Breakout in Gold: what the correlated markets say about that.

Gold is a follower, not a leader. Gold goes where the four much larger markets tell it to. In this piece, we study what the four correlated markets are saying about gold.

The Dollar Index

On average, gold correlates negatively with the dollar. There are short-lived periods during which the relationship spikes toward the positive (red vertical dashed-lines on chart) which subsequently result in lower gold prices (red dashed-arrows on chart).

We are in one of these situations at the moment (red oval on chart). Gold can continue to rise from here, but this gives us reason to question gold’s upside potential.

From a more fundamental perspective, a low dollar obviously helps US domestic production and exports, but increases prices of imports and pushes inflation higher as a result. The former effect, will please the US economy overall, but will not be tolerated indefinitely by the rest of the world’s economies, making a rally in the dollar an increasing possibility which will end-up pressuring gold. The latter effect, will increase the likelihood of the Fed raising rates which puts upward pressure on the dollar and downward pressure on gold.

However, if the dollar cannot hold the 92 level, and gold breaks above $1310, then a new bull market for gold is in play.


Gold correlates positively with inflation, as measured by the TIP etf (inflation adjusted Treasuries etf). As the chart below shows, TIP is still in a down-trend and unless it breaks to the upside, gold’s present move will be limited.

The way we see it, if inflation starts to rise, the Fed will raise rates faster than the market is predicting which will cool inflation, raise the dollar, and put pressure on gold. If inflation drops, TIP will drop and put pressure on gold. Neither scenario is bullish for gold in the medium-term.

Treasury Rates

All three parts of the Treasury rate curve (2-y, 10-y, and 30-y) show a negative correlation with gold (chart below). However, the strongest negative correlation is at the 2-year rate; 2-y correlation turned positive only twice in the last two years, while the 10-y was positive five times, and the 30-y six times.

While all three rates continue to fit within their long-term uptrend channels, the 2-year rate has the best fit when it comes to the upward bias in rates. This is understandable since the Fed is only able to directly influence the short-end of the curve. Even though the perceived speed at which the Fed is expected to normalize interest rates has slowed down, the bias is still up and this should limit gold’s upside.


The USD/JPY pair shows a very strong negative correlation with gold. The trading pattern that seems to be developing is similar to that of Spring 2013, and winter 2015/16 (chart below). The currency pair is in an uptrend as long as it does not break support at the Fibonacci 50% retrace (108). As long as the 108 level holds, gold’s upside will be limited.

In summary, the four correlated markets the dollar, inflation, rates, and the USD/JPY continue to limit gold’s attempt at an upside breakout. The Achille’s heel of our hypothesis is the 92 level for the dollar; if the dollar cannot hold the 92 level, and gold breaks $1310, then gold will be in a bull market. Until/unless that happens, gold’s upside will remain limited.

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