Gold Trading Fixated on the Dollar

 | Oct 13, 2011 | 1:30 PM EDT  | Comments
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Gold has been a frustrating market for the day-to-day followers of price action in the yellow metal.

Trading in gold recently has been choppy and more unpredictable on a daily basis. But prices have been trending generally higher from the September spike low of $1,535 an ounce, based on the active Comex December futures contract. The gold market bulls have gained a bit of fresh upside near-term technical momentum recently.

The marketplace generally perceives gold to be a safe-haven asset that appreciates during times of heightened economic or geopolitical uncertainty. Yet on recent days, when there has been a risk-off mentality among investors, gold has tended to be under selling pressure, along with other major raw commodity markets.

The recent risk-off days in the market were due mostly to the turmoil surrounding the European Union's sovereign debt and financial crisis and the EU's efforts to deal with it.

Instead of seeing safe-haven investment demand amid the EU debt crisis, the gold market and other raw commodity markets have seen recent downside price pressure come in part from an appreciation in the value of the U.S. dollar against the other major currencies. Given that most major world commodities are priced in U.S. dollars, when the greenback appreciates then those commodities become more expensive for purchasers on the worldwide market who hold other currencies.

Indeed, gold traders have recently chosen to focus on the bearish aspects of the stronger U.S. dollar vs. the bullish aspect of the EU debt crisis.

The U.S. dollar is also perceived as a safe-haven investment during times of keener uncertainty, and competes with gold for investor demand. Historically, the U.S. dollar index and gold have traded in an inverse relationship. The dollar index is a basket of six major world currencies weighted against the greenback.

The U.S. dollar index had seen a strong appreciation against the other major world currencies in recent weeks due to the uncertainty of the EU debt crisis. But as the EU crisis appears to at least temporarily stabilized the dollar index this week has come under strong selling pressure to produce near-term technical damage and suggest the index has put in a near-term market top. Such a scenario would be bullish for gold.

From a technical perspective, December gold futures prices are in a three-week-old uptrend on the daily bar chart. From an important longer-term technical perspective, gold prices have been trending higher for 10 years and prices are also in a strong longer-term price uptrend. The technicals in the gold market remain overall bullish, which strongly suggests the path of least resistance for gold prices will remain sideways to higher, despite the day-to-day price fluctuations.

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