Gold, the USD and rubber bands

In a prior life I was a sports conditioning professional. Whenever I had athletes who needed to run faster on the field, one of the drills involved giant rubber bands...



The athlete straps into the tubing and starts running as fast as possible while the coach holds the athlete back from top speed while being "dragged" in the same direction. About halfway through the drill, the athlete is "released" from the tubing and hits full speed in an explosive way. After the release, the coach falls back in the opposite direction.

So what does this have to do with gold and the USD?

Simple.

For the last 2 weeks, both gold and the USD have been rallying which seems to defy logic since they are typically negatively correlated assets. What this tells us is that the underlying strength of gold is immense since it's rallying in the midst of a rising dollar.

In effect, the USD is acting as the rubber band on a forward running gold price. If we see a continuation of this trend, it makes a spectacularly bullish case for gold. Why? Fundamentals tell us the USD is in long-term decline and will continue its decline once the flight-to-safety trade is over.

When the dollar decline resumes, gold is likely to cut loose from the "rubber band" that's been holding it back from explosive new highs. I suspect we'll continue to see USD and gold rally together but for how long is anyone's guess.

The longer they rally in tandem, the more spectacular gold's rise will be when the USD drops again. Watch this "race" closely and look for the rubber band to break loose.

When it does we just might witness one of the fastest sprinters in recent memory.