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The Dollar Reigns Supreme . . . But For How Long?

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Having failed in its attempt earlier this month to move above $1,300 an ounce, gold is once again looking for sustainable support under the technically and psychologically important $1,200 level.

How quickly things can change in world financial markets: Just a few weeks ago it looked like gold might break-out on the upside on the back of bullish geopolitical and global economic developments – and establish a new floor price around $1,300 an ounce. But, having failed in its attempt to move up, we now wonder (along with what must be a majority of gold-market analysts and participants) if gold can indeed move higher anytime soon . . . or if it is destined first to sink further before reestablishing its bullish long-term uptrend.

How gold performs in the days and weeks ahead may have significance in determining the direction of the market over the next few months. Our technical trading models suggest that a reflexive bounce could bring us back to $1,300 fairly quickly – while a breakdown below $1,200 an ounce could trigger even more selling and a further price retreat all the way back to $1,080.But, importantly, gold’s near-term performance has little to do with the yellow metal’s long-term multi-year direction. As we have written in recent commentaries, we expect the price of gold will move to new historic highs in the next few years as more people and institutions around the world have the means and desire to hold more of their wealth in gold.

Perhaps the most powerful gold-price drivers so far this year have been the performance of the U.S. dollar in world currency markets and the performance of equities on Wall Street. Historically, gold has been the preeminent “safe-haven asset” and currency of “last resort.”

But now as in the past few of years, gold continues to ignore geopolitical and global economic developments, the sort of which have in the past supported a bullish price trend. The civil war in Ukraine, the crisis in the Middle East, the possible withdrawal of Greece from the European Union, the pace of global monetary creation – any of these might once have been enough to trigger significant safe-haven demand for gold.

But, lately gold’s traditional role has been surpassed by the appreciating greenback whose strength in world currency markets has been fueled by increasingly stimulative monetary policies virtually everywhere but in the United States. As the dollar has appreciated, gold denominated in U.S. dollars has depreciated – a tendency that has been exacerbated by the pull of higher equity prices and the flow of funds from under-performing gold to over-performing stocks.

This situation can’t and won’t continue forever. Eventually, markets must reflect realities. The U.S. dollar may be the most attractive (or least unattractive) runner in today’s currency derby – but, fundamentally it remains unhealthy.