Are the Dollar and Gold Now Becoming Joined at the Hip?
Today's Idea
If the price direction of Gold and the Dollar begin to correlate, and the risk averse trade again becomes popular with traders, a unique strategy using futures options that would benefit if both Gold and the Dollar move higher in the near-term may be a strategy you wish to consider. For example, with February Gold trading at 1375.80 and the March Dollar Index trading at 80.130 as of this writing, the February Gold 1400 calls may be bought and the February Gold 1500 calls may be sold for about 25.00, or $2500 per spread, not including commissions. To partially offset the cost of purchasing this bull call spread, some traders may wish to explore selling the January Dollar Index 80 puts, currently at 1.21, or $1,210 as of this writing. The selling of the DX option can act as a "hedge" should the direction of the Dollar move inversely to Gold, as was the case most of this year.
Fundamentals
It has been the rare occasion recently for both Gold and the U.S. Dollar to be trading higher on the same day, but that is what we have seen this week, as traders fearing the uncertainty regarding hostilities on the Korean Peninsula as well as the debt situation in Ireland, moved assets back to "safe havens" of Gold and the greenback. Gold also received additional support from continued concerns about inflation. This is especially true in Asia, particularly China, where banking reserve requirements have been raised and price controls for food put in place to help cool the robust economy. It does appear that Gold's recent price correction, during which prices fell about $100 per ounce in only a few trading sessions, may be over, as the market has regained about 50% of the sell-off amount. The rally in the Dollar is more pronounced, with the lead month Dollar Index futures trading at highs not seen since late September, with weakness -- especially in the Euro -- accounting for much of the recent strength. The Dollar got an additional boost from German Chancellor Angela Merkel's comments that the Euro is facing "an extraordinarily serious situation," after the 16-member nations agreed to a bail-out for Ireland's debt situation. With both political and economic uncertainly prevailing at the present time, we may start to see Gold and the Dollar move in tandem in the near future, especially if traders begin shun to a greater extent so called "risky" trades.
Technical Notes
Looking at the daily chart for December Dollar Index futures, we notice what appears to be a rounded bottom formation that cumulated with the spike bottom of 75.235 on November 3rd. Since that time, prices have moved above the 20-day moving average, which sparked additional buying by short-term momentum traders. The 14-day RSI has moved positive, with a current reading of 63.11. Although the recent sentiment has turned positive for the Dollar Index, the longer-term 200-day moving average does not come into play until the 82.30 area, and it will take a daily close above this indicator to signal a potential change in the long-term bearish trend for the Dollar. Support is seen at 75.235, with near-term resistance found at the August 6th low of 80.745.
Mike Zarembski, Senior Commodity Analyst
