Strange Goings-On Between Gold and the Dollar

Lately the greenback and the yellow metal aren't keeping to their normal patterns.
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Gold has a unique, oppositional relationship with the dollar. When the greenback rallies, gold generally bucks any move higher in the dollar. When the dollar falls, gold almost always does the opposite and gains ground.

Although imperfect, gold's negative correlation with the dollar is

statistically consistent on a daily basis and comes with a logical explanation.

Since world gold bullion is primarily a dollar-denominated commodity, anytime the dollar drops, gold becomes relatively cheaper across the globe, increasing the demand. And almost every time the dollar gains, gold prices usually fall as relatively higher prices reduce demand everywhere for the metal.

But when a market doesn't do what it's supposed to, that is, when a "normal" market relationship doesn't hold, take note. That can be a market hinting that the forces underpinning the expected movement are being ignored and that stronger influences are afoot.

Cracks in the Ingot

The dollar/gold relationship is showing fissures. The December

dollar index

(DXZ2:NYBOT) has gained for the past two sessions. February

gold

(GCG3:COMEX) should have traded lower or flat, but it didn't.

Gold traders expecting a reaction rally in the dollar index off its current double bottom and contract low should have sold gold in anticipation of a countertrend bounce in the buck. They didn't. Gold failed to maintain its oppositional relationship. In short, it didn't do what it was supposed to do.

Instead, gold exploded Tuesday to a six-week high and achieved the 325.0 price target I

projected on Oct. 29.

What are the forces that could be straining the statistical relationship between gold and the dollar? The lowest interest rates seen in half a lifetime, which is inflationary, gold

triggering out of a weekly pullback setup and

war jitters.

Other Markets

December

silver

(SIZ2:COMEX) is also trading at a one-month high and asserting itself as a potential momentum mover. December

copper

(HGZ2:COMEX) may be providing a second-chance entry out of its pullback from a one-month high after retouching the trigger Tuesday -- the high of the low bar in the pullback. Copper's 10-day moving average is acting as support.

December

wheat

(WZ2:CBOT) is confirming that it wants to trade down to the autumn low after etching an outside bar down Tuesday. The weak close Tuesday suggests any down pulse to that target could be swift.

Finally, as if on cue, stock index futures -- December

S&P 500

(SPZ2:CME),

Nasdaq 100

(NDZ2:CME), and

Dow

contracts (DJZ2:CBOT) -- all triggered out of classic pullbacks from high setups Tuesday.

Marc Dupee is an independent trader and co-author of the book

The Best: Conversations With Top Traders. Dupee was formerly markets analyst and futures editor for TradingMarkets Financial Group. At time of publication, he held no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he invites you to send your feedback to

Marc Dupee.

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