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Trading Lessons

U.S. Dollar, Euro and Their Influence on Gold and Silver

Commodities / Gold and Silver 2013 Nov 29, 2013 - 04:42 PM GMT

By: P_Radomski_CFA

Commodities

In our essay on precious metals from Nov. 22, we focused on the markets from the long-term perspective. As we wrote in the summary:

(...) the final bottom for the decline in gold, silver and mining stocks doesn't seem to be in just yet.

On the next trading day, after the essay was posted, gold, silver and mining stocks declined and dropped to their fresh monthly lows. Although we've seens some improvement in recent days, precious metals still have been trading in the narrow range.


Many times in the past, the situation in the U.S. dollar and the euro gave us important clues about future precious metals' moves. Therefore, today we'll examine the US Dollar Index (from many perspectives) and the Euro Index to see if there's anything on the horizon that could drive the precious metal market higher or lower in the near future. We'll start with the long-term USD Index chart (charts courtesy by http://stockcharts.com).

$USD US Dollar Index - Cash Settle (EOD) ICE - long-term chart

From the long-term perspective, the situation hasn't changed much recently. The long-term breakout above the declining long-term support line has not been invalidated. Additionally, the USD Index reversed right in the middle of our target area. Therefore, from this perspective, it seems that the downward move - if it's not already over - will be quite limited because the long-term support line will likely stop any further declines.

Now, let's examine the weekly chart.

$USD US Dollar Index - Cash Settle (EOD) ICE - Weekly Chart

Looking at the above chart, we see that at the beginning of the month the USD Index reached the 50-day moving average, which triggered a corrective move in the following weeks. With this downward move the U.S. dollar dropped to the low that we had seen three weeks ago, therefore, we might see a post-double-bottom rally in the coming weeks.

Keep in mind that from this point of view the current correction is still shallow, which is a bullish signal for the short term. As you can see on the above chart, recent weeks have formed a consolidation, which is likely a pause before further increases.

Let's check the short-term outlook.

$USD US Dollar Index - Cash Settle (EOD) ICE - Short-term Outlook

As you can see on the above chart, the USD Index extended its decline and dropped to the previously-broken support/resistance line created by the June low. Last week, the proximity to this support level (or comments from the Fed about the possibility of tapering the QE program - which we don't believe, by the way) triggered a sharp move up, which took the dollar above the level of 81 once again. Therefore, since this level was reached once again, it seems that we might see a similar rally once again. Additionally, the greenback formed a daily hammer (reversal) candlestick, which is another bullish sign.

On top of that, both happened right after the cyclical turning point, which amplifies their bullish implications. Connecting the dots, it seems that another move up could be seen shortly.

Let's now take a look at the medium-term Euro Index chart.

$XEU Euro - Philadelphia INDX - medium-term Euro Index Chart

As you see on the above chart, since the beginning of the week, the euro has continued its rally. The Euro Index moved above the level of 135 once again and corrected exactly 61.8% of its October-November decline (to 136.09).

At this point, it's worth mentioning the short-term rising support line based on the July and September lows, which is slightly above the 61.8% retracement. Looking at the above chart, we clearly see that despite the recent corrective upward move, the breakdown below this line hasn't been invalidated.

Combining these two facts, we can conclude that the move up is quite likely over and the decline can continue. If we see a move below 131.56, the bearish implications will be even stronger.

Having discussed the current situation in the U.S. currency, let's see how it may translate into the precious metals market. Let's take a look at the Correlation Matrix.

Correlation Matrix

The Correlation Matrix is a tool which we developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold correlations and silver correlations).

The correlation coefficients remain strongly negative as far as the short-term (30 trading days) link between precious metals and the USD Index is concerned. The 10-day column includes values close to 0, which simply means that gold didn't respond to dollar's move lower - which is a bearish sign.

Summing up, looking at the current situation in both currencies, we are likely to see weakness in the Euro Index and improvement in the USD Index on a short-term basis. As mentioned earlier, the USD Index reached its cyclical turning point and, taking this fact into account, it seems that the bottom of the current correction is already in. Additionally, the euro corrected exactly 61.8% of its October-November decline and approached the short-term rising support line without breaking it, which means that the move up is quite likely over. Therefore, currently, the implications for the precious metal market are bearish.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold & Silver Investment & Trading Website - SunshineProfits.com

* * * * *

About Sunshine Profits

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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