Dollar bulls living dangerously

Reflecting a modest recovery in the dollar, precious metals have been sold down in paper markets. In European trade this morning, gold was at $1823, down $42 from last Friday’s close, and silver was at $21.20, down 75 cents on the week.

Technically, gold’s consolidation from 1 February looks like a normal pull-back in a continuing bull market, with the gold price coming back to test its key moving averages. And for lovers of Fibonacci ratios, the price has retraced 62% of the rise from last November’s bottom. This is worth mentioning because traders use these technical factors for guidance.

For hedge funds, the trading counterpart for gold is the dollar in a pairs trade, and the next chart is of its trade-weighted index.

To progress further, the rally in the TWI must overcome resistance at the 105 level, which has turned this index multiple times. Currently, traders see inflation continuing to be a problem, with producer prices firmer than expected. The talk is of a 50-basis point hike in the Fed funds rate at the next FOMC meeting.

In current markets there is a strong view held by traders that a strong dollar is always the mirror image of a weak gold price. The next chart shows that sometimes the correlation is positive and sometimes not.

Currently, the correlation is positive. But going by Comex Open Interest, gold and silver are now as oversold as it gets.

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