Dollar Rallies, Gold Corrects Then Resumes Climb

After taking it on the chin for the last six months, the U.S. dollar now looks set to rally.

Gold is being dented, having recently traded back below $1,900.

Meanwhile, the dollar is already up nearly 1.5% since the start of September. That’s a big deal for the world’s reserve currency.

But if you consider what’s happened to the dollar since March, this could be the start of something bigger.

In my recent articles, I’ve been telling you to watch for a relief rally in the dollar over the near term.

I also said that could weigh on gold, generating some temporary weakness which would create an excellent opportunity to buy.

Well, it looks like we’re entering that period now, suggesting it will soon be time to put cash to work in the gold space.

Dollar Looks to Break Out

This recent 1.5% gain for the dollar has been a stealth rally so far. I suspect that’s because it’s small compared to the massive drop in the U.S. Dollar Index over the past six months.

In March the USDX peaked above 103 as COVID lockdowns went into full swing. By late August it had dropped 10.7%, scraping the 92 level. That’s a massive drop for any currency in such a short time, but it’s a very big deal for the world’s reserve currency.

I’m not saying it wasn’t deserved, especially given the trillions being printed to stimulate. But that also doesn’t mean it hasn’t become oversold in the near term.

From the following chart, courtesy of www.sentimentrader.com, we see that “smart money” dollar hedgers have not been this bullish on the dollar since 2012.

(Click on image to enlarge)

The last few times dollar hedgers were similarly bullish, the dollar went on to generate noticeable rallies. And I think we could be in for a similar outcome this time as well.

A quick analysis of the USDX price, using UUP as a proxy, provides some technical basis.

(Click on image to enlarge)

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