Tags: dollar | gold

Upcoming Move in Gold Will Stir Dollar Volatility

By Sean Hyman   |   Wednesday, 02 Sep 2009 01:52 PM

Even though I’m a currency guy, I watch other markets to see how they will affect the currency market.

For instance, for months now I’ve been watching the gold chart. It’s coiling up tighter and tighter into what chartists and market technicians call a triangle chart pattern.

When this forms on a gold chart it’s an indication that there is a tug-of-war happening between gold bulls and gold bears. Some are selling gold due to the current deflation in the United States. Others, at the same time, are buying it in light of the inflation that they see coming down the road.

So far, neither side is winning. But both sides get tired of pulling the price of gold to each side. This pattern eventually ends with one decisive winner and a one-way, volatile directional move.

This move will be coming very shortly in gold. It will move the price of gold at minimum by $200 an ounce in either direction in a very short period of time, most likely days to weeks.

This coming directional breakout in gold is going to have an opposite effect on the U.S. dollar.

In fact, there are two currencies that will be affected greatly by the move in the gold market: the Aussie dollar and the U.S. dollar.

Since gold is denominated in U.S. dollars, the two tend to be on the opposite side of the trade from each other. As gold goes up, over time the dollar goes down, and vice versa.

The Aussie dollar will be greatly affected because Australia is one of the world’s biggest gold exporters. As the price of gold rises, so do their profit margins. Likewise, as the price of gold falls, it squeezes these margins.

As Australia’s profits expand it’s bullish for their currency.

So in the end, the AUD/USD will move in the direction of the breakout in gold as the dollar trades in the opposite direction of gold and, at the same time, the Aussie dollar trades in the same direction of gold.

So, keep your eye on which direction this break out and you’ll likely have your trading direction for AUD/USD, too.

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Even though I’m a currency guy, I watch other markets to see how they will affect the currency market. For instance, for months now I’ve been watching the gold chart. It’s coiling up tighter and tighter into what chartists and market technicians call a triangle chart...
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