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When we look at the major headlines in the financial news media, two of the most commonly discussed assets are gold and the US Dollar.  There are important reasons for why this is the case.  But for investors looking to establish active positions in the market, it is important to have an understanding of how the historical trends in both of these assets tend to influence one another.  This can make it easier to establish positions in other areas, as categories like stocks and bonds tend to be impacted by many of the same events.  Here, we can see that it is important to view the ways trading activity in gold and the US Dollar can be used to establish positions in the broader market.

Historical Chart Tendencies

In the chart below we can see that gold and the US Dollar will typically move in opposing directions.  We would say that this means the two assets share an inversely correlated relationship, and this is something that can be used to establish positions in these assets once a trend in one of these areas becomes apparent.

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Chart Source:  Atlanta Gold and Coin

In this chart, the trending moves are marked by the red and blue arrows.  Blue arrows indicate uptrends while the red arrows indicate downtrends.  The boxed areas show situations where the previous trend has run its course and is now reaching its transition point.  This is an occurrence that indicated trend reversal, and this is a formation that gives traders an opportunity to start looking for contrarian strategies.  If you are familiar with broad approaches to you market you might understand that these scenarios tend to provide the best opportunities to buy low and sell high — something that is generally the highest goal for technical analysis traders.

Asset Similarities

For the most part, the inversely correlated relationship that is shared by gold and the US Dollar comes from the fact that gold is typically priced in Dollars.  This means that strong upward movements in gold can have a negative impact on the Dollar (and vice versa).  But while there are many differences in the trend activity that we have seen historically in gold and the US Dollar, there are also fundamental similarities that should be understood by anyone investing in these markets.

Conclusions for Investors

In terms of market sentiment, both gold and the US Dollar tend to rise when general volatility or uncertainty become apparent.  This is because investors are selling off their risky assets in order to buy assets that have a reputation as being a safe haven.  The changes in these supply and demand dynamics tend to be bullish for both gold and the US Dollar, so an awareness of these types of scenarios can make it much easier to spot trading opportunities as they arise.  If you are having trouble establishing a stance on the market, these are some of the viewpoints that technical analysts will consider when determining which scenario (bullish or bearish) is most likely to unfold when looking at some of the market’s most commonly traded assets.

 

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