It Is Not About Gold Being Oversold

or not gold is currently oversold; rather it is all about whether or not the U.S. dollar is overbought. The current selloff in gold, which began immediately following prices reaching the 2018 apex at $1,370 ounce, has been driven first and foremost by dollar strength. It is the dollar leading gold prices and not the other way around.

There are market analysts who are looking for a corrective bounce in gold based upon the fact that prices are oversold. However, the real issue is whether or not the dollar will continue to gain value and move to higher ground. As long as the dollar remains in a dynamic uptrend, it is very unlikely that gold pricing will recover and move higher.

It is for that reason that the real question is whether or not the dollar is overbought. There is no doubt that at some point the dollar will hit the ceiling and begin a corrective stage. However, there are many examples of the dollar as well as U.S. equities gaining value over an extended period of time after moving into overbought territory.

In April 2014 the dollar index had been trading at 79. The rally that followed lasted almost a year, until the first week of March in 2015 when the index ran to just over 100. In other words, in just under a year the dollar gained 21% in value when compared to the basket of currencies in the dollar index.

In March 1995, the dollar index was pegged at roughly 80 and began a multiyear rally which lasted up until July 2001, taking the dollar to just above 120. That multiyear move increased the value of the dollar by about 40%. During that multiyear rally, there were peaks and valleys. Meanwhile, the dollar index did not move to higher ground parabolically.

The fact of the matter is that extended rallies and extended bear market selloffs are relatively common when looking at the dollar. It has traded higher and overbought, or traded lower and oversold on multiple occasions.

The last major correction in the dollar index began in December 2016 when the dollar index was trading at 103. It would take well over a year, up until the beginning of this year, for that correction to conclude when the dollar hit 88. During that extended time, the dollar remained in oversold territory for quite some time.

We will at some point see a corrective bounce in gold prices, but a real bottom in gold prices and a return to gold prices rallying cannot occur without the reciprocal selling pressure and lower pricing in the dollar index.

Wishing you as always, good trading,