Another day, another gain for gold. The price of the precious metal inched 0.77% higher on Tuesday, marking the fourth consecutive day of forward progress. In fact, gold is now 13% above October's low, and seemingly still accelerating upward.
The implosion of most cryptocurrencies and persistent inflation is getting most of the credit for the advance. And, to be fair, that's certainly a factor. It's arguably the least important factor though. Driving most of this advance is the falling value of the U.S. dollar, which is the currency gold is globally priced in. If the dollar's weakening, most likely, that's making gold relatively more valuable. Don't believe it? Take a look at the chart below comparing gold prices to the U.S. Dollar Index.
A one-off coincidence? Not likely. Here's the zoomed-out version of the same chart comparing gold prices to the U.S. dollar going all the way back to 2011. Although the relationship isn't a perfectly-inversed one, it's close to being perfect.
And, that's bullish for gold, and will be for a while.
While the soaring value of the greenback since 2021 is understandable -- the U.S. recovered from the pandemic faster than the rest of the world, but suffered extreme inflation and subsequent interest rate hikes as a result -- the big bullish move through late-2022 is also far too extreme. More to the point, it's not sustainable. The conditions that caused the move are now ultimately undermining it. At the same time, other countries' economies are perking up as well, making their currencies at least a little more attractive.
That's the long way of saying the U.S. Dollar Index could continue to fall back to more historical norms. That's bullish for gold.
And it's not as if gold itself doesn't have lots of technical room to keep rallying anyway. It's long-term ceiling currently lies somewhere around $2120, although there's a minor resistance level near $2030. Don't be surprised to see gold prices readily march up to at least the lower of those two levels while the greenback rekindles its tumble.
Don't misunderstand. The mass exit from cryptocurrencies is likely steering some traders into gold. Ditto for inflation, and the threat of continued inflation, and the likely continued increase in interest rates meant to curb that inflation. Gold is typically viewed as a hedge against inflation, and there's certainly no short of hedging-based buying underway here.
Take a closer look at the longer-term chart again, though. Namely, look at when the dollar's value started to take off, and when gold started to weaken. The greenback was starting to soar by the end of 2021, well before there was any indication that inflation and interest rates would race out of control. Gold prices started to buckle in early 2022 though, when inflation just took hold. If anything, that's when gold should have started soaring in anticipation of the inflation that was just heating up then. Instead, it spent the better part of last year declining.
The only cause-effect correlation that makes sense? Gold's relationship with the dollar. Gold bottomed when the dollar peaked in October.
And that's why you've got every reason to believe gold prices will continue to rise as long as the greenback continues to fall. To this end, while technical analysis (or chart-based analysis) doesn't mean quite as much for currencies that it does for stocks and market indices, the U.S. Dollar Index has clearly been comfortable in recent years just under the 100 level. Look for a move at least to that area.