Gold Dives as Dollar Rises

 

 

Chart of Gold – Gold Dives as Dollar Rises – Source: TheTechnicals.com and TradingView

The price of gold took a sharp dive on Thursday, plummeting well below its key 50-day moving average. Driving this move was the U.S. dollar, which rose broadly against a basket of other major currencies.

Gold Uptrend Driven by Low-Interest Rate Expectations

Since the lows of mid-August 2018, gold has been on a relatively sharp upside trajectory. This has especially been the case as the U.S. Federal Reserve began to get more dovish and interest rate expectations have declined significantly since late last year. When interest rates fall or remain low, non-interest-bearing gold has less competition from interest-bearing instruments. As a result, gold prices and demand for gold tend to rise.

Gold as a Safe Haven

Gold has also been buoyed in recent months by various market risk concerns, including fears of global trade wars and economic slowdowns. These concerns have helped boost the precious metal in its capacity as a perceived safe-haven asset. Investors tend to buy gold when they are fearful about global political and economic conditions.

Strong Dollar Caps Gold’s Gains

One key factor that has kept gold from surging even more than it has, and is now helping to pressure it, is the sustained strength of the U.S. dollar in the past several months. Since gold is typically denominated in U.S. dollars, the precious metal and the dollar are generally inversely correlated. As a result, when the dollar drops in value, gold prices tend to rise, and vice versa. Now, as the dollar is on the upswing again and not far off recent highs, gold investors are starting to feel the pain.

What May Happen Next?

From a technical perspective, the sharp drop below the 50-day moving average is significant. Price has also formed a rough head-and-shoulders pattern. Traders consider this a relatively strong bearish chart pattern.

If the price of gold remains below its 50-day average and the key $1300 psychological level, the strong dollar could place significantly more pressure on the precious metal. This could potentially extend the drop in the price of gold towards the $1250 price region, which is near the current location of the 200-day moving average.