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Dollar’s Demise Signals Gold’s Rise

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Little has changed in the precious metals over the past week, so I’m going to focus on the dollar as a key driver of Gold’s future direction.

I have been pounding the table consistently for weeks now stating my belief that we have not seen the peak in the DXY and therefore the lows in the metals and miners. The fact that neither the Funds nor the Commercials cut their relative positions despite the sharp drop from 94.50 resistance indicates that they don’t believe the top is in either. There is still room for those respective positions to increase to 2019, 2018, or 2016 peak levels before they dump them in the opposite direction as the dollar dives.

Courtesy of Ole Hansen of Saxo Group, my first go-to chart I look at every Monday morning:

Non commercial Dollar Position incl. DXY

My target on the upside remains 96.50 for several reasons:

USD chart

96.50 is the point where wave C is equal to 1.618 times wave A from 89.17 to its peak of 93.47, or a rise of $4.30. Wave C began where wave B bottomed out at 89.52. 4.30 times 1.618 is about $7. Add that to 89.52 and you get 96.50, approximately. This is a standard ABC corrective rally before it falls to a new lower low next.

96.50 also represents 50% retracement of the decline from the peak at 104 in March 2020 to the bottom at 89.17 in January this year.

When it peaked at 104, the weekly RSI hit an extreme overbought 70. It could certainly do that again and has the potential to do so should DXY rise to 96.50.

USD chart

Lastly, the upper band of DXY’s channel, which provided the resistance at 94.50, certainly allows for such a move up in the near future before it capitulates.

Ahead of that rally, we have yet to confirm the bottom in the DXY. My target zone of support off the peak at 94.50 was and is 92.85 to 93.70. We have already taken out 93.70 and next is the 61.8% retracement at 93.50, which is where it bounced today, Thursday. Below there is the 76.4% Fibonacci level at around 93.30, which is where the 50-day moving average is. But my preferred target is 92.85. 

Without getting into the details of it, 92.85 is where wave C of the current drop from 94.50 equals 1.618 times wave A. 

It’s also the 61.8% retracement of the rally from the triple bottom at 91.78 to the 94.50 peak.

Now the gravy: it also happens to be where the support trendline of the channel is rising. A wonderful confluence of indicators.

This is just my best guess for the future direction of the DXY based on several pieces of data that are lining up together. I could be completely wrong. But if this is anywhere close, and the inverse relationship with Gold in particular holds, then Gold could rise to 1837 again or 1880 while the DXY falls to 92.85. But once DXY hits its low and turns up to a higher high, say 96.50, then Gold could fall below 1675, and the rest of the complex with it.

Now going one step further… I believe that the DXY will rise into a peak, probably around 96.50, from which it will fall to a lower low below 89.17. That’s what happens after an ABC corrective move up—it’s followed by five waves down. The positioning data provided by Ole and his team at Saxo certainly supports that thesis. It could take another couple of months or more before we reach that peak, but if and when that drop begins, watch Gold, Silver, and the miners finally soar to new heights.

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About the Author

David Brady has worked for major banks and corporate multinationals in Europe and the U.S. He has close to thirty years of experience managing multi-billion dollar portfolios including foreign currency, cash, bonds, equities, and commodities. David is also a CFA charter holder since 2004.

Using his extensive experience, he developed his own process utilizing multiple tools such as fundamental analysis, inter-market analysis, positioning, Elliott Wave Theory, sentiment, classical technical analysis, and trends. This approach has improved his forecasting capability, especially when they all point in the same direction.

His track record in forecasting Gold and Silver prices since has made him one of the top analysts in the precious metals sector, widely followed on Twitter and a regular contributor to the Sprott Money Blog.

*The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

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