Corona Virus
Stay Safe, FollowGuidance
Fetching Location Data…
Jignesh Davda

Gold prices fell sharply in early March during a time of panic where the yellow metal usually thrives. The tables have turned since then and gold is on the verge of breaking to fresh highs not seen since 2012 even though there are forces against precious metals.

A Stronger Dollar is Doing Little to Contain the Gold Rally

Price behavior in early March was surprising for gold traders. The shiny metal usually does well during times of uncertainty and there was a big shift to risk aversion during this time as the Coronavirus threat escalated.

However, investors showed a strong preference for the US dollar which inevitably weighed on gold prices.

Interestingly, the greenback has shown strength once again since the middle of April. The rally isn’t nearly as strong as early last month but on a trade-weighted basis, the greenback is up about 2%. As of the European open on Friday, the dollar index (DXY) is on the verge of breaking to fresh highs for April.

The dollar and gold prices have a long-standing inverse relationship with each other. The fact that the yellow metal is able to rally along with a stronger dollar is the first reason I am bullish gold.

US Dollar Index (DXY)

Stocks have Rebounded Nearly 30%

Another common inverse correlation is between gold prices and stocks. In the bigger picture, these two assets don’t usually move in the same direction.

A divergence was seen in the second half of 2019 and both the S&P 500 and the price of gold gained notably during that time.

The same thing is happening once again as we’ve seen the S&P 500 and gold prices both bottom at around the same time in late March.

The big difference here is that gold is outperforming since bottoming when adjusted for volatility. Even though the yellow metal is up about 19% versus the almost 30% gain in the S&P 500, gold has broken above it’s March high while the equity index still needs to rally another 22% to do the same. The outperformance is the second reason I believe there is more upside for precious metals.

Gold Performance vs S&P 500

Gold Mining Stocks Are Breaking out

The final and the biggest reason why I expect more upside in gold is because the Gold Miners ETF (GDX) is signaling a technical breakout.

GDX has crossed above a horizontal level near $32 which had held it lower in 2016 and earlier this year. The ETF has broken to a fresh seven-year high this week as a result.

I put a lot of emphasis on this technical development because GDX has otherwise been an under performer. Consider that spot gold broke above its equivalent 2016 high over the summer last year and is up about 30% since then.

When weak instruments within the same asset class start to show strength, there is a good chance a big move is coming.

Gold Miners ETF (GDX)
Don't miss a thing!
Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Trade With A Regulated Broker

  • Your capital is at risk
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.