One of the biggest inverse relationships out there is between the U.S. dollar and gold. Some people refer to gold as being an anti-dollar because when people don't want dollars, they run to gold.
Now, this inverse relationship isn't tick by tick, but rather, it shows up over time (months).
Therefore, a lot of my reasoning behind why gold will find a bottom has to do with what I'm seeing happening with the dollar right now.
Back in the April through July period, the greenback was producing higher highs, yet lower lows at the same time. This broadening tug of war on the chart shows that there is a lot of indecision about the dollar and the continuation of its two-year uptrend.
Well, in July, the buck finally broke south, as the bears won that tug-of-war battle. Then the dollar almost immediately broke its two-year uptrend line and headed for its 200-day moving average.
By the time September rolled around, the buck had clearly fallen below its 200-day moving average, which is another sign that the short sellers of the dollar were still in control.
Well, as the dollar peaked out in July, gold bottomed around then too.
Recently, the buck has been rallying upward, since it's almost been a straight shot downward ever since it topped out in July. So it's time for a "bear market bounce" to occur, and that's what we're in right now.
Where does the dollar's bounce upward likely stop? It typically halts around the U.S. Dollar Index's 200-day moving average or lower. As that unfolds, this could have gold retest its July intra-day lows around $1,180.
However, it's in that $1,100 to $1,200 region that I believe gold halts its decline, as the buck gets ready to make its next dive.
But aside from what I'm seeing on the charts, why would the dollar continue to dive overall? Well, Janet Yellen is about to take over as the head of the Federal Reserve. From the speeches and comments that I've heard from her, it tells me that she's more likely to push tapering out much further than the December or March deadlines that most people have for the Fed.
She's more of a believer in erring to the side of stimulating too much rather than too little. So she will print money for longer than Bernanke would have. She'll keep interest rates low for longer than he would have. And all of that adds up to being bad news for the greenback and good news for gold.
However, the reason why this hasn't taken place just yet is because the market is convinced that tapering is coming either this month or within just a few months. So they're expecting the dollar to rally and gold to continue to plunge.
While I could be the one that's wrong, I think the masses are wrong. You see, typically, when "everyone" is convinced that something is going to happen, it rarely does. Why? The masses almost never see the next thing coming ahead of time. If they did, most investors would be very successful. However, we know this is not the case.
The masses think that since Fed Chair Ben Bernanke has alluded to tapering soon that Yellen will just carry that thought on into her reign at the Fed. I don't think that's a safe assumption to make at all.
Therefore, I'm going to go with what I'm seeing happening technically on the charts (which is an overall breakdown in the dollar) and I'll continue to hold onto Yellen's views from the past, knowing that she's not likely to change her stripes now.
Also, people are freaking out about gold's fall like it has already surpassed its June lows. In other words, they are all worked up about it more now than they were then. That's yet one more sign that gold could be nearing its next bottom.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.
© 2023 Newsmax Finance. All rights reserved.