Brexit has become very likely due to result of the UK vote. But so what (gold- and currency-wise)? The uncertainty dropped significantly, and markets were able to sign a breath of relief (bearish for gold), but on the other hand Brexit itself increases the geopolitical turmoil (bullish for gold). Gold didn’t react decisively in the short run overall, but the European currencies: the euro, and the pound rallied. In the first part of today’s analysis, we’ll focus on what happened in the euro and how the forex situation fits the other gold price predictions.
Let’s start with the long-term chart featuring gold price in terms of the euro.
Gold in the Eyes of the Europeans
The most important thing about gold’s performance is it’s 2019 attempt to break above the 2011 highs. It succeeded but only for a short while. The breakout was invalidated almost instantly as it was clear that gold is not able to withstand the selling pressure. Invalidations of breakouts tend to be very bearish developments and this time was no exception. And just like that – gold declined.
It’s been a few months since gold topped and gold – looking from the long-term perspective - is now only a little lower. Some may say that it’s a proof that gold is just correcting after a big rally and that another big upswing is just around the corner. But that’s not what the chart facts support. The fact is that gold failed to break above the previous high, which is bearish. Looking at the short-term performance, it might be both: correction or the early part of the decline, but so far nothing happened that would justify the bullish interpretation.
In particular, please note that back in 2012, when gold also tried to break above the previous high (and it actually succeeded in terms of the monthly highs), and failed, it also declined at a relatively slow pace initially. That didn’t prevent gold from declining very rapidly in the following months.
This means that if you’re using euro for your day-to-day transactions (for instance, because you live in the Western Europe), then you shouldn’t count on the continuation in gold’s rally in the following months. In fact, something exactly the opposite could take place.
If you’re using U.S. dollars for your day-to-day purchases, the above is also very important to you. In this case, the above chart implies that the value of gold is likely to decline relative to what the EUR/USD currency pair will be doing.
And the EUR/USD pair…
The Euro and the Dollar
The Euro Index – proxy for the above – is at its medium-term resistance. Being at an important resistance without breaking above it means that the price is likely to move down. That’s how resistances work.
Moreover, please note that the entire September – today decline is one big prolonged shoulder of the bearish head-and-shoulders pattern (the early-2019 rally being the head). This means that once the Euro breaks significantly lower – below the previous 2019 lows, it’s likely to fall particularly hard. The size of the decline that follows the breakdown below the head-and-shoulders pattern is likely to be similar to the size of the head, which in this case means a move below the 2017 low. Of course, this would have major repercussions for many other markets, including gold.
If the euro declines that significantly, breaking below its 2017 low, and at the same time – based on the previous chart – gold declines more than the euro, gold would likely truly plunge in terms of the USD. Of course that’s not the only factor that points to this outcome, but it’s something that confirms other, even more important factors.