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The Gold Rush Is Likely Over

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Gold ($GOLD) performs its best in a falling U.S. Dollar ($USD) environment.  There is a solid inverse relationship between the direction of GOLD and the direction of the USD that has existed for decades.  The following chart illustrates this relationship from 2001 to 2010:


"Gold thrives when the dollar dives."  Now let's move on to current reality.  The U.S. Dollar has been in an uptrend since 2011 and I'd let the chart tell us when this uptrend is over.  One major factor in the dollar direction is the relationship between our treasury yields and foreign treasury yields.  In my research, I've found that the relationship between the U.S. and Germany is the most positively correlated in terms of equity performance.  I've also discovered that comparing the 10-year U.S. Treasury Yield to the 10-year German Treasury Yield offers up some great clues about the direction of the dollar.  Think about it.  If economic performance is expected to strengthen, treasury yields will typically move higher.  If the U.S. treasury yields are moving up faster than Germany's, it's an indication that our economy is strengthening at a faster clip.  Hence, the stronger dollar. 

Take a look at this relationship and how the dollar is impacted:

When the dollar bottomed in 2011, the $GOLD:$SPX ratio topped.  Since then, the dollar has been trending higher and the $GOLD:$SPX ratio has been declining.  At the top of the chart, the second red arrow highlights the 10-year U.S. Treasury Yield topping vs. the 10-year German Treasury Yield and that coincided with the resurgence in gold during Q4 2018.  But check out those red circles.  There's a new sheriff in town in 2019.  Despite the overall weakness in the 10-year U.S. Treasury Yield, the relationship between U.S. and German treasury yields ($UST10Y-$DET10Y) has improved and we've seen the dollar begin strengthening again.

Meanwhile, although $GOLD performed well in 2019 until the past two weeks, its relative performance has once again turned lower.  If GOLD cannot outperform the benchmark S&P 500, I'm not interested.

As GOLD uptrended into 2019, I gave it a begrudging "short-term buy" endorsement, but with U.S. treasury yields picking up steam once again, I expect GOLD to be an underperformer in 2019.

I'll pass.

Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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