Get 40% Off
🔥 This hedge fund gained 26.16% in the last month. Get their top stocks with our free stock ideas tool.See stock ideas

Gold Now Waiting On U.S. Dollar Top

Published 03/08/2015, 12:33 AM
Updated 07/09/2023, 06:31 AM
EUR/USD
-
USD/JPY
-
DX
-
GC
-
GDX
-

Gold had held up well in recent months considering the upside explosion in the US Dollar Index. That is because Gold surged nearly 21% against foreign currencies in three months. Still, this is not enough to carry Gold. Its rebound petered out (in nominal and real terms) after the Swiss news and has growing downside momentum due to the surging USD index. We’ve seen some positive developments under the surface for precious metals but it's clear the sector won’t begin a sustained rebound until the USD reaches its next peak.

Gold priced in foreign currencies (FC), as discussed repeatedly is often a leading indicator for Gold as shown below. Gold/FC led Gold higher during the 2001 and 2008 bottoms and led Gold to new highs in 2001, 2005 and 2009. The current period could be similar to 2000-2001 during which Gold/FC trended higher as Gold trended lower. Then, the first divergence showed up in February 2000. Gold stocks bottomed nine months later and Gold bottomed 13 months later. The first big divergence this time around was near the end of October 2014.

Gold vs Foreign Currencies vs Gold in USD 1998-Present

Turning to currencies, in recent weeks we noted that the USD index had reached its third most overbought point since 1971. First it was yen weakness driving the USD higher. Recently it was both the yen and the euro. In recent weeks the yen has not made a new low while the euro has plummeted. Clearly, the USD index won’t correct until the euro’s decline finishes.

Below we plot a weekly chart of the euro that includes indicators showing the euro’s distance from various exponential moving averages (20,40,80). We mark and highlight the rebounds from the most oversold points. A few weeks ago the euro was arguably at its second most oversold point since 1990. Considering the depth of the euro’s decline and its current standing it appears in a somewhat similar spot to early 2000. See the arrow.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

XEU Weekly

In considering the extremes in the currency markets, we are looking for big counter trend moves in the months ahead. However, in the short term the euro, which we think is the key, lacks major technical support until parity. It has room to fall further. While a major snapback is likely ahead (and the reverse for the USD) it is not necessarily imminent.

As I pen this, Gold is trading at $1167 and Market Vectors Gold Miners (ARCA:GDX) has 12% downside to test its daily low. Don’t be surprised if precious metals bounce in the coming week as Gold has support at $1160. That being said, Gold looks like it’s headed for a test of at least $1080 (the 50% retracement of the bull market) while the miners are headed for a retest of their lows. That is the bad news but the good news is precious metals are finally moving closer to the end of the seemingly forever bear market.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.