Yellen Turning from Friend to Foe for Dollar Bulls: Good for gold?

From a long term perspective, gold and the dollar have an inverse relationship. If the Dollar gets stronger, people tend to drop gold. On the contrary, if the Dollar weakens people tend to buy gold to hedge, bidding the value up.

The Federal Reserve has encouraged a stronger Dollar these last couple of years, but this may be about to change.

“While Bloomberg’s Dollar Spot Index climbed to a record on Tuesday, the measure is rising at the slowest pace since June and speculators including hedge funds are paring bets on how much the currency will strengthen. Yellen told Congress last week she won’t be locked into a timetable for boosting borrowing costs, just days after minutes of the Fed’s January meeting underlined the damage a stronger dollar can do to the economy.” – Bloomberg

Of course, this won’t happen overnight. For the time being we can expect a strong Dollar in the short future. That being said, I think the picture could change quickly and drastically. The strength of the Dollar is a relative strength rather than a fundamental strength in my opinion.

Let’s take a look at an interesting cycle chart comparing UUP and GLD:

We can clearly see that GLD (in orange) has a lot of room to go up and UUP (in blue) will eventually be pulled by gravity.

 “While bullish-dollar bets remain the biggest position in the market, investors are reducing the amount they’re speculating, according to data from the Commodity Futures Trading Commission in Washington. Net longs on the dollar versus eight major peers fell for the past three weeks to 404,276 contracts as of Feb. 27, down from a record 448,675 in January.” - Bloomberg

I believe we will see GLD move above $120.00 in the months to come.