US Dollar trends to guide gold markets

August 29, 2020

New York (Aug 29)  When the COVID-19 pandemic first began to make its negative influences felt throughout the financial markets, global investment trends in the U.S. currency quickly emerged as a primary safe haven beneficiary. As a result of these risk-off trends in market sentiment, the U.S. Dollar Index (DXY) was propelled to its highest levels in more than three years and prior resistance levels (above 99.80) were overcome in a clear and decisive fashion. However, deep reversals became present in the market after the U.S. Dollar Index approached highs above 102.90 and its valuation experienced declines of as much as -10.5% in less than four months. Not surprisingly, this quick reversal of fortune has led to a surge in the number of financial pundits in currency markets that are calling for the greenback’s demise and the end of its role as the world’s reserve currency.

Of course, these types of grandiose statements are almost always premature (and probably designed to attract attention to the author’s commentary). But it should also be understood that there are legitimate factors involved here that could lead to further weakness in the market’s valuation of the U.S. currency. Ultimately, I believe that this type of bearish event could turn out to have a positive effect on the market prices of both gold and silver as we head into next year.

As the U.S. Federal Reserve remains committed to holding interest rates near historic lows for an extended period of time, the current market environment looks to be well-suited for additional moves higher in precious metals assets. Gold and silver prices tend to perform best in low-yield interest rate environments, so the economic disruptions created by the COVID-19 pandemic have almost ensured that this risk-off investment context will continue to characterize the financial markets for the next several quarters.

For these reasons, it will be critical for precious metals investors to continue monitoring market trend activity in the U.S. Dollar Index as a way of gauging where gold and silver prices are likely to travel next. From a technical perspective, buying activity in DXY is likely to encounter resistance near the 94.70 region (which is the market low established on March 9th, 2020). In this case, I expect to see “support-turned-resistance” scenarios contain market prices in DXY on the first upward approach of this important price zone.

Of course, this sort of price analysis strategy can also be implemented by those looking to capitalize on recent trends in foreign exchange markets and I would expect these investment influences to be felt primarily by currency pairs like the EUR/USD or USD/JPY. However, these types of active day trading strategies will often lead to increased transactional costs and this is why it is so important to compare broker reviews before establishing active positions in the open market.

If we do see market trends in DXY break above this key resistance level, it would not be surprising to see prior rallies in both gold and silver markets to experience corrective selling pressure. As dollar-denominated assets, gold and silver prices tend to be heavily influenced by the generalized price trajectory that is presented by the U.S. currency. However, I will continue to maintain my bullish view on the precious metals space as long as gold prices manage to hold above critical support levels in the $1,760 region.

In silver markets, the market’s price momentum has been quite strong during the last two months. However, readings in the Relative Strength Index (RSI) are now reaching into overbought territory and pullbacks have occurred near the next critical resistance levels near $26 per ounce. We will need to see a monthly close above this level to maintain a bullish view on the metal near-term

Finally, platinum prices have maintained a healthy trajectory and the metal appears to have formed a strong base above the $875.30 level. As long as markets are able to maintain support in this area, the outlook remains bullish and we have set the next price target at $1,018.10 (which is the price high that was established on February 19th, 2020).


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