Gold Forecast: US Dollar Recovery And Its Impact On Gold Prices

We are now preparing for what should be the final retracement in the gold price before 2016 highs are exceeded for good. The degree to which this retracement gives back recent gains is open to some variability, but the highest probability assessment is that gold will find support over the next 1-3 months within the $1,295 - $1,305 range. The subsequent advance should take prices above the 2016 peak at $1,378 en route to $1,400+ later this year and $1,500 by early 2019.

We expect a correction in gold will now unfold due to the important support zone that is being tested for the US dollar, which should lead to a multi-month rally for the US currency. As a backdrop, investors should recall that typically (but not always) the gold price and the US dollar move in opposite directions. We can observe this inverse relationship with an examination of the two asset classes over recent months:

Long-Term US Dollar Outlook

Let us turn to the long-term chart of the US dollar to observe the significant support area which should act as the platform for a medium-term bounce:

The support zone in question is highlighted by the green-shaded circle, near 87 – 88 on the US dollar index, which measures the greenback against a basket of major world currencies.

Note how the 87 – 88 area coincides with the long-term linear rising trend which began in mid-2011 at 73 on the dollar index (lower magenta color line). This trend was solidified through the 2014 lows at 79. Now, this same trend is being tested again. Being a long-term rising trendline, we are certain that technical-based buyers will be emerging to scoop up dollars in and around this region.

Recovery In The Dollar

A recovery in the dollar should take the world’s reserve currency back toward 91 – 92 on the dollar index by Q1 – Q2, 2018. This movement should correspond with the retracement expected in the gold price.

It is worth highlighting at this juncture that we believe the dollar rally which is forthcoming will be intermediate in length, lasting several months to half a year at most. The bigger picture for the US dollar is now decidedly negative, having witnessed a false breakout in 2017 (red highlight, above) after two years of consolidation – this being the most ominous of all reversal signals which exist in technical analysis. Such was the topic of this article, published exactly one year ago today: US Dollar Index Weakness…Implications For Gold Prices.

In sum, we expect the dollar will now begin a counter-trend rally which will see the broken critical support zone between 91 – 92 retested from the lower side. Although this retest should ultimately fail, over the intermediate-term the bounce should negatively impact gold prices.

Impact On Gold

The primary gold chart is thus updated below, showing the highest-probability assessment for gold’s trajectory over the remainder of the year:

There is a confluence of support which exists for gold in the $1,295 - $1,305 region, and this represents the zone where the metal should bottom in coming months. Specifically, this region represents clear horizontal resistance from September through November, 2017, which was broken just two weeks ago. Broken resistance should act as support going forward. Additionally, the 50% Fibonacci retracement of the entire December through January advance comes in at $1,302. We expect gold will target this range over the coming weeks and months.

Gold Volatility To Subside

Gold has seen a series of violent surges and retracements every 1-3 months since the 2015 bottom at $1,045 per ounce. Indeed, as a trader myself, I have become accustomed to these swings both higher and lower. However, as markets typically do – just when we come to expect a certain behavior, that is typically the exact time in which a market will try to fool us by changing its disposition.

In this case, we expect that by mid-year, gold will become much less volatile. Indeed, the trading action by Q2 and into Q3 might become downright boring to the casual observer.

This will be the perfect backdrop: our analysis shows that after a moderate recovery, the US dollar will begin to fall anew by Q3, and thus solidify a multi-year downtrend.

Conversely, the falling US dollar will act as a spark to ignite gold above the 2016 peak at $1,378. This will likely come in dramatic fashion, after several months of listless grinding trading action for precious metals.

Takeaway 0n Gold

The US dollar is preparing for a recovery rebound. The bounce should act as a drag on gold prices for several months.

Do not be fooled: the dollar has formed the worst of long-term reversal signals that a technical analyst could ask for. By mid-year, the dollar should begin to roll over again and continue to decline.

Over the next several months, we anticipate moderate weakness in gold. Investors should use this period to finalize physical holdings and targeted investments into the gold mining sector before the advance to $1,400+ commences.

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