Gold vs. Dollar and Copper. Key Patterns Pointing to a Potential Upside Breakout

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This week, Mike Roy reviewed two important ratio charts that help understand gold’s position in its long-term bull market and where it may head next.

The first chart is the crucial long-term gold/DXY ratio. DXY itself is a ratio chart measuring the relative strength of the U.S. dollar against a basket of major currencies. When gold outperforms DXY, it signals a major bull market, as seen in the 1970s and the first decade of the 2000s, where gold significantly outperformed DXY. Roy identified this chart as a large upward channel, showing confirming price action near the middle line. Earlier this year, the price briefly broke out of the channel, followed by a strong bounce, demonstrating how powerful the upper boundary remains. Pessimists would note that the recent price action eerily resembles the 1980 peak, which led to a 20-year “drought” in the precious metals market. However, initial false breakouts often lead to bullish consolidations at the tops of important trend lines, and this may be what we are seeing now. In any case, if gold wants to resume its multi-year bull market and reach a new peak, as Roy suspects, it needs to reclaim this upper level and leave this channel for good.

The second chart reviewed is the gold-to-copper ratio. Roy has always found the symmetry of this upward channel impeccable—a beautiful inverted head and shoulders pattern with four shoulders on each side. He has long felt that a long-term collapse in gold prices would be accompanied by a channel breakdown and a measured move based on this head-and-shoulders pattern. Currently, the price is inside its 4th right shoulder and right along a six-year support level. Roy suspects this chart might hint at a short-term upside reversal for gold, but predicting timing is often foolhardy with a chart spanning nearly 40 years. The important thing is that if the long-term gold bull market resumes, this pattern should not fail. The last few months have been tough for gold investors, but long-term charts and fundamentals remain extremely positive.