The Euro Index Fails to Move Up Decisively. Will Gold Manage to Do What the Euro Did Not?

By: Przemyslaw Radomski, CFA | Fri, Aug 5, 2011
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Based on the August 5th, 2011 Premium Update. Visit our archives for more gold & silver analysis.


 

President Obama's slogan changed from "Yes we can" to "Yes we cave," as heard on one of the Late Night shows this week. It only took the threat of financial Armageddon to get both sides to work together and get the debt ceiling legislation passed. So the U.S. avoided economic disaster, as if $16 trillion in debt is not economic disaster. Congress waited until the last minute, taking an unnecessary risk in a fragile economy and engaging in political brinkmanship that has raised fears in the rest of the world that America is in for a long period of political instability that could have profound consequences for global growth, investment and diplomacy.

Although the week looked promising to bulls after the Washington deal was signed, investors have been scrambling for havens on fears the US economy is facing a double dip recession and worries about the Eurozone and a focus on a slew of downbeat global manufacturing news. (So what else is new?) Stock markets have been taking a major hit and gold has surged to new highs marching into record territory Wednesday, with gold for December delivery rising to a high of $1,675.90 an ounce. (It was only a few weeks ago that we admitted to a bit of a thrill when gold crossed the psychological level of $1,600.) Gold investors didn"t need any additional incentives to buy gold but it probably helped that South Korea's central bank bought 25 tons of gold over the past two months in its first purchase in more than a decade. Events are unfolding in a dizzying speed. Tuesday"s 2.6 per cent slump for the S&P 500 was the biggest single-day drop in a year, pushing the benchmark below its 2011 starting point and taking its losing streak to seven consecutive days in which it fell a total of 6.8 per cent.

Ironically, the deal to cut federal spending signed into law on Tuesday, doesn"t actually reduce federal spending since the new law does not address federal spending on health care. The Congressional Budget Office estimates that the federal debt is likely to exceed 100 percent of the nation"s annual economic output by 2021, largely because of the rising cost of services such as Medicare, Medicaid and Social Security. Bill Gross, founder of Pimco, put it, the debt is not just on paper, it"s also walking/living liabilities in the form of people. "I call these liabilities "debt men walking" because as long as 330 million living Americans require promised entitlements - the $66 trillion that wear shoes are as much of a liability as the $10 trillion on paper," he wrote.

By the end of the 10-year deal, the federal debt would be much larger than today as both the government and its debts will continue to grow faster than the American economy. The debt ceiling deal doesn"t stop the U.S. from going over the fiscal cliff," says Senator Rand Paul, a Republican from Kentucky. "At best, it slows us from going over it at 80 m.p.h. to going over it at 60 m.p.h." he wrote in an open letter.

Whether it is about the global economy or about one"s private investments, the speed of events is definitely crucial. To have our finger on the pulse of the precious metals market, let"s move to the technical part of this week"s essay. We will start with the long-term Euro Index chart (charts courtesy by http://stockcharts.com).

$XEU Index

In the long-term Euro Index chart this week, we see that the Euro Index reversed direction and invalidated the previous breakout above the declining short-term resistance line. It now appears to be attempting to invalidate its previous breakout above the long-term declining resistance line which is now a support line.

The index level is still well above the ultimate support line at the level of 139. A move below this support line would have very negative implication for the European currency. This would also likely have a bullish impact on the dollar.

$USD Index

In this week"s long-term USD Index chart, we see that the breakdown below the rising support line has been invalidated and the index is making an attempt to move above the upper border of the declining trend channel. There have been several attempts previously to move above this resistance line but none have succeeded. It appears that nearly everyone is skeptical at this point about a USD Index rally and we are as well (we generally don"t like the idea of being on the same side of the "boat" as the majority of investors, but it seems to be appropriate at this point). We prefer to wait for a confirmation of a breakout before commenting on any substantial rally taking place from here.

$USD Index

In the short-term USD Index chart, we see that a local bottom recently coincided with a cyclical turning point and the index has rallied since. Additionally, we see no breakout yet above the resistance level created by last November"s low and multiple smaller local highs seen in the past few months. Simply put, the jury is still out as far as where the dollar goes from here. Volume levels in the UUP ETF (which is not featured this week) suggest that the odds of a move higher from here are quite high. This would have negative implications on the precious metals sector and especially upon metals.

In our essay on gold & currencies (July 29th, 2011), we stated the following:

(...) important days appear to be ahead in the currency markets with the euro"s breakout and the dollar"s breakdown subject to being confirmed or invalidated soon. Whichever way things turn out will likely determine the trend in both markets for at least the short term. What is more, the action in currencies may have important impact on precious metals as the relationship between gold and the USD Index seems to come back to normal. Any possible action could add fuel to flame as the situation in gold remains mixed and tense this week with a slight bearish bias.

For the time being, it seems that the influence of the currency markets on precious metals is even more important than before. What is more, the bearish bias seems to have been strengthened by the recent action in the USD Index.

The main issue at the moment is that the signals from the currency markets do not stay in tune with the price movements of gold itself. The most bullish point in this recent move is that it is not only visible in terms of the dollar but also on the non-USD side as we"ll see in our next chart.

$GOLD:UDN Chart

In gold"s long-term chart from a non-USD perspective, we see a confirmation of the breakout seen on the USD side. This is important in that it makes a decline below the $1,600 level appear even more unlikely. The upside target rewards appear to be quite attainable in just a matter of time. It seems well worth waiting for based on the downside risk present today.

Summing up, significant changes were seen this week as the Euro Index has invalidated its breakout and the USD Index has done the same with its breakdown. This bullish development for the dollar, if confirmed, could have bearish implications across the precious metals sector. With gold having moved higher, the short-term situation for the yellow metal appears mixed at this time as a number of possibilities exist concerning gold"s next move. This does not affect the long-term outlook however, which remains bullish.

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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.

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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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