Yellow Gold Rises (Then Falls) (Then Rises Again)As mentioned in my last idea on the subject, Gold is poised to rise dramatically in 2023 due to an upcoming liquidity event.
Gold is a useful coincident indicator when used in conjunction with the USD.
When Gold/USD are negatively correlated, it generally means there's a loosening of financial conditions for whatever reason (e.g., central banks selling dollars to buy gold, credit becoming more available, government sending cheques).
When Gold/USD are positively correlated, it generally means there's a tightening of financial conditions due to uncertainty in the monetary system (e.g., flight to safety, store of value).
What are the charts suggesting now?
First, the dollar has been rising fast and hard since Q2 2021 up +28% in more than a year. It then reversed course in Q4 2022 falling -10%.
This is not at all unusual. Often the dollar falls in Q4 due to seasonal market dynamics. And when it does, it then retraces the entire drop and more in Q1.
As you might imagine, that could be hard on liquidity sensitive assets. Yet gold is interesting in this regard. If the liquidity shock is presaging something more nefarious, such as a global event or credit crisis, then Gold's fall pivots on a dime and the price rockets upwards.
So these are the warning signs I'd be watching for:
A sharp bounce in the DXY here (or as low as 97)
A pullback on Gold to $1,730 (or as low as $1,510)
A pivot in Gold so it rises with DXY
Seeing this play out means that Gold is going to new highs... and that we're in a recession that gets deeper and more painful as the dollar rises.
