The U.S. Dollar Is Providing Investors a Trading Opportunity in Gold
We may already be on the cusp of a turning point in the greenback. Here's how to take advantage.
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The U.S. dollar is the most important and influential currency in the world. It resides in the massive foreign exchange market, which trades about $7 trillion daily.
Because of its size and influence, big moves in the dollar affect all asset classes, including stocks, bonds and commodities. The greenback’s influence on gold was covered in detail last week, as the rising dollar sent a clear signal that gold was about to pull back.
How long will this bout of dollar strength continue? The charts are providing some solid clues. At least in the short term, we may already be on the cusp of a turning point in the dollar.
On Thursday, the U.S. Dollar Index was climbing for the fifth consecutive session, when it hit a brick wall at 107.00 (black dotted line).
Why is that figure significant? According to the weekly chart, 107 is where dollar rallies tend to run out of steam (red arrows). It seems the greenback has finally encountered a difficult hurdle.
Let’s zoom in to the daily chart for a closer look at the dollar’s reaction to that 107.00 level:
This doesn’t necessarily mean that strength in the U.S. dollar has ended. When Trump won the presidential election in 2016, the dollar rallied for months, not days. I’m not suggesting 107 is a definitive reversal point, but it might create an interesting setup for a short-term trade in gold.
Recently, I pointed out that dollar strength was about to lead to a bearish reversal in gold. As of Thursday, the spot price of gold had declined for five consecutive days. At the same time, the U.S. dollar was enjoying five consecutive bullish sessions.
Just as the dollar was hitting resistance at 107.00, gold found a moderate level of support near $2,550 (black dotted line). I’m not expecting a complete reversal of gold's trend, but I think it’s worth a look for a short-term trade from the long side. We just entered a small position in gold at $2,565 (green), with a stop below Thursday’s low at $2,535 (red).
This is a counter-trend trade, as the overall trend in gold is decidedly bearish. Because of that, we’ll use a tight stop, which we’ll raise to break even if the price of gold reaches $2,595 (blue). I’ll close half the position if we reach $2,595, and exit the remainder at my discretion.
At the time of publication, Ponsi was long spot gold.
