What does the US dollar have to say about gold ?

After making fresh cycle highs overnight at $1877, gold slumped to close near $1850 after robust U.S. economic data sent the U.S. dollar, real yields, and nominal U.S. yields higher.

Gold 1

Generally speaking, a lower U.S. dollar and lower yields are supportive of a higher gold price. Last week the breakdown in real yields was a key factor behind our long gold trade suggestion in this article here (long gold at an average of $1845).

Although 10 year real yields have bounced from -117bp to -110bp in recent sessions, resistance is viewed at -100bp, where they broke down from in early November. As such negative real yields are likely to remain supportive of gold in the medium term.

However, should the U.S. dollar continue to power higher, it would be a significant setback to last week's break higher in gold.

Using the U.S dollar index, the DXY, as our barometer for U.S. dollar directionality, after an impressive rally over the past week, the DXY index is currently testing the resistance coming from the top of the upward sloping trend channel near 96.00.

Further reinforcing the importance of resistance near 96.00, the 50% retracement of the entire down move from the March 2020 102.99 high to the January 89.20 low is at 96.10.

It will be a surprise if the DXY index doesn't at the very least see a modest retracement from the 96.00/10 resistance zone in coming sessions and, by doing so, allow gold to consolidate its break higher and keep it on track for a test of resistance at $1916.

Aware that should the DXY see a sustained break and close above 96.10/00, it would likely see gold fallback towards interim support near $1800. To protect against this, we suggest tightening stops on our long gold trade idea to break even at $1845.

Gold daily chart 17th of November

Source Tradingview. The figures stated areas of November 17th, 2021. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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