Gold and the Dollar

Gold is generally quoted in US dollars per ounce of gold; so any fluctuations in the strength of the dollar are likely to be reflected in the dollar price of gold: when the dollar falls the gold price rises........ and when the dollar rises gold falls. The relationship is not exactly inverse, however, and there are times when both gold and the dollar rise or fall simultaneously.

Divergences

For want of a better term we call these periods, when the normal inverse relationship breaks down, divergences. On the chart below the US Dollar Index rises when gold falls, and vice versa, except for divergences at [A] and [B].

The divergence at [A] occurs when a rising gold price gives advance warning of a decline in the dollar. 

Data Source: Netdania

At [B] the index consolidates while gold continues to rise. The consolidation may be the start of an inverted head and shoulders or ascending triangle, but either pattern would only be confirmed if the index breaks through resistance at 92.5.

If gold falls below its recent support level of $550 per ounce, then the US Dollar Index is likely to reach 92.5. If not, and gold rises above its recent high of $730, expect the US Dollar Index to show weakness and fall through its recent support level of 83.5.

Data Source: Netdania

The Fed holds the only wild card: further interest rate rises would support the dollar and possibly interfere with the normal inverse relationship.