Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Is the Plunging Euro Bullish or Bearish for Gold?

Commodities / Gold and Silver 2010 Apr 27, 2010 - 02:00 PM GMT

By: Przemyslaw_Radomski

Commodities

Best Financial Markets Analysis ArticleIn our previous essay we've discussed i.a. the changes in the strenght of influence that the U.S. Dollar has on the price of gold and what it means to gold Investors / Traders. In the following essay, we will provide you with a follow-up on the analysis regarding U.S. Dollar, and then we will move to the gold market itself.


In the first part of this essay we will begin with a reply to the interesting question that we've received during the previous week about gold, U.S. Dollar and Euro. The question was:

Since Greece looks likely to default ... Are we now looking at a major drop in the value of the Euro resulting in a major rise in the value of the dollar ... resulting in a collapse of gold prices?

In addition to the points made in the full version of this essay, we would like to provide you with additional thoughts regarding that matter, as there is another reason as to why the Euro down -> Dollar up -> Gold down is not that simple.

The market mechanisms would work in the above-described way if we assumed that the value of gold in Euro couldn't change. In this case if value of Dollar increased against the Euro it would have to mean that its value against gold would also increase. In other words, value of gold in USD terms would indeed decrease.

However, not only can the value of gold in Euro change, but it (as you will see on the gold:UDN ratio chart, which trades very closely do the gold in Euro) has very strong technical reasons to rally.

Now, if we assumed that the value of gold in Euro moves much higher ceteris paribus (all other things unchanged), then the above implication (Euro down -> Dollar up -> Gold down) loses its reliability.

Let's take a look at a simple simulation:

  • Gold in Euro moves up by 100% from 1,000 to 2,000
  • Dollar goes up against Euro from 0.7 to 0.9 (meaning that 1 dollar used to buy 0.7 Euro and now it buys 0.9 Euro)

What impact does it have on gold in the U.S. Dollar?

At the beginning gold traded at $1,429 (1000 / 0.7) and now it trades at $2,222 (2000 / 0.9), which means that it increased by about 56%.

So - we have an increase in the value of gold in both: USD and EUR, which means that gold increased its value against the U.S. Dollar while the Euro decreased its value against the U.S. Dollar.

Of course, the numbers above are just hypothetical, and everything depends on the sizes of the respective rallies/declines, but the above example clearly shows that a decrease in the value of Euro (against the Dollar) does not need to translate into lower price of gold.

At this moment, it's not hard to imagine European investors to purchase gold in response to the Greece-related turmoil. Yes, there will be investors willing to purchase dollars as a safe-haven (which we find rather ironic at this moment), but some may be willing to purchase PMs. As in many other cases - charts provide timing details, and right now, the situation appears bullish - also from the non-USD perspective - we will get back to this issue in the following part of this essay.

Moving on to the analysis of charts, let's begin with gold from the long-term perspective (charts courtesy by http://stockcharts.com.)

The big news is that we have seen the return of a self-similar pattern meaning that past performance would likely be replicated to a considerable extent.  During the previous week, we saw a continuation of this trend. In the latest Market Alert, we suggested buying gold, silver and mining stocks even though a period of sideways movement may be imminent.  We did have some sideways movement this week, as indicated at that time and with the RSI moving down from around 70 to 50 it seems that gold is becoming ready to rally soon (as explained in the full version of this essay - not necessarily immediately.)

The 50-day moving average also comes into play here. Please note that at the end of September 2009 gold bottomed after declining about half of the distance between previous high and the 50-day moving average. This is also where we are today, which suggests that gold is not likely to move below the very recent low - or even if it does - that it would move much lower.

The Stochastic Indicator suggests that it should be below the 20 level before the true bottom is reached. Presently it is around 50.  This indicates that we may need to see further consolidation with gold trading sideways in a tight trading range

History tends to rhyme more often than repeat and therefore we do not advise waiting for the Stochastic Indicator to drop to 20.  It may, for instance, only go down to 30 or even 40 before the consolidation completes and the rapid rise begins.

The analysis of gold from the non-USD perspective confirms points made above.

From the non-USD perspective, let’s revisit the April 9th, 2010 Premium Update explaining exactly what the above chart indicates:

UDN is the symbol for PowerShares DB US Dollar Index Bearish Fund, which moves in the exact opposite direction to the USD Index. Since the USD Index is a weighted average of dollar's currency exchange rates with world's most important currencies, the gold: UDN ratio means the value of gold priced in "other currencies".

On April 9th, 2010 we wrote that we can expect a brief test of this breakout.

This is precisely what we've seen - the ratio declined to the 42-43 area and moved back up, thus confirming the breakout. While it is not certain that this ratio will move higher immediately, this chart clearly indicates bullish trends for the medium- and long term.  In the short term some consolidation is not out of the question, but we don't think that a plunge below the 42 level is likely, which is in tune with what used to happen at the end of April.

Summing up, last week we stated that we expected gold to move sideways or decline slightly in the near-term, but we were bullish medium-term, consistent with the prior week and these comments are up-to-date also this week. The full (6 times bigger) version of this analysis is available to our Subscribers.

To make sure that you are notified once the new features are implemented, and get immediate access to my free thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

P. Radomski
Editor
Sunshine Profits

    Interested in increasing your profits in the PM sector? Want to know which stocks to buy? Would you like to improve your risk/reward ratio?

    Sunshine Profits provides professional support for precious metals Investors and Traders.

    Apart from weekly Premium Updates and quick Market Alerts, members of the Sunshine Profits’ Premium Service gain access to Charts, Tools and Key Principles sections. Click the following link to find out how many benefits this means to you. Naturally, you may browse the sample version and easily sing-up for a free trial to see if the Premium Service meets your expectations.

    All essays, research and information found above represent analyses and opinions of Mr. Radomski 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, Mr. Radomski and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above belong to Mr. Radomski or respective associates and are neither an offer nor a recommendation to purchase or sell securities. Mr. Radomski is not a Registered Securities Advisor. Mr. Radomski does not recommend services, products, business or investment in any company mentioned in any of his essays or reports. Materials published above have been prepared for your private use and their sole purpose is to educate readers about various investments.

    By reading Mr. Radomski's essays or reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these essays or reports. Investing, trading and speculation in any financial markets may involve high risk of loss. We strongly advise that you consult a certified investment advisor and we encourage you to do your own research before making any investment decision. Mr. Radomski, 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.

Przemyslaw Radomski Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in