- Gold is Breaking Out Against Currencies Other than the Dollar
- Historical Volatility of the Ratio is Near a 10-Year Low
- Bollinger Bands Can be Used to Calculate the Distribution
When you are evaluating the price of gold it’s important to understand that the yellow metal is quoted in dollars and therefore the price that you see in the United States is different than prices outside the United States. Sure, if you are trading gold in France, you will see the price of gold bar quoted in dollars, but if you want to purchase it, you need to exchange your Euro’s for dollars. So, to purchase gold outside the United States such as the Eurozone, you would evaluate the price in terms of Euros. One way you can see where gold stands as viewed by the world outside the United States is to evaluate the price as a basket of currencies excluding the dollar.
Gold as a Ratio to the US Dollar Index
The chart below is a chart of gold bullion divided by the US dollar index. The index is a basket of currencies including all the majors which include the euro, the yen, the pound, the Canadian dollar, the Swiss franc and the Australian dollar. This chart provides a graph of historical prices of gold regarding the basket as opposed to U.S. dollars. Prices peaked in 2011, during a period when the U.S. financial crisis spilled over into the European debt crisis. Since that time the value gold bullion relative to the dollar index has tumbled 40%, and at its low in early 2016 was down more than 60%.
During 2017 the price of gold quoted in currencies excluding the dollar rallied and is now in the upper end of a 1-year distribution. The chart shows gold divided by the dollar index overlaid with Bollinger bands
What are Bollinger Bands?
Bollinger bands created by John Bollinger are a technical analysis study that provides a moving average, and a standard deviation around that moving average. The Bollinger bands are used to describe historical volatility as well as, how far prices can rise or fall relative to the recent distribution of prices.
The prices used in the graph are monthly prices of gold/$USD, and the Bollinger band calculation is a 12-month moving average with a 2-standard deviation range. Two standard deviations encapsulate 95% of the price distribution, meaning that only 5% of the prices lie outside the range. As you can see from the chart there are times when the ratio of gold to the dollar index rebounds from a Bollinger band high or low, and times when prices slice through these ranges and begin to form a trend.
Where is the Price of Gold / USD?
The ratio of gold to the US basket is now in the upper section above the 12-month moving average and below the Bollinger band high. The ratio has also now broken out above a 2-year range eclipsing the highs generated in 2016 and 2017. So, the question is whether the Bollinger band high with act as resistance or the beginning of a trend.
The ratio has broken out, and historical volatility is near the lowest its been in the past 10-years. Historical volatility is reflected by the Bollinger band width which subtracts the Bollinger band low from the Bollinger band high. A rising Bollinger band means that volatility is climbing and if this is combined with a ratio breakout the likely direction is upward.
To evaluate gold prices which are quoted in dollars, you can divide the price of gold by the U.S. dollar index, which shows you the price of gold in many currencies. The ratio of gold to the index is breaking out as volatility is rising and prices are testing the upper end of the Bollinger band range. While this point might be resistance, it is more likely the beginning of another leg up in the ratio of gold bullion prices in currencies excluding the U.S. dollar.
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Treasure Coast Bullion Group
Read more by Treasure Coast Bullion Group, Inc - Staff Writer