USD & Gold Trend

Written by Research | 01 March 2010

Does the Rule of Supply & Demand still works?
For how long would Gold and USD move at the same direction ?

The precious metal price movements from its usual inverse relationship with the US Dollar is currently more in line with the upward track of the USDX, as obvious seen on a weekly and monthly chart analysis. Although, it may not seem to be on a day to day basis and even on the short term time frames that shows a negative reaction.

As most of the prominent analyst seen on Bloomberg that specualtes that Gold prices will eventually be at $900.00/oz. levels by the 2nd or third quarter of the year. Gold moving up with the dollar is a sign of tremendous strength in both markets which some investors may simply ignore this concept.With Gold futures prices up almost 5% from this month's low of $1,043.50/oz. the U.S. dollar index, which measures the U.S. unit against a trade-weighted basket of six major currencies also have gained more than 2% from its low at 76.60 in the closing of January 2010.

"Both gold and the dollar have been trending upward since early this month, If gold and the dollar can decouple it would hold important implications for the precious metals moving forward in the middle or even towards the end of the year. but its too far ahead to be able to forsee the reactions that it may create depending on the directional movement of the USD by the 2nd quarter of the year which we have specualted that may correct back lower to the 78.80-79.50 bp temporarily which is a good corrective move.

However, these implications are likely to be good for gold. A decoupling in the relationship would mean that investors are not only buying gold as a U.S. dollar hedge but as a safe-haven asset as a flight to quality and buying for this reason is so heavy it is outweighing the selling pressures from U.S. dollar strength by other investor and traders who happens to think otherwise.

But the direction of the precious metal and dollar are destined to diverge again -- and when they do, gold may or may not come out a winner.The global markets are currently focusing on Europe's troubles, feeding a rally in the dollar, yet gold is still trading at around $1,100 levels give and take a few. So if gold can make gains, or even just tread water whilst the U.S. dollar rallies, it will soar if the US dollar begins to much lower and unexpectedly in some point in time.

On the other hand, even though gold prices have been moving up with gold over the last month, if the U.S. dollar continues rallying, this will eventually flow through to have a negative impact on gold. Which would be the biggest possible risk for gold if the USD would be sustained with a high volume rally. but what would build the volumes up at this point of time is the next big question mark. For now, however, the gold market's apparently changing relationship with the dollar deserves a closer look because it can offer hints for gold's next direction as seen here in the chart that it looks more likey to move higher in line with the long term outlook for the USDX staying above the 79.20-80.10 bp. As we are so used to looking at gold rising when the dollar falls that the common inclination of gold moving higher when the dollar goes up seems to break the rule on the law of supply and demand.

However, as technology more often than not already defies such concepts. Others may and may not disagree as trading has changed tremendously since the early 80s. Gold's ability to move higher against most major currencies is that amjority of the investors and institutional traders as well fund managers in the commodities market are making these choices as diversification follows specially coming from a financial debacle; it as an alternative to foreign currencies. Although, their price fluctuation has risk but still an alternative nonetheless. And these investors are a little more sophisticated as they choose the precious metal because of the relationship of a huge amount of debt and deficits the US is facing not to mention the financial crisi in Europe led primarily by Greece and Spain as of the current market conditions. Which weighs heavily on the mindset of investors.