The Dollar Is Likely to Spur Precious Metals to Move Higher

By: Przemyslaw Radomski | Mon, Nov 28, 2011
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Based on the November 23rd, 2011 Premium Update.Visit our archives for more gold & silver analysis.


 

Analysts for Goldman Sachs have recently predicted that low interest rates will keep gold prices climbing for the rest of this year and into 2012 and raised their price forecasts for the precious metal to $1,930 per ounce from $1,860. So far this year, the price of gold is up about 26 percent.

Among other things, gold has been a beneficiary of the imploding euro. It's simple physics, or economics, in this case. Money has to go somewhere. Bonds of the smaller countries have been hit, stock markets have made little progress all year, European bank have suffered losses over Greek debt, so there isn't much choice left for investors. Some European money has crossed the Alps into Switzerland, always the continental safe haven of choice in turbulent times. But the Swiss have taken steps this summer to cap their currency to keep it from rising too quickly and destroying the attractiveness of their exports. German bonds have also been a beneficiary and the yield on the 10-year German bond has fallen to 1.7%, compared to 2008 when it was 4.5%. Germany is the stable, productive, responsible adult on the continent. But even Germany's debt-to-GDP ratios don't dazzle.

Right now, there seem to be three possible scenarios for the euro zone that we can see and all will be bullish for gold.

If the European Central Bank will begin start buying euro-zone bonds on a massive scale, printing money to the tune of trillions of euros to do so, the massive amounts of money flooding the market will inevitably push the price of gold up.

If, on the other hand, the euro zone falls apart, one does not need much imagination to foresee the chaos that will ensue. Using the word "chaos" will be an understatement. Each country will have to introduce new currencies along with stringent capital controls to stop money from fleeing the country. Banks will collapse. We're talking mayhem.

This is the kind of pandemonium that would be a boon for gold. For awhile, gold could become the only credible currency left standing.

A third possibility is that the current mess with a flavor-of-the-week euro zone crisis will drag on for a few more years. Last week Mario Monti was selected to form a new Italian government. Monti, who is known in the Italian press as "Super Mario," will have to face heroic challenges as he tries to steer his country from the brink of economic disaster.

Whatever the most recent crisis, and they seem to appear at an alarming rate of about one a week, gold should also flourish in that environment as investors lose patience and confidence in fiat currencies.

What's the most likely outcome in our view? First the third possibility, then a mix of third and first one, which will ultimately lead to the second scenario - however it seems that it would take years for this stage to be reached.

Now, let's move on from the long-term to the short-term and to the outlook for the precious metals market. Those of us who are interested in where the market is headed in the next weeks will appreciate our technical analysis part. We will start with the analysis of the USD Index (charts courtesy of http://stockcharts.com) and then we will discuss its meaning to the precious metals investors.

$USD Index

In the very long-term USD Index chart, the short-term trend continues to be up and the long-term down. An important resistance line is just below the 80-level very close to the levels that the dollar has just reached.Even if the rally continues from here, it is not likely to take USD much higher.

very long-term USD Index chart

In the short-term USD Index chart, we see that the uptrend in the USD Index has continued this week. Based on the very long-term chart, we see that the resistance line is very close to the current index. The resistance is close to 80 and is likely to be where the index tops. This could be seen very soon. A cyclical turning point is at hand as well which makes this an important point in time. The current rally could reverse very soon, and declines may be seen for some time here.

To see how all of this will most likely influence the precious metals market, let's move on to the analysis of our Correlation Matrix.

Correlation Matrix

In the Correlation Matrix, a tool which allows us to see the impact of the currency markets upon the precious metals, we see a moderate correlation between the USD index and gold in the very short-term (based on Nov 25th closing prices, the correlation numbers are very similar to the ones presented above).

While the classic way of interpreting the correlation coefficients suggests that there is no meaningful relation between precious metals and dollar, we believe that's only half of the story at the moment. In reality, we believe that these numbers should be viewed as a confirmation of gold's strength. The reason is that they say that gold was not really affected by dollar's significant November rally. When approached in this way, these coefficients are indeed quite bullish.

There's a simple way to verify whether the above is the case or not. Namely, when USD finally reverses and begins to slide again, gold will either respond very positively (small move lower in USD would translate into big rally in gold) or not (small move lower in USD would not make gold react in a meaningful way). Based on what we've seen on Monday before the markets opened, it seems that the former is the case and that the points made in the above paragraph are valid.

This is also consistent with the recent indications of our Gold Stock Extreme #2 Indicator which we published on November 23rd, 2011 in our essay on gold price moves:

(...)our in-house developed SP Gold Stock Extreme #2 Indicator (...)has recently moved below the dotted line. This normally indicates that we are at a local bottom or quite close to it. Previously, in 7 of the 8 times this has been seen in 2011, the local bottom was seen if not immediately, then still very soon. Seeing this a few days ago meant that additional few days of trading sideways or slightly lower prices are not out of the question, but that the decline is almost complete.

Therefore, higher prices for the precious metals sector appear to be just around the corner.

The possible action in the dollar greatly supports the points made previously.

Summing up, it appears probable that the short-term move (weeks) for the dollar will be to the downside and this would most likely spur precious metals to move higher.

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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.

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