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The US Dollar is Correcting, but the Trend is Lower

Those following our analysis or who are following us on social media might be exhausted by the repetitive mention of the weekly dollar index chart. But, it is a crucial price driver for most assets and shouldn't be underestimated or ignored. The typical relationship between gold and the dollar is inverse. Still, we have seen some discrepancies this year as markets work out the chaos of non-stop government stimulus and then an abrupt reversal of those policies. Yet, in the end, the price of gold is quoted in dollars and will eventually resume trading inversely to the greenback.

The dollar is currently experiencing a sharp corrective rally, which we believe will continue into the 103.50/104.00 price range. However, unless something changes on the fundamental or trader positioning front, we expect that level to reject the rally and for the dollar to resume its downtrend. Our ultimate target is in the mid-90.00s and maybe even as low as 90.50 if the Fed returns to a looser policy. If sidelined bulls are lucky, the corrective dollar rally will result in a gold dip before the more significant trends of a lower dollar and higher gold resume.

Interest Rates Could be Peaking

Higher interest rates have worked overtime to thwart gold rallies. The average retail investor generally considers stocks, bonds, real estate, and gold as their core holdings. One of those assets isn't like the others; gold does not pay dividends, interest, or income. As a result, when interest rates are high, allocated dollars are more likely to make their way into the bond market.

The Federal Reserve is ahead of most global central bankers on the rate hike front. The US will likely be wrapping up the rate hike campaign in the next meeting if it hasn't already, but others have several increases to go (if the US is any guide). The interest rate differential and a multi-month decline in the US dollar make Treasuries attractive to overseas investors.

Additionally, the stock market has successfully attracted new investment dollars via FOMO (Fear of Missing Out), leaving the bond market flat-footed. However, although chasing stocks higher worked in 2020, 2021, and thus far in 2023, without aggressive government stimulus, the days of irrational exuberance might be coming to an end. If so, I can't think of a better place for money to flow than Treasuries yielding 4% to 5% with potential for capital gains and minimal default risk. Even if the Fed doesn't pivot from rate hikes to rate cuts, interest rates can grind lower on increased demand for nicely yielding safety assets.

Revisiting the monthly 10-year note futures chart, it is evident that the technical situation is dicey. However, the fundamental argument for owning and accumulating Treasuries at the currently discounted levels should keep the market from falling off the cliff.

Weekly Gold Chart

After collapsing from $1,900 per ounce in 2011 to $1,175 in 2013, gold spent six years trading sideways. The price range spanned from about $1,370 to $1,040. The range was finally broken in mid-2019 and led prices to a new all-time high price of $2,050. Since then, the market has found comfort trading rangebound from about $1,650 to roughly $2,070. Furthermore, the rally that started in 2018 created a trendline that continues to guide prices by luring buyers on dips. At this time, the trendline comes in near $1,870. We expect this area to hold, but we recognize that the gold market is messy, particularly in overnight trading sessions during the late-summer doldrums. Thus, we can't rule out slippage to the 50-week moving average near $1,840 and possibly even a test of the 200-week moving average near $1,800. We witnessed a similar aberration of the price temporarily falling below the uptrend line in August of 2022, but prices eventually made their way back above it to suggest the uptrend is still intact.

When, or if, the gold market breaks above $2,100, we expect a stair-step repricing to bring the market to an uptrend line that dates back to 2016. This price represented by this line increases over time but is currently suggesting gold could trade as high as $2,600.

Conclusion

Late summer and early fall have habitually created buying opportunities in gold. Conservative traders might try to hold out for prices near $1,800 on December gold, but aggressive traders could consider nibbling on the upside at the trendline ($1,870). We wouldn't be surprised to see gold reach $2,600 in the coming months or years.