Weakening Stock Market Drives U.S. Dollar and Gold Trends

Given the linking of the S&P 500 and gold, when will the metal recover? Models for gold are suggesting that there is a low coming in late July (Chart 2). And as gold is still in a primary bull market, the probability that the yellow metal will advance back to the resistance level of $1,000 in August is high. This would also point to the likelihood of some weakness in the USD$.

The tight correlation between the three markets, stocks (the S&P 500), currencies (US dollar) and commodities (gold) during this bear market would suggest that the expected strength in gold during August should indicate some stability in stocks (S&P 500).

Bottom line: During the final phase of this severe bear market, short-term stock market activities can often be evaluated more accurately by the movements of other markets. As traders are using the big dollar as a 'safe haven' during periods of decline in equities, the ebb and flow of capital between stocks and currencies leaves a footprint on gold. This short-term mark on the commodity can help investors understand the direction of the S&P 500.

Final note. Though the short-term movements between stocks, currencies and raw materials are important, the longer-term perspective of the three markets are also vital for investors to remember. Commodities are in a secular bull market which is anticipated to last another 8-9 years. The US dollar is in an extended downward trend. Currencies always move to their fundamentals. The outlook for the dollar remains negative. The S&P 500 has been in a bear market for 9 years and is expected to stay range-bound for another 8-9 years.

By Donald W. Dony, FCSI, MFTA