Are Correlations Between Currencies and Precious Metals Returning to Normalcy?

By: Przemyslaw Radomski | Tue, Feb 26, 2013
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We have been witnessing the abnormal situation in the intermarket correlations for quite some time now, i.e. positive correlation between dollar and gold and silver (or virtually no correlation at all) , and negative one between the general stock market and precious metals sector. Such a set-up is not the best from the precious metals perspective, as the overall medium-term outlook is bullish for stocks and bearish for dollar. But last week seems to have brought some important changes to the structure of correlations. Before we analyze them, let's see what happened on the currency market last week - we'll focus on the USD Index (charts courtesy by http://stockcharts.com.)

$USD US Dollar Index - Cash Settle (EOD) ICE

On the very long-term chart we see a move above the declining long-term resistance line which normally would be a big deal. However, in the middle of last year when this happened, it was followed by an invalidation of the breakout and a subsequent decline. We expect to see the same thing here once again. Keep in mind that we have not seen a weekly close above this resistance line and really need to see several before stating that the breakout is truly confirmed.

Let us see how the medium-term perspective looks like.

$USD US Dollar Index - Cash Settle (EOD) ICE

We include this chart in today's article so that we could make some points about the head-and-shoulders pattern. We see that it is no longer perfectly symmetrical, but this does not invalidate the pattern. It could still be the case that a double right shoulder is forming. If the index declines below the 79 level, the pattern and the outlook will once again be just as bearish as if the breakdown took place last month.

Finally, let us take a looka at the short-term picture.

$USD US Dollar Index - Cash Settle (EOD) ICE

In the short-term USD Index chart, we see the index right at its cyclical turning point. The sharp rally this month brought the index to its November high and the last part of this rally severely exacerbated the decline of gold.

With the index at its November 2012 high, at a cyclical turning point, and with RSI levels above 70, a decline here is quite likely very soon if not immediately.

Let us take a look at gold and silver correlations to see how such a decline in the U.S. dollar could translate into precious metals prices.

Correlation Matrix

The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely: gold & silver correlations). We continue to see some return to normalcy between the precious metals and the USD Index. Unfortunately the reason is that precious metals declined as the USD Index rallied. Of course, this must be considered a better scenario than if the metals had declined in price for no apparent reason. The indications are that when the USD Index reverses, the precious metals will do the same. With the USD Index at a cyclical turning point therefore, we could very well see higher prices for precious metals and mining stocks in the coming weeks.

We have mentioned the importance of cyclical turning points in the analysis of the currency markets and we would like to address one of our subscriber's question regarding that matter, as this technique seems to raise doubts among our readers.

Q:Hi there, I was wondering if sometimes cyclical turning points just don't happen at all. For example, we've been waiting for a cyclical turning point in the USD but it just hasn't happened. And it now seems to be forming a right shoulder of a head-and-shoulders pattern. Is there a variable or certain rule about cyclical turning points that I don't know about and would like to understand?

A: Yes, sometimes cyclical turning points just don't happen - just like any technical tool. Good tools work most of the time and excellent tools can be expected to work 80% of the time or so (and it can be the case that something doesn't work a few times in a row only to then work 20 times in a row). Expecting anything more than 80% is not really realistic and thus cyclical turning points also have to not happen at times. It still seems that they will work this time, though.

Summing up, the outlook remains bearish for the dollar. The implications from the currency markets appear quite bullish for the precious metals sector in the weeks ahead.

To make sure that you are notified once the new features are implemented, and get immediate access to our free thoughts on the market, including information not available publicly, we urge you to sign up for our free gold newsletter. Sign up today and you'll also get free, 7-day access to the Premium Sections on our website, including valuable tools and charts dedicated to serious Precious Metals Investors and Traders along with our 14 best gold investment practices. 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.

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