Gold and the Contra-Trend Moves Seen in USD and EUR Indices

By: Przemyslaw Radomski, CFA | Fri, May 13, 2011
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Based on the May 13th, 2011 Premium Update. Visit our archives for more gold price analysis.


 

We took a look at the Premium Update from this time last year and we saw that the more things change the more they remain the same. This time last year we wrote about the Greek crises and it seems that the European Union's strategy of playing for time and hoping that Mr. Ed will learn to speak Greek has not helped the situation much.

It was just a year ago that Europe bailed out Greece. A year later Germany is looking good with growth accelerating and unemployment lower than at any time since German unification. The European Central Bank is even raising interest rates to curb inflation. Things are more or less level in France and Italy, each of which recorded G.D.P. growth of 1.5 percent in 2010, well below Germany's 4.0 percent. But Greece is still a mess with an economy that shrank 6.6 percent, far more than the 1.9 percent decline in 2009. Greece has not managed to restore its creditworthiness and Greeks have not embraced the idea that they need to grit their collective teeth and suffer the austerity cuts for a better future. The cost of borrowing has risen and Greece's chances of renewed access to private lending on terms that the country can afford are not promising.

Recent anti-austerity strike in Greece and Standard & Poor's new warning about Portuguese banks exacerbated the euro-zone sovereign debt worries, sending the euro below $1.43 against the dollar and down more than 1% against sterling. Thousands Greek protesters took to the streets of Athens to demonstrate against the government's austerity measures, which were mandated by the European Union/International Monetary Fund bailout of Greek sovereign debt.

Like we said... things haven't changed much. Last year at this time we wrote:

'The Greeks themselves are not exactly embracing the bailout, as evident by Greek demonstrations which turned deadly this week when three people were killed after protesters set fire to a bank in central Athens. It's hard to rescue a country that doesn't seem to want to be rescued.'

This year's May turmoil comes as fears grow that Greece could default on its debt next year without more help. The euro's drop, just a week after it hit a 17-month high versus the dollar above $1.49, accelerated after steep losses in stocks and commodities led to a stampede for the safe-haven dollar. (We can never truly understand investors who think that the dollar is a better safe haven than gold.) Speculation over whether Greece will receive more bailout funding kept risk appetite volatile with investors pricing in the possibility that the Hellenic Republic will eventually need to restructure its debt.

We believe that postponing the inevitable will not help the Greeks, but only make the debt restructuring hurt more when it finally does come. Greek debt is expected to exceed 160 percent of gross domestic product and could easily go higher. As of now, markets are refusing to touch Greek debt - the latest indication is the recent S&P downgrade.

With so much happening in the markets let's turn to the technical part with analysis of the Euro Index. We will start with the long-term chart (charts courtesy by http://stockcharts.com.)

$XEU Index

In the long-term Euro Index chart, we have seen some declines. Although it could be argued that the euro has moved below the declining support line, this is truly quite insignificant and barely visible in the chart. We view this as a correction within the rally and not as a decline - at least not yet. There does not appear to have been any real change in the trend - only a temporary contra-trend move.

$USD Index

In short-term USD Index chart, we see the usual reflection of what has happened in the Euro Index. The highs of November 2010 seen in the Euro Index correspond to lows here in the USD Index.

The 50-day moving average is also in play here - we can see that it has provided support and resistance for the USD Index level on several occasions in the past and may very well do so again. At the moment of writing these words, USD Index has in fact moved slightly higher, but it's below 76 and points made above remain up-to-date.

Before summarizing, let's take a look at the general seasonal tendencies in the USD Index.

True Seasonals

Please note that the end of May on average marks the end of the decline - we are close to this point, but not yet at it, so further declines or a re-test of the previous bottom is quite likely. (In case you've been wondering, yes, the chart above is actually a screenshot taken from our new soon-to-be-released version of the website. In short - this is not an ordinary seasonal chart that you might have seen on the Internet. It's much more in-depth as it takes into account derivatives' expirations' influence on the prices of a given asset - and actually our website is the only place that provides these charts.)

Summing up, even though it may appear that support and resistance lines have been broken in the currency markets, such is not the case. The USD Index did rally slightly but is tied to the Euro Index which has not invalidated its previous breakout. The key factor here is that the very long-term Euro Index chart is still bullish and it follows that the sentiment for the USD Index is therefore bearish.

Since gold is positively correlated with the euro, a short-term rally in the yellow metal is quite possible (this takes into account the intraday decline seen on Friday). This would be very much in tune with the seasonal tendencies present on the dollar market.

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Thank you for reading. Have a great 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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