This week it was the Forex market that demanded my attention. Not because it was flailing out of control, on the contrary, it was because thatâ€™s where the excitement was. The British Pound, Euro, and Australian Dollar either hit new highs this week or crossed important price levels, all at the expense of the US Dollar.
It safe to say that the US Dollar is firmly entrenched in a Bear Market and itâ€™ll probably get worse before it gets better. I fully understand why traders are shying away from the US Dollar but the one thing thatâ€™s causing me to scratch my head is gold prices. Why on earth are they so low? I would expect that a weak US Dollar should give Gold prices a boost, but it hasnâ€™t.
According to some current research Iâ€™ve done for publication, an interesting non-linear relationship has presented itself between Gold and the US Dollar. These results made me challenge conventional wisdom that a weak dollar = strong gold prices.
Based on this curve, and using Wednesdayâ€™s closing prices, Gold should be trading at $570/oz (USD closed at 80.28); gold closed at $662 that day.
This means that either:
- Gold prices are two high and should come down, or
- The US Dollar is too weak, or
- My model is wrong
My point is, assuming my model isnâ€™t wrong, that inefficiencies exist in the markets more often then we believe Sooner or later these inefficiencies will correct themselves, usually very violently, without any warning.