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Quick Tutorial on Gold, Silver, US Dollar

Published 04/02/2024, 01:24 AM
Updated 07/09/2023, 06:31 AM

I've often said in order to better assess the solidity of a gold selloff or rally is to evaluate the performance of other metals, especially silver. I shall not go into the details of examining the technicals of copper and platinum. Instead, let's focus with illustrations on XAG and DXY.

Gold-Silver-Dollar-Weekly Chart

Just as we gleaned valuable information from silver and USD during the low points of gold, let's do the same during gold's latest record high. Gold has yet to make any notable pullback since breaking its 4-year trendine resistance.

Silver, however, has not yet broken its own 4-year trendline resistance. 

As long as silver rally does not show the same potency and momentum shown by gold, the US dollar will continue to find support. Watch today's action for instance, how all currencies are down against the US dollar while gold is ripping at new highs.

To better understand the above thesis, take a look at Summer 2020 (blue shaded area in the chart), when gold powered to new highs alongside silver, while USD fell aggressively. In that case, the gold rally and USD plunge was a result of unprecedented quantitative easing from the Fed and other central banks. Selling USD, buying indices, and buying metals was the easiest and most straightforward trade between April and early August.  As long as both the Gold/Silver ratio and DXY are moving closely together (up or down), the trade becomes clear. A similar example to Spring-Summer 2020 was spring 2021.

A contrary example to the above two cases was summer 2022--when the Gold/Silver ratio powered ahead with DXY, while both XAU/USD and XAG/USD sold off furiously.

There are two clear reasons why this information is vital and useful for currency and metals traders:

1. It will help you avoid committing the amateur error of blindly shorting the US dollar just because gold is rising.

2. It will help you avoid buying silver erroneously and irresponsibly (just because gold is rising), which would be dangerous since silver requires a higher margin and involves more volatility. 

Charts-wise, instead of focusing on silver technicals, go straight to the technicals of Gold/Silver ratio, which reveals a neutral or range-bound formation since January, similar to that of the DXY chart, or the main individual USD pairs. 

Zooming on the daily chart, you will find EUR/USD, GBP/USD, and AUD/USD mostly heading lower since early March. In effect, they're reverting to their medium-term support.

If you have read the above 290 words of this analysis, then I shall reward you with the following 3 paragraph-summary:

1. As long as silver is not breaking key technical upside (or downside), then it's unfeasible to see USD breaking key technical downside (or upside). 

2. Said differently, the inverse correlation between silver and the US dollar is more enlightening and helpful than the correlation between gold and the US dollar.

3. Identifying what is in fact the USD is also part of the equation. Using USD/CNH can help avoid the traps of DXY, which gives more weight to EUR and overlooks the ravages of JPY. 

Overnight, hours after the Monday Asia open (5:16 am British Summer Time), I told our WhatsApp Broadcast Group, why I was getting out of my short-term gold Longs at 2250, allowing for a margin error of $10. Indeed gold peaked at 2265. 

This is the same WBG to which I shared why $2185 was going to be the target for our gold longs, 4 days before the March 8th release of NFP/UnempRate. 

The Group was also told of the $2222 target, 10 days before it occurred. The explanations, calculations, and rationales are all documented in our WBG communications. I'll be happy to share all upon request.

Finally, I shared with the Group a unique quantitative rationale on why DAX40 will hit at least 18000 before mid-April. 

Latest comments

Gold is now over your exit point of 2250 by 50 dollars per oz. And silver is exploding today and tonight. Another negative gold silver article proven erroneous by reality.
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