How does the Dollar Index (DXY) impact the direction of Gold?
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Gold has been a highly valued metal throughout human history. The other day I was reading up on some macro trends concerning inflations and money management and found that right from 1500BC, gold has been actually used as an economic vehicle much like the modern-day currency.
The scarcity factor and the industrial advantage of this metal have made this the most sought after and fought for commodity. Cities and kingdoms have been brought to dust, for a few glittering yellows. Today, it's ironic how a technical understanding of candlestick charts and other parameters like the Dollar index can keep away so many tears and bloodshed!
In 1971 US President Richard Nixon declared that the United States would not consider gold as the fixed denominator for printing money. Since then, it has all become apparent that the value of gold is what and how much the US Dollar is able to buy for it.
Hence, the easy mathematical interpretation is that the two are inversely related. Gold gets cheaper when USD is getting expensive and is in high demand. The opposite is true for a falling USD valuation. The Dollar Index is a good focal point for studying how to trade gold.
I think this image will elucidate the point better.
Gold due to its appeal as a safe haven is considered a good hedge against the stock market volatility and I see that people are much vocal and propagating the buying of physical gold etc, especially when there is a crash like that during March '20 crash.
All things being said, I think it is important to have an objective point of view of the charts while we study for the purpose of trading commodities. If you come across a chart of Gold that has a direct correlation to DXY, it is perhaps not an exception. The Dollar itself can be going through a valuation revision and that might temporarily pull or push the prices in awkward pockets.
I think it's much simpler to just consider the important levels; like that of Support and Resistance to find our Highs and Lows, to deploy a trade!
What do you think?