commodities, it trades relatively in line with the USD. Beginning in early January 2015 we saw Gold move in sharp divergence to the USD. This divergence peaked at the end of January to the tune of an 18% premium to the USD or a -0.9 correlation. I'm curious if this had to do with central bank purchases in preparation for ECB QE, a la maybe the SNB? Since then, we've seen an accelerated move down in Gold, which has confounded many. The explanation is rather simple: Gold was just catching back up to the USD strength it ignored in January and February. Currently, Gold trades at a mere 1% premium to the dollar, on a relative basis. Since the beginning of February, we've seen correlations return to normal ranges, putting in successively less negative lows and more consistently >0.8 prints. Expect Gold to resume its highly positive correlation with the USD, which is headed higher. With a decisive break below Gold's 50% retracement on the monthly chart, expect Gold to continue lower.
Gold is priced in USD, and like most other commodities, it trades relatively in line with the USD. Beginning in early January 2015 we saw Gold move in sharp divergence to the USD. This divergence peaked at the end of January to the tune of an 18% premium to the USD or a -0.9 correlation. I'm curious if this had to do with central bank purchases in preparation for ECB QE, a la maybe the SNB? Since then, we've seen an accelerated move down in Gold, which has confounded many. The explanation is rather simple: Gold was just catching back up to the USD strength it ignored in January and February. Currently, Gold trades at a mere 1% premium to the dollar, on a relative basis. Since the beginning of February, we've seen correlations return to normal ranges, putting in successively less negative lows and more consistently >0.8 prints. Expect Gold to resume its highly positive correlation with the USD, which is headed higher. With a decisive break below Gold's 50% retracement on the monthly chart, expect Gold to continue lower.
