Currencies Still Seem To Smother Gold And Other Precious Metals

By: Przemyslaw Radomski | Tue, Jul 24, 2012
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It seems that every season we hear a new catch phrase, be it "subprime," or "quantitative easing", or "risk on, risk off" or "the new normal." The latest bon mot if you haven't already come across it, is "fiscal cliff" with the attendant worry that the U.S. is about to fall off a precipitous edge.

U.S. economists who have been worried this past year about the troubles on the other side of the pond, have now turned their attention back to the U.S.

So what is this "fiscal cliff" that is giving everyone such vertigo?

It is the confluence of several tax-cut measures, including the Bush tax cuts that are set to automatically expire in combination with automatic spending cuts that were set in motion to force lawmakers to do something about the deficit. The day of reckoning for all of them is January 1, 2013.

Sometimes phrases seem to appear out of nowhere but in this case we know the origin. Federal Reserve Chairman Ben Bernanke first used the term in February to warn Congress that the economy could go into decline if lawmakers allow major tax cuts to expire and $1.2 trillion in spending cuts to go into effect all at the same time.

Economists warn that the one-two punch of an increase in payroll taxes and in income tax rates, as well as large cuts in domestic and defense spending could hurl the country back into recession.

Congress could prevent that outcome, but Democrats want to see tax hike for the rich and Republicans want to include the affluent in a renewal of the Bush-era tax cuts. Think of the Democrats and the Republicans as Thelma and Louis. If you recall, Democrats and Republicans took this fight to the precipice the last time the Bush tax cuts were set to expire, in December of 2010.

Last Tuesday, Bernanke, who disappointed gold investors by not mentioning quantitative easing, sounded his warning again.

"I don't have a specific recommendation, other than to think not just about the individual policies, but of the collective impact," Bernanke said. "Congress is in charge here, not the Federal Reserve."

Meanwhile, the prospect of a government-induced recession is already taking a toll on the economy.

A New York Times article said that business executives and policy makers are increasingly concerned that companies have already begun to rein in hiring and investments.

Morgan Stanley echoed the sentiment and said this week that fiscal cliff worries are reaching new heights across a wide range of industries and already there are reductions in business orders and hiring.

A new report commissioned by the aerospace industry says federal budget cuts could cost the country's economy more than 2 million jobs and raise the national unemployment rate by 1.5 percentage points over the next year.

Calling this a major "macroeconomic event", IMF chief economist Oliver Blanchard, said it would cause a recession and probably kill growth in the U.S. next year and probably kill growth in advanced economies.

Analysts seem to agree that the effect on the economy could be dramatic. On the one hand higher taxes combined with spending cuts would reduce the deficit by an estimated $560 billion. But on the other hand, the policies would cut gross domestic product (GDP) by four percentage points in 2013, sending the economy into a recession, according to Congressional Budget Office.

If Congress shows signs of dawdling and playing chicken, as it did with the debt ceiling crisis, for example, that in itself is likely to have an effect on the economy even before 2013 as households and business hunker down into defense mode. It is possible that this will all be put off until after the November elections.

To see whether this daunting debate had any effect on the U.S. currency, let's begin today's technical part with the analysis of the USD Index long-term chart. (charts courtesy by http://stockcharts.com)

USD Index long-term chart

In the chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), we see a verification of the breakout above the long-term resistance line - a major development - and prices appear ready to move higher. This seems likely based on the situation in the Euro Index (which we'll comment on next) and with the breakout here already verified. The upper border of the trading channel formed by the local highs and of the past twelve months is the only resistance line currently ahead and a 5% rise from Thursday's closing index level will likely be needed before this resistance line can be challenged.

What about the Euro Index? Does it confirm the bullish outlook for the dollar?

$XEU (Euro - Philadelpiha) INDX

Last week we saw a confirmation of a breakdown below the neck level of the head-and-shoulders pattern. This was the third consecutive week of verifying this breakdown. The implications are bearish here and, of course, bullish for the USD Index.

So, with a bearish situation in the Euro Index and a bullish one in the USD Index let's have a look at our own tool that gauges the intermarket correlations, to see how the currencies can influence precious metals' prices.

Correlation Matrix

The Correlation Matrixis a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. The medium- and short-term coefficients are the most important to watch, and analysis of the currency markets continues to appear more important than analyzing stocks. Once again the implications here are clearly bearish for gold, silver and mining stocks alike.

With the USD Index likely heading higher, the negative correlation with precious metals points to lower prices for the latter.

Summing up, the outlook has changed very little within the past few weeks and continues to be bearish for the euro and bullish for the dollar. The negative influence of the currency markets upon precious metals seem likely to continue. The most important thing here is the medium-term correlation as it shows that precious metals are likely to move against the USD Index even if this doesn't hold for a few days. If you're interested in reading more in-depth analysis and you would like to know how much can the precious metals (and the HUI Index) decline, we invite you to read the full version of this article.

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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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