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US Dollar’s Weakness or Gold’s Strength? at Trader’s Narrative

Proving the old technical analysis adage true that the more a level is attacked, the higher the probability that it will break, gold recently broke through the $1000 ceiling and closed at a new, all time historically high price.

While this got a lot of attention in the media, gold sentiment remains relatively subdued in response. Since gold is the haven sought by dollar bears, the big question is whether this important technical move is a result of weakness on the part of the US dollar or whether it is secular strength from the gold market pure and simple.

The simple way we can look at this question is to strip away the effect of the US dollar by dividing the price of gold by the US Dollar Index, as the chart below shows:

gold relative to US dollar index Oct 2009

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4 Responses to “US Dollar’s Weakness or Gold’s Strength?”  

  1. 1 Mak

    quick correction… to adjust the gold chart for dollar weakness, you need to MULTIPLY them, not divide them. Dividing them makes the result higher when dollar is weaker, which is exactly the effect we’re trying to adjust for.

  2. 2 Mike C

    OK, I’m confused by both the original post and Mak’s comment. Any chance of a more detailed explanation of how and what we are measuring in the chart either by division or multiplication?

  3. 3 Mak

    let’s say that in real terms Gold does not change. then if the dollar gets weaker (DXY goes down), the nominal value of gold will be increasing. What we’re looking at on a normal gold chart is the nominal value of gold. the article above means to strip out the inflationary impact of the dollar’s recent demise to look at how gold is really acting. the true picture when you look at it that way is that gold peaked in February, put in a low in July, and didn’t really start turning up in earnest until early September. This leads us to two conclusions…1)weakness in the dollar was masking weakness in Gold for most of the spring and summer, and 2) Gold’s recent strength these last 6 weeks is not just due to the dollar weakness.

  4. 4 Jim

    Mike C, in my experience all you really need to look at are gold in US$ terms and Euro terms to see what’s going on. Here’s what gold has been doing in terms of Euros

    It clearly peaked in February, but this month it has risen above a multi-month trading range.

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