The U.S. Dollar Index is worth watching closely today, with important implications for gold.
The dollar is pressing on key support at 96.40/50. This represents the June 7 pullback low as well as the 200 DMA, the September 2018-present support line and the major up trendline off of the February 2018 low at 88.25, which initiated the up-leg to the April 2019 high at 98.33.
Given the cluster of many important support points at 96.40/50, a sustained (closing) breach of that zone likely will have significant technical implications that point USD toward the 94.00 level, amounting to a potentially rapid decline of 2.5%.
Such a decline will argue that the February 2018 to June 2019 advance in the U.S. dollar has both peaked and topped ahead of a period of USD weakness that generally will present tailwinds for the commodity and precious-metals markets.
With respect to gold, the price reaction to a USD breakdown will be interesting because August gold futures already have rocketed 11% from $1272 in early May to $1415.40 Thursday evening, which may have anticipated USD weakness. In fact, anticipating this rally, we added NUGT to our MPTrader.com model portfolio in early April, exiting on June 20 for a 33% return.
If any rally in gold reverses sharply from $1420 in the upcoming hours – amid and despite USD weakness – the divergence will serve as a warning that gold is ripe for a correction of its $140 advance sooner than later.
That said, should August gold climb and sustain above $1420, my work will point to $1445/50 as a minimum next target zone thereafter. This will argue that its multi-year upside breakout will continue unabated, perhaps in reaction to the combination of an easier Fed, a weaker USD, rising inflationary expectations and heightened geopolitical tensions.
