Gold prices spike on Dollar weakness

• The USD index (DXY) dropped to its lowest since March, primarily due to strong housing data and a dovish Federal Reserve stance.

• The double top formation indicates a potential decline in the USD index to 102 or lower, while the corresponding double bottom in gold prices suggests continued strength in gold.

• Gold prices surged past $2450 after breaking out of a double bottom, with any price corrections seen as strong buying opportunities due to the weakness in the USD.

The USD index (DXY) dropped and broke its support level, reaching its lowest point since March. This drop was primarily due to the strong housing data showing a 3% increase in Housing Starts in June and a 3.4% rise in Building Permits. These data put some pressure on the US dollar and break the support region. The Federal Reserve's dovish stance, with bets leaning towards potential rate cuts and lower US Treasury yields, contributed significantly to this decline. The market expects a possible rate cut in September. Federal Reserve officials are taking a cautious approach. Richmond Fed President Thomas Barkin suggested that the July policy meeting may debate whether inflation should still be elevated. This further weakened the USD. These elements diminished confidence in the US Dollar, reinforcing its bearish outlook.

This bearish outlook is evident from the double top formation with the neckline at 104. The neckline was broken, and the daily candle closed below this level, triggering further downside in the US dollar index. The double top formed at the trendline, which extends from the September 2023 high into June 2024. The breakout of this double top indicates a potential decline to 102 or lower.

Conversely, this breakdown in the US dollar index has strengthened gold prices, which have broken record highs from $2450 and initiated a strong surge. This surge began after the breakout of a double bottom. It was discussed with premium members in the weekly letter that the gold chart showed an inside candle on Friday, July 12th, and since gold produced new highs after July 8^th (short-term cycle time), gold prices were likely to trade higher into July end. A break of $2425 was expected to lead to a strong and quick move to higher levels, and this is exactly what happened.

Interestingly, while the US dollar index produced a double top, gold prices formed a double bottom. This suggests that gold prices will remain strong due to the weakness in the US dollar index, and any price correction should be considered a strong buying opportunity.

Bottom line

In conclusion, the USD index experienced a significant drop, breaking its support level and reaching its lowest point since March, driven by strong housing data and a dovish stance from the Federal Reserve. Market expectations of a potential rate cut in September and cautious comments from Federal Reserve officials further weakened the USD. This bearish outlook is confirmed by the double top formation at the trendline, indicating a potential decline to 102 or lower. Conversely, this weakness in the USD has bolstered gold prices, which surged past $2450 following a double-bottom breakout. The interplay between the USD's double top and gold's double bottom suggests continued strength in gold prices. Therefore, investors may consider buying gold in the dips.

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