Gold vs Dollar Relative Strength Analysis


As we head into the next tightening cycle, it is informative to consider the relationship between the dollar and gold. To this end, below is the weekly relative strength chart of FXCM's USDOLLAR basket and our XAUUSD instrument. The chart has a cyclical component to it. Between 2011-2013, the ratio formed a base or accumulation pattern (first green rectangle). When this completed, the greenback appreciated against the precious metal in a markup stage. For 5 years between 2014-2019, the ratio moved in a sideways distribution pattern (red rectangle). Whilst the Fed aimed to keep rates "lower for longer", the fedfunds rate was hiked into the distribution phase. Rates started declining in the second half of 2019, which coincided with the markdown of the dollar/gold ratio. We note another potential accumulation pattern (second green rectangle) has been charted as monetary policy is set to pivot into a contractionary phase.


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Below we focus on the 2021 year on the same weekly time frame and introduce oscillators to test the ratio. The shorter green EMA has crossed above the longer orange EMA (red ellipse). These are trend-following indicators and if a markup phase is to develop, they need to develop angle and separation, as they move up.The stochastic oscillator is also positive. If it moves into its upper quintile and maintains that position (blue arrow), the odds favour appreciation in the greenback over the precious metal. This would be supportive of the cyclical hypothesis, as seen over the last decade in the relative strength ratio.


Past Performance: Past Performance is not an indicator of future results.

Featured Image by Arek Socha from Pixabay

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Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.


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