Searching for a top in USD index, keep an eye on Gold

It is quite well known that Gold and USD index are inversely related. But the inverse relationship has been stronger than ever since the talk of a rate hike in the US began in mid‐2014.

Gold prices are known to be influenced by quite a few things‐

• US/Europe/China economic data

• Geo political troubles

• USD index (rate hike expectations in the US)

• Risk‐on/Risk‐off in equities

However, since March 2015, the metal is simply tracking rate hike expectations in the US. This is evident from the fact that the yellow metal failed to respond to – Greek crisis, Rout in Chinese equities. The metal simply does not respond to any weak economic data out of China, Europe or US.

During the latest round of Greek crisis, it was the treasury yields and the German bund yields which took a hit on safe haven appeal. Equities and commodities (energy and base metals ) felt the heat as well. However, Gold remained on a declining trend as if it was never a safe haven metal. Consequently, the first indication of either ‐ the delay in the rate hike in the US or first rate hike pricedin are likely to appear through the movement in Gold prices. In both the cases, the USD could see a major correction across the board. Last week’s sharp fall in Gold was not accompanied by a rise in the USD index or a strong US data that bolstered rate hike expectations in the US. Gold could be indicating a top in the USD index if‐ It begins responding to risk‐off events – The largest single day drop in the Shanghai Composite index since 2007 could have pushed Gold above USD 1100/Oz levels. However, technical factors could have played its role too. Moreover, the metal has erased major part of its gains ahead of the durable goods orders data in the US. However, if the metal begins to respond to risk‐off events, it could be an indication of a major correction in the USD index ahead.

Rises on weak China, Europe or US data – As mentioned earlier, the metal has simply stopped responding to weak economic data out of China, Europe or US. On a few occasions, we witnessed gold moving marginally higher on weak first tier economic data releases. However, the metal was quickly offered as rate hike expectations remained intact. Consequently, it did not respond to weak Chinese or European data as well. Hence, gold posting significant gains on weak US data could be a primary indication of either rate hike has been priced‐in or markets believe the rate hike may be delayed‐ both leading to a major correction in the USD index.

Responds to risk aversion in equities – Moroever, this would be an indication that investor interest in Gold is back. The sell‐off in Chinese stocks or the fall in US equities witnessed last week hardly helped the yellow metal strengthen. Amid increasing rate hike bets in the US, the investor confidence in Gold has been low.

Furthermore, when viewed as a hard currency, rising gold prices do indicate a sell‐off in the USD against other paper currencies and vice versa.

The Fed, in its June policy statement, stated that it would publish a separate document on how it intends to implement the policy tightening. In case, the Fed has planned a rate hike in September, a clearer indication of the same is likely to emerge in its policy statement on Wednesday. In such a case, Gold may take another hit, which could be followed by above mentioned signs of reversal and a possible major correction in the USD index.

Gold – Inverted head and shoulder on hourly chart

• An inverted head and shoulder formation with the neckline at 1104.70 is in the making in case the metal rebounds from near USD 1180 levels in the days ahead. A break above 1104.70 would open doors for 1137‐1140 levels.

• In case, the Fed provides a strong indication of a rate hike on Wednesday, the metal may fall below the last week’s low at 1072 and extend losses further. This could be the last leg lower in Gold, before moving higher and indicating a major correction in the USD index.

• In case, the Fed stays non‐committal an inverted head and shoulder breakout could be expected.