It seems that the correlation between gold and the U.S. dollar has become positive, contrary to what we are used to, as we have always witnessed an inverse relationship between the two. This was evident last year, where both assets showed significant strength, with gold rising by 27%, while the dollar index increased by around 7%. The positive momentum for these two assets seems likely to continue in the upcoming period, due to several factors, some of which are shared, while others are different.
The shared factor is considering both assets as safe havens against risks and geopolitical tensions in the Middle East, the Russia-Ukraine war, and fears of the war expanding, which increases the attractiveness of these assets and leads investors to seek them.
As for the different factors, the strength of gold is driven by the following reasons, among others:
- Continued buying by central banks globally, led by the People’s Bank of China.
- Continued demand from Chinese consumers as a hedge against the economic risks facing China, especially concerning the troubled real estate sector.
- A hedge against inflation, which remains entrenched, particularly U.S. inflation, which stood at 2.7% in November 2024.
- Expectations from the dot plot indicating two U.S. interest rate cuts this year, which will give positive momentum to the yellow metal, which yields no return for investors. The lower the interest rates, the more attractive gold becomes.
Goldman Sachs has revised its gold price forecast, indicating that it will reach $3,000 by mid-2026, instead of by the end of this year, suggesting that central bank demand will remain the main driver in the long term.
As for the factors supporting the U.S. dollar, the most significant ones include:
- The outperformance of most U.S. economic data relative to analysts’ expectations, such as the Non-Manufacturing PMI from the Institute for Supply Management (ISM), which recorded a growth of 54.1 points yesterday, higher than the expected 53.5 and previous reading of 52.1. Additionally, job openings recorded 8.098 million, higher than the forecast of 7.730 million and previous reading of 7.839 million, indicating continued flexibility in the U.S. economy.
- The cautious and hawkish statements by Federal Reserve Chairman Jerome Powell, especially concerning inflation, where he indicated that reaching the inflation target of 2% could take one or two years. Furthermore, the Fed’s dot plot was published, showing two interest rate cuts next year, after September’s dot plot had projected four cuts. This reflects a slowdown in the pace of interest rate reductions, which has positively impacted the U.S. dollar.
- Donald Trump’s trade policies, where he threatened to impose large tariffs on imported goods. He also pledged to reduce corporate tax revenues, close the borders with Mexico, and prevent the entry of illegal workers into the U.S., which would fuel inflation again, thus potentially leading to upward momentum for the U.S. dollar index.
It seems that technical indicators may support gold prices in the coming period for several reasons:
- First: The convergence of the 20-day moving average, which is around $2,640, with the 50-day moving average, which is around $2,653. Any bullish crossover between them could indicate positive momentum for the yellow metal.
- Second: The Relative Strength Index (RSI) currently stands at 52, suggesting bullish momentum for gold.
- Third: The MACD indicator (blue) crossing above the Signal Line (orange), which gives positive momentum to the yellow metal.
The upcoming challenge for gold is reaching the $2,700 level, followed by $2,790, which is the record level it reached on October 31, 2024.
Please note that this analysis is provided for informational purposes only and should not be considered as investment advice. All trading involves risk.
