Since the 1970s, gold and crude oil have tended to rise and fall together as illustrated by the chart below, with gold and crude prices adjusted for inflation.
The reason is not hard to find. When crude prices rise the Dollar weakens. The chart below compares crude, adjusted for inflation, against an inverted Dollar Index. Major rises in crude are normally accompanied by a similar rise in the inverted Dollar index (signaling Dollar weakness).
However, the inverse is not always true. The 1986 Plaza Accord — where Japan and Germany agreed to scale back Dollar purchases — caused a sharp fall in the Dollar without a corresponding rise in crude.
If Donald Trump successfully negotiates a new trade deal with China, cessation of Chinese purchases could spark a similar decline of the Dollar.
The Dollar Index is currently consolidating between 88.50 and 91. I suggested last week that it may be forming a base. But rising Crude prices add downward pressure on the Dollar.
And Gold is the likely beneficiary.
Breakout above $1375/ounce would signal a strong advance.
We can’t blame Donald Trump for the rise in geo-political tensions around the world. Those are more a legacy of the previous administration’s failure to enforce red lines. But Trump’s communication style does tend to inflame issues and tensions in Syria, North Korea, South China Sea, Ukraine, the Balkans and Baltic states — to name but a few — are also likely to fuel demand for gold as a safe haven.