Making Sense of Gold, US Dollars and Oil

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Things calmed down a bit in US markets overnight. Stocks were flat, oil fell a few percent, and gold had another decent session.

As we come to the end of another week, let’s try and make sense of what’s happening. The best way of doing that is to look at some charts. It puts things into perspective and takes some of the emotion out of it.

The first chart I want to show you is the US dollar index. Since New York Federal Reserve President Bill Dudley spoke yesterday, the index has fallen considerably. He hinted that US rates rises might be done for now.

You can see the extent of the two day move in the chart below. This chart bears watching. Right now you could say that the US dollar is simply consolidating its gains after a massive run up in late 2014/early 2015. It’s moving sideways.

Source: BigCharts

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While the broader trend is still up, continued weakness and a fall below 94 would warn of a change in trend. This could be bullish for stocks and especially commodities.

Remember, a strengthening US dollar represents a tightening of global liquidity. The run up in 2014/15 reflected the end of the Fed’s QE program and the move to higher interest rates.

But if interest rate rises are now off the table in the US, the dollar index may continue to go sideways for a while. For now, the important thing to watch for is a break below support at around the 94–93 level.

Now let’s check out the gold chart. Gold is like the ‘anti-US dollar’ trade. And it’s put in a pretty good rally recently. In fact, gold (in US dollar terms) looks as good as it has in some time.

The chart below shows the gold proxy, GLD. As you can see, it bottomed in December, which was the same time as the US dollar index reached its peak.

The overnight action in gold was good. It broke above a key level of resistance, which was the area it broke down from in July last year (circled in the chart below).

Source: BigCharts

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  But gold still has a bit of work to do. While the moving averages (blue and yellow lines) are beginning to turn up, they suggest that gold remains in a downtrend. What you want to see is the yellow line cross above the blue line. That would be the first indication that the trend may be in the process of changing.

The other point to note is that the US dollar index doesn’t necessarily need to fall for the gold price to keep on rising, although it would certainly help. The US dollar index consists of the US dollar versus other paper currencies like the euro, the yen and the pound.

If Europe and Japan persist with their debt monetisation and negative interest rate schemes, it is conceivable that the US dollar and gold could rise together.

The last chart I want to show you today is oil…West Texas Intermediate crude oil. As you can see below, over the past two years oil has collapsed, falling from around US$105 a barrel to under US$30.

Source: StockCharts

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The trend, as indicated by the moving averages, is unequivocally down. The volatility of recent days does stand out, but it’s way too early to call a bottom here.

Look at the last few times oil ‘bottomed’, in March and August 2015. While I think oil is fundamentally cheap here, there is nothing stopping it from going lower. Wait for the trend to turn before taking a punt on higher oil prices.

 

Greg Canavan,

For The Daily Reckoning

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Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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