Aussie Dollar Weakness A Dangerous Sign For Gold

The commodities front remains mixed as the U.S. dollar’s recent rally has put downward pressures on many resource prices. Furthermore, the ongoing bull run on Wall Street has prompted many investors waiting on the sidelines to jump into equities in lieu of chasing paltry yields in the bond market or lackluster returns in the commodities space [for more market news and analysis subscribe to our free newsletter].

Surprisingly, gold has managed to keep afloat in recent weeks amid the stock market euphoria, which is a commendable feat given the extreme selling pressures it saw earlier in April. The outlook for the yellow metal remains mixed, however, as technical patterns and currency market trends are hinting at another round of selling in the near future.

Chart Analysis

Seasoned gold traders are aware of the historically high correlation the metal exhibits relative to the Australian dollar, and as such, the recent weakness seen in this currency ought be treated as a potential signpost for further selling pressures in the gold market. The fundamental reason behind why the Aussie dollar bears a direct relationship with the price of gold is fairly straightforward; Australia is one of the largest producers of gold in the world, and as a result, its currency tends to follow the price of the yellow metal, although not necessarily in perfect tandem.

The Aussie dollar has been experiencing a steep sell-off over the past two weeks, whereas gold prices have dragged along sideways, thereby potentially hinting at an impending sell-off for the precious metal. Consider the three-year daily performance chart below for the currency pair Australian Dollar/U.S. Dollar:

Click to Enlarge

Notice how the AUD/USD currency pair has been fairly range-bound, with resistance lying around 1.075 and support near 0.975.  Plain and simple, the Aussie dollar has more room to fall from a technical perspective, which should raise a few red flags for gold traders looking to buy into the yellow metal [see 5 Commodity Trading Mistakes You Could Be Making].

Although gold’s recent rally is certainly steep and encouraging, the yellow metal has a history of carving out multiple-bottoms before resuming its longer-term uptrend for good. The Aussie dollar sell-off does not by any means predict lower gold prices; however, it does hint at a higher possibility for a downturn in gold given the historically direct relationship between the two asset classes.

Outlook

With gold prices hoovering between $1,400 and $1,450 an ounce, the next important technical level lies at the $1,400 mark. A break below $1,400 an ounce will likely lead to gold retesting its recent lows around the $1,350 level. Likewise, if the yellow metal establishes definitive support at current levels, and especially above $1,450 an ounce, its rebound has a much higher probability of persisting. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Disclosure: No positions at time of writing