The Changing Dynamics of the Dollar, Gold, and Oil

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Probably most people are aware of the fact that gold has been going higher.  It is once again approaching $1,000/ounce.  It traded almost to $990 today!  Strangely enough, the dollar has also been climbing, as a result of foreign currencies dropping.  On the other hand, just six months ago, people were asking, “How high can oil get?”  Now, it seems like oil just cannot find a bottom!!  Crude traded below $35/barrel today!!

In our Trade Room today, I pointed out:
HappyTrading 
February 18, 2009 11:40 AM
dollar
breaking higher even though gold is going up!

February 18, 2009 12:19 PM
dollar/gold
check out the past 3 months comparing UUP and GLD. no longer inversely related…

February 18, 2009 12:20 PM
USO
on the other hand, does not seem to be done going down…

So, what am I saying?  The dynamics between the dollar, gold, and oil are changing.  Normally, dollar and gold are “inversely” related.  When the dollar goes up, gold goes down, and vice versa.  But, for the past 3 months, both gold and the dollar have been going higher.  On the other hand, oil just keeps on going lower.  It seems like some people from “Fast Money” on CNBC are perhaps watching our Trade Room.  In the Fast Money show today, they pulled out charts to show the dynamics between the dollar, gold and oil too!  Let’s take a look:

UUP (dollar) vs. GLD (gold)

In this 6-month chart, we can see that UUP (dollar) and GLD (gold) had been “inversely” related up until late January, where both became almost in sync and going higher!

Now, let’s add USO (oil) into the chart:
GLD_5F00_USO.jpg" />
We can see just how much USO (oil) has gone down.  In the past 6 months, while UUP and GLD have gone 10-20% higher, USO has lost about 80% of its value.  Crude traded around $140/barren last summer, and it is now below $35/barrel!

Further, USO may not be done going down!

In this 3-month chart for USO, we can see that it broke the support at $27.5 last week and has started a new leg down.  Its daily MAs are curving lower, deeper into their bearish formation.  USO continues to slide on its daily lower BB.  Its MACD has just begun to curve lower again!  This could also mean that some of the energy stocks have more downsides coming, for instance XOM and CVX!

Since the present economic slowdown is “global”, the dollar held up well against foreign currencies.  It does seem that people believe that the US economy will be able to recover this global economic downturn faster than Europe.  The dollar was much weaker in the early part of 2008 as the Fed started cutting rates.  In the past 6 months, central banks in Europe have been slashing their rates to catch up, and thus, helping to push the dollar higher.  The stock markets around the world have been coming down fast.  As funds get taken out of the stock markets, they have to go somewhere, although much funds are still waiting on the sideline.  The dollar is being bought, especially by China.  On the other hand, gold has always been seen as the “safe haven”.  So, funds have been also running into gold.  Oil keeps dropping as economic forecasts shrink.

Some people are predicting a bounce in oil soon.  But, with the world becoming more aware and focused on alternative energies, how high will oil prices bounce?  Or, will it just stablize and start to get replaced more and more by other resources?  It seems that not only the stock markets are changing fast, the dynamics in the commodities are shifting, too!  We’ll continue to monitor the markets as new trends emerge!

Good night and HappyTrading! ™