Should you buy or sell gold as the US dollar weakens?

Gold failed investors during the COVID-19 pandemic and this year too. A traditional hedge against inflation, it did not act as it should have, given the surging worldwide inflation and the depressing gold price.

In fact, a close look at the 2022 charts shows the price of gold yielding a negative return. At the same time, inflation reached double-digit levels in the United Kingdom, presses towards similar levels in the United States, and so on.

But as much as it disappointed investors looking for protection, gold price just followed the dominant trend in financial markets.

That is a stronger US dollar.

The dollar’s strength made it difficult for many countries to counter inflation

From the moment the Federal Reserve announced that it would hike the funds rate, many emerging countries began raising rates in anticipation of the Fed’s move. The problem was that most of the debt in the world is denominated in US dollars, and, to stop the capital from fleeing a country, the central banks raised rates.

But the ongoing rise of the dollar during 2022 made it difficult for countries to fight inflation. The strong dollar quickly became the dominant theme as markets quickly synchronized.

As such, the more the dollar advanced, the more the equities fell, bond prices fell, yields rose, and the price of gold declined. Traditionally, the US Treasury yields and the price of gold have an inversed relationship.

Only recently, the US dollar has shown some signs of weakness. Is this a clue that the price of gold might surge from the lows?

Also, is it possible for gold to deliver positive returns in 2022?

EUR/USD suggests that gold might have formed a double bottom pattern

One interesting correlation in 2022 is the one between the EUR/USD exchange rate and the gold price. They moved in a synchronized, direct correlation, and so they will likely do so in the near future.

EUR/USD prepares for the all-important ECB meeting in two days. Expectations are that the central bank will hike the key interest rates by another 75bp and will make TLTROs less attractive to commercial banks.

If that is the case, the financial conditions in the euro area will tighten dramatically in the months ahead, leading to a substantial decline in the ECB’s balance sheet.

But if the correlation with the price of gold holds, it means that a higher EUR/USD exchange rate would lead to a higher gold price. If the double bottom pattern is confirmed, the measured move suggests that the price of gold may deliver positive returns by the end of the year, should the EUR/USD rally well above parity on a hawkish ECB statement.

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