The Swiss Franc and Gold - A Short-lived Relationship?

By: Przemyslaw Radomski | Wed, Sep 7, 2011
Print Email

Based on the September 2nd, 2011 Premium Update. Visit our archives for more gold & silver analysis.


 

Just a few days ago, the Swiss National Bank effectively abandoned the floating exchange rate of the franc by imposing a lower limit of 1.20 on the EUR/CHF exchange rate. This means that the SNB will try to buy so much foreign currencies to bring the rate above that level. The immediate result was the rally of the euro, a rally that was also visible in the EUR/USD currency pair.

Usually the appreciation of the euro and the depreciation of the dollar is good news for precious metals investors. However, this time it seems that the investors are quickly coming to their senses. Switzerland is a relatively small country and it will not be able to artificially sustain a peg to the euro if the financial markets continue to buy francs. This is precisely what we are seeing at the moment - the franc starts to appreciate once again and may continue to do so because of the extremely tense atmosphere in the Eurozone. This is no good news for the euro itself.

The information coming from the USA is not consoling either. Last week the White House tapped Alan Krueger, a Princeton University professor and noted labor expert, to be chairman of the Council of Economic Advisers to help guide the White House through a jobs crisis. (The unemployment rate seems to be stuck at 9.1 percent.) Krueger's appointment might come in handy as President Obama's plans his speech to be delivered next week after the Labor Day holiday where he is expected to roll out a plan with "fresh ideas" to accelerate job growth and jump-start the economy. Obama is requesting a joint session of Congress for next Wednesday. In a letter to the leaders of both houses of Congress Obama said it is his "intention to lay out a series of bipartisan proposals that the Congress can take immediately to continue to rebuild the American economy by strengthening small businesses, helping Americans get back to work, and putting more money in the paychecks of the middle class and working Americans."

He will have to convince skeptical voters that he has something new to offer, but it is doubtful that he has a rabbit to pull out of a hat. He will probably be praying that Congress returns from it vacation willing to work with him.

Everybody gets to say "coulda, woulda, shoulda" at some point in their investing career. Certainly those who have not yet bought gold have said it to themselves more than once over the past couple of years.

One guy who was deep into lamentations and regrets last week was Pimco's Bill Gross. The manager of the world's largest bond fund has admitted that it was a mistake to bet so heavily against the price of U.S. government debt. Earlier this year Gross got rid of US related securities in his $244 billion Total Return Fund. The high profile call that made headlines has backfired as the bond market rallied. As of Monday last week, Pimco's flagship fund ranked in the 501 spot out of 589 bond funds in its category. No much to brag about. Gross, who is one of the most influential voices in the bond market, warned investors to avoid Treasuries. In the July edition of his widely read Investment Outlook, he warned that promises to American's aging population made them "debt men walking."

We appreciate a good play on words and it's not his fault that investors, for some reason, believe that Treasuries are a long-term safe haven. We would have to express some sympathy with Mr. Gross because we can't figure out why anyone would consider sovereign debt paper to be a better safe heaven than gold and silver.

The question for now is whether precious metals are a good bet in the short-term. To answer to that question, we will move on to the technical part of this essay. We will start with the long-term Euro Index chart (charts courtesy by http://stockcharts.com.)

$XEU - Euro Index

On August 19th in our essay on the relationship between currencies and gold, we mentioned:

If the breakout does hold and is verified, a rally in the Euro Index will likely follow. This would almost certainly result in lower values for the dollar and perhaps higher precious metals prices. A breakdown however, will clearly be bearish and likely lead to further declines for this index and may have a negative impact on gold and silver prices as well.

Following the press release of the Swiss National Bank, which we have mentioned at the very beginning of this essay, the Euro Index rallied and briefly broke out above its declining resistance level. However, as the subsequent moves suggest that a move lower is likely, we do not see today's rally as a true breakout and would prefer to wait for a confirmation of the recent move up. Immediate declines would invalidate the breakout and suggest that the euro will not have a positive impact on precious metals. Based on the most recent price action this appears to be the case.

US Dollar Index - Cash Settle

In the long-term USD Index chart, we see the index at the upper declining support line and trying to move higher. However, this price action does not take into account the following fake rally in the euro which turned into a decline. Consequently dollar rallied and moved above the declining trend channel.

If the breakout holds then it would likely mean a bigger rally for the USD Index and it will also likely mean lower values for the precious metals sector.

Summing up, the recent appreciation in the euro seems to be short-lived and we currently do not view it as a bullish signal for precious metals. The following rally in the USD Index took the dollar above the declining trend channel, which - if confirmed and no additional factors emerge - will likely correspond to a decline in the precious metals.

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, we urge you to sign up for our free e-mail list. Gold & Silver Investors should definitely join us today and additionally get free, 7-day access to the Premium Sections on our website, including valuable tools and unique charts. It's free and you may unsubscribe at any time.

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

 


 

Przemyslaw Radomski

Author: Przemyslaw Radomski

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.

Copyright © 2009-2014 Przemyslaw Radomski, CFA

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/