James Hyerczyk
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Comex Gold

Gold continued to show resilience last week in the wake of a sharply higher U.S. Dollar against a basket of major currencies, higher U.S. Treasury yields and extremely strong demand for higher risk assets. To some, the rally in gold doesn’t make sense because we’ve all been programmed to believe that dollar-denominated gold typically becomes a less-desirable asset when the dollar rallies.

Last week, April Comex gold futures settled at $1322.10, up $3.60 or +0.27%.

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When you look at the current fundamentals, you have to wonder why gold is moving higher and trading within striking distance of its high for the year. Stripping aside the traditional fundamentals reveals to me that gold is moving higher because of the weakness in the Euro. To put it another way, gold traders are ignoring the rally in the dollar because the bearish outlook for the Euro Zone economy is driving European investors into the safe-haven gold market.

Furthermore, given the high weighting of the Euro in the dollar index, one can clearly see that the weaker Euro is driving the dollar index higher and not necessarily rising Treasury yields and strong appetite for risk.

Is the Dollar Really That Strong?

The secret behind the rally in gold may be found in looking at the U.S. Dollar’s relationship against the major individual currencies.

In 2019, the USD/JPY is up 0.79%. This can be understood because of increasing demand for risky assets and the widening of the spread between U.S. Government bond yields and Japanese Government bond yields. The USD/CHF is up 2.40%. This is another case of investor demand for risk driving the U.S. Dollar higher.

Here’s the surprising news. The AUD/USD is up 1.23% for the year. The NZD/USD is up 2.19%. The GBP/USD is up 1.07% and the USD/CAD is down 2.88%.

Most importantly, the EUR/USD is trading 1.54% lower.


Weekly Forecast

The evidence is in and we have to conclude that gold isn’t breaking sharply because the U.S. Dollar is not that strong. Therefore, demand for dollar-denominated gold should not be dropping as one may think. The data clearly shows that as a gold trader, you shouldn’t be worried about the U.S. Dollar at this time, but rather the Euro.

Friday’s price action in gold showed that for a short period of time gold could be supported by both a stronger and a weaker Euro.

If the Euro strengthens then the Dollar Index will weaken. If the Dollar Index weakens then demand is likely to rise for gold.

Furthermore, if the Euro weakens then gold is likely to be supported by safe-haven buying into gold.

This is the way I see it over the short-run. The market is likely to revert back to its normal correlation with the U.S. Dollar later this year, but at least for the time being, you have to use the Euro for guidance.

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