Will Gold Continue to Fall Against the Mighty Dollar?

• Tweet
• Pin It

This week one of the market trends we want to focus on is falling gold prices. This news story has generally been in the background compared to many others, but it is important.

While it took longer than we expected, the EUR did eventually fall against the USD. We netted a quick profit from the short term trade, but our interest now shifts to gold prices. For the last several years gold prices have soared as confidence in the USD wavered. Now with positive job reports, many traders wonder if gold can stay this high. Is gold on a bubble? A strong USD traditionally means weaker gold prices and vice-versa. With the US economy poised to turn things around, it is definitely time to ask what’s going to happen to gold.

Where does gold stand?

Gold and many other precious metals continue to lose value as the USD gains strength. The recent FOMC meeting minutes played a major hand in continuing that trend. Gold has fallen 3.46% over the past month. There was a small mini-recovery at the end of this week, but it was far from a trend. While reports suggest the US is going to continue to gain strength, there are some reasons to give gold a further look.

One of the first clues is that there were no negative reports to knock down the US Dollar. Quite the contrary, the US economy continues to recover even with Friday’s non-farm payroll coming out as a disappointment for not meeting expectations. Despite that, unemployment still dropped. However, this might open the door for gold to re-gain some of its lost value. The question then becomes whether this means the recovery is slowing to open the door for gold, or if it’s just a small bump in the road.

One market issue that cannot be ignored is the effect that the India jewelry strike is having as it goes into its third week. India is the 2^nd biggest consumer of gold in the world, and the wide array of strikes is definitely a market factor working against gold right now.

What should we watch for in the US economy?

The two reports that mean a lot are the consumer confidence report and the jobs report. Up until this past Friday, the jobs reports were consistently out performing expectations and pointed to a strong recovery. Friday’s report was disappointing; the least number of jobs were added in five months. This is something that bears watching. It does not change the fact that since the beginning of 2011, we have seen the largest and most consistent job growth since all the way back in 2006. The consumer confidence reports have been their highest in years, which also is a good sign for further recovery.

Of course, some of the old patterns still apply. If the United States economy continues to prove it is undergoing a sustained recovery, then gold will fall. However, if this recent bump leads to a rockier or slower recovery, that is another story. That situation could open the door for gold as a safe haven once again. This is especially true if the European debt crisis refuses to die and rears its ugly head once again. That is very possible according to many analysts.

Last year, several FOMC meeting reports suggested a strong possibility of a US recession in the fall of 2012. If this occurs, the price of gold will come roaring back. However, recent reports suggest that this is far less likely now. The strong job creation is an especially good deterrent against the possibility of the feared double dip recession coming true.

At the end of the day, when looking at the current US economy against these high gold prices you see a stronger USD as bad news for gold values and a weaker USD as good for gold. This has been a pretty consistent pattern through recent years and should remain so.

So what does this mean to us?

You can call this another reason to keep watching the USD. Gold prices have spent a lot of time at or near historic highs because of the weak US economy. As we all know, no trend can last forever. Pay attention to job reports and consumer confidence reports in particular, but all the major US reports will be important on this topic. If the US continues to show signs of a stronger economy and the USD keeps rising, then the value of gold will fall.  However after the last several years of economic turmoil many traders are still risk adverse. If these positive trends disappear, then there is every reason to believe gold could rebound to yet newer highs.

We are still waiting for gold to break one of the trend lines on the cart below. After we have a close below one of the trend lines and obtain an arrow from Trend Finder, then we will trigger a trade.

Due to the fact that the EURUSD has moved to the down side, but has pulled back for the day, we have another short term trade. We are shorting at 1.30334, risking 1.30634 with a 1.30234 take profit.

Good investing,

Jason Fielder

facebook   twitter   linkedin   reddit   email