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Thursday, September 11, 2014

Junk Bonds vs. Gold


The Dollar Since 9/11


The Almighty Dollar

Most are aware of the inverse correlation between the U.S. Dollar ($USD) and gold prices ($GOLD). Although, as with most price relationships in the financial markets, shorter-term disconnects between this correlation exist from time to time but when viewed over longer time periods, such as this 20+ year monthly chart, the inverse correlation between the major trends in the dollar and gold becomes clear. There are also a few very important developments to note on the $USD. First would be the fact that the $USD had been consolidating within a very large, multi-year triangle pattern as shown on the chart below. In fact, this most recent sharp rally in the dollar, which was largely the cause of the recent drop in gold, has brought the $USD right up to the top of that triangle pattern, a key resistance level. This most recent kiss of that downtrend line, which generates off the November 2005 highs in the dollar, marks the 5th tag of the top of the pattern. While an upside breakout of the dollar is certainly a possibility, resistance is resistance until broken and this triangle pattern is very large and long in duration, I’d prefer to wait for a solid monthly close above or below the pattern in order to confirm a breakout in the dollar.