Now if there is one thing we all know about gold – it is the dollar / gold rule. We are told by analysts that gold is the perfect hedge against a declining U.S. dollar. So if the dollar is weak, gold is strong and if the dollar is strong, gold is weak. In other words the two have an inverse relationship. The problem with the gold complex so far this year has been the persistent strength of the dollar due to the Euro problems. Since early December 2009 the US dollar index has run up from 74.27 to over 82 for a pop of over 10 per cent on the index. This in turn had gold reverse from a peak in December 2009 to post a 14-week low in early February 2010.
A look at a weekly chart of gold and the U.S. dollar tells me “something is up with gold” because ever since the February low – gold has rallied along with the dollar. When I examine a weekly gold vs. U.S. dollar chart I see that gold is returning the relative out perform in the face of a rising U.S. dollar. I can also see an elevated base and a bullish large inverse head & shoulder pattern.
One has to wonder if gold can rise against a strong U.S. dollar what would happen should the dollar turn lower?