...Let’s talk about Dollar gravity, which is a factor more apparent on the Forex side but obviously it does play a significant role across all market verticals and in particular on the future side. As you can see above the Dollar just completed a series of 10 consecutive higher closes and only yesterday dropped back after touching the 101.4 mark. It would be fool hearted [sic] to proclaim an immediate top here and now as currencies often exhibit excess kurtosis which is a fancy way of saying that they have a tendency to run far beyond your most conservative stops and then some.
Now with that in mind let’s talk about Dollar gravity which I have attempted to visualize by showing you a GOLD:USD ratio (in blue) on top of just the continuous gold futures contract (in green). What you may notice is that the ratio has been dropping below gold over the past few years which means that gold in relation to Dollar strength is weaker than gold on its own.
I know this can be a bit confusing as futures contracts after all are quoted in Dollars, right? But recall that the Dollar index represents the strength of the Dollar in relation to other currencies. And if the Dollar strengthens then it obviously will impose a drag on commodities (as well as stocks) as you require less Dollars to buy the same amount.
What I find interesting is that the ratio and the futures seem to have been in relative sync during the heydays of the goldbugs, which means from about 2005 into mid 2011....MORE