Gold's Performance Relative to The U.S. Dollar Provides Us with Invaluable Insight

By: Przemyslaw Radomski, CFA | Fri, Mar 26, 2010
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This essay is based on the Premium Update posted on March 26th, 2010.

In our previous commentary we analyzed the situation on the USD Index and since we have just seen it moving sharply higher, we believe you would appreciate an update. Once we cover the situation on the U.S. Dollar market, we will move to the implications it may have on the precious metals sector.

Moving on to the technical part of this week's update Let's begin with the long-term chart (charts courtesy by http://stockcharts.com)

US Dollar Chart

In the previous essay we mentioned that we saw the USD index break below the up trending channel line. This move was confirmed with 3 consecutive closes below the lower channel trend line, so the next significant move in the index is likely to be down.

Well, by definition from time to time unlikely has to occur, and this is what we've seen this week, as the USD index rallied dramatically higher. This week the USD index pierced the lower border of the previous trading channel and once again moved inside of it. However, there is still a lot of evidence that this rally is not going to last because the latest upswing is knocking up against resistance at the Fibonacci 50 percent retracement level of the previous (2009 Mar - Dec) decline. Key Fibonacci levels have historically been reliable in identifying key support and resistance, especially on the U.S. Dollar market.

In addition, the Relative Strength Index (RSI) is right at the 70 level and looking at when this was the case in the past 4 out of 5 times at least a small rally took place in the precious metals market. Therefore, the long-term USD Index chart suggests higher PM prices. Let's take a look at the short-term chart for more detailed view.

US Dollar Chart with Channels

What is even more visible on the short-term chart than it was the case with the long-term one is the way PMs reacted to the recent strength in the U.S. Dollar. Please note that even though the USD index had a significant rally, Gold and Silver were basically unharmed as they moved down just slightly. We realize that the very recent downswing in PMs might have appeared dramatic on a day-to-day basis; it is much less so when one takes compares it to the analogous move in the U.S. Dollar. This certainly bodes well for the possibility of higher prices in the precious metals going forward.

Therefore, despite this week's price appreciation in the USD Index, we are still not bullish on this market. Given the historical significance of the RSI being at 70 and the fact that the USD Index has just touched the 50% retracement of the previous rally leads us to anticipate that the recent USD Index rally will stall out and retrace. In addition, a rally for PMs and PM stocks is looking more and more probable.

Additional details regarding the correlation between the USD Index and the precious metals can be found in our correlation matrix.

Correlation Between the US Dollar and Precious Metals

The main thing to notice on the correlation matrix this week is how we are starting to return to the highly negative correlation between the U.S. Dollar and the precious metals. Look over the last 10 trading days how that the Gold/USD, Silver/USD and HUI/USD are all starting to increasingly get more negative.

Additionally, please take a look at the 30-day column and the values of correlation coefficients between Gold and USD Index / S&P 500. What is particularly interesting is the fact that for the first time since many weeks the correlation between gold and USD Index is stronger than with the general stock market. Moreover, that is also the case with the HUI Index.

When we commented on the correlation matrix in the last week's Premium Update - we wrote the following:

These values are nothing to call home about per se, but once you compare them with the values from the previous week we see that they have all declined, suggesting that perhaps we won't have to wait too long for the return of the strong negative correlation between PMs and the USD Index.

This week, we see stronger evidence of the return of the negative correlation between gold and USD Index, which (as mentioned two weeks ago) is one of the things that would indicate that the PM market is ready to move higher.

Summing up, the USD Index moved to its resistance level after having rallied strongly. This rally caused gold to move lower, but its decline was relatively small. This is bullish for PMs in two ways. Firstly, it means that gold is once again becoming negatively correlated with the USD Index, which in the past meant that PMs are ready to move higher. Secondly, it suggests that the gold market is strong, as it has held up relatively well. Should anything change we will send out a Market Alert to our Subscribers ASAP.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

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

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

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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