Gold Drops Dollar Correlation

In a stunning change of momentum, gold prices disconnected from the strong inverse-correlation to the US dollar on Friday, plunging by over $20 points within a very short period of time while outpacing weakness in the dollar. Typically, the opposite would occur with gold prices ticking higher on the softness in the US dollar, however, this marked a change in prevailing momentum, heightening the risks of a serious correction lower in gold prices. With the multi-year trend lower intact and two longer-term technical patterns beckoning a more bearish outlook, there is a strong possibility that prices could fall below long-term support at $1140 per troy ounce. The descending triangle pattern which has been in formation for several years continues to experience a consolidation while the medium-term head & shoulders bearish pattern also highlights the bearish bias in precious metals. Any strengthening in the dollar could see a substantial pickup in momentum lower for gold prices.

After marking the end of the first phase of halting the swift advance of the Houthi rebels in Yemen, Saudi Arabia resumed its aerial and naval bombardment campaign yesterday in a sign that the longer battle for restoration of the government is still in its early phases. While the initial campaign was able to substantially neutralize offensive capabilities of the rebels that could disrupt key shipping lanes and possibly target neighboring Saudi Arabia, the ground campaign will be imperative to restore the Hadi Administration’s rule. Crude oil prices continue to test multi-month highs with the spread between Brent and WTI widening substantially after narrowing early last week. The spread is just above $8 points at present, near the historical spread between the two products of $8-10 after rebounding from just over $5.50. Even with growing production and inventories near full capacity, oil prices continue to display bullish momentum in the near-term.