Gold Intermarket: At the mercy of action in the USD index, risk-off could weaken the correlation

The inverse correlation between gold prices and US dollar index is widely known and followed and appears to have strengthened even further in 2016.

A look at the weekly chart clearly shows that the Dollar index is in process of completing the head and shoulder pattern, while gold weekly chart shows an inverse head and shoulder breakout.

The price action confirms the strengthening correlation as well. Dollar index topped out at 110.60 in December 2015, while Gold bottomed out at around $1047 levels in December as well.

Risk-off could weaken correlation

The correlation has been strong as the weakness in the dollar index and the resulting strength in gold has one common factor – Falling Fed rate hike bets.

However, the correlation could weaken significantly if we see a major bout of risk aversion in the markets. This is because US treasuries are a traditional safe haven assets like Gold and increased demand for them results in USD strength. In such events, dollar usually stays resilient against risk currencies and weakens against safe haven assets.

Hence, during bouts of risk-off we may see gold rising despite sideways to positive action in the USD index.