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November 25 Dollar and Gold Report
Well, it appears gold is going to continue running since the euro broke out definitively above the 1.50 level. Given the relationship between gold and the dollar for the last 10 years, either the dollar's really about to break down or gold is frothy. We believe it's the latter, still. This type of situation where gold has run up so dramatically versus the dollar has only occurred twice in the past 10 years. Both times, gold ran longer than anticipated and corrected more strongly than anticipated when it finally did correct. What to know more? Email us and request a copy of our upcoming gold analysis. It's free, but because of that price, it has slipped from our goal of publishing it today until sometime near the end of next week due to other priorities. There is no free lunch....
US Dollar, the Euro, and Gold
The dollar is at an interesting crossroads. Again, gold is either frothy, or forecasting a big downward dollar move.
Below is a chart of gold versus the dollar and the euro since 1995:
The tighter correlation between the euro and gold has been present since 2006, with the euro outperforming at times and gold outperforming at times. In general, gold is (and should be) generally outperforming all currencies.
Here's a closeup of the last 6 months.
Note that since November, the euro (in gold color), and the dollar (in black) have basically been moving sideways while gold (in red) has run up strongly. Since these breakdowns in correlation do not last long, either the gold price is too high and a consolidation is needed, or the currencies are behind the curve with the dollar needing to break down and the euro needing to go on a run. The euro had been leading gold for some time, but at this stage, gold has closed the gap and we should be seeing tighter correlation again. We'll see for sure soon.
Let's look at a bullish and bearish case (short term) for the dollar:
The bullish technical case is a right triangle that would take the dollar up to the 77 level or so, breaking the 50 day moving average. That would be a red flag were it to occur as it would also likely take the RSI above 50, indicating a bullish dollar move. This has happened before, and when it happens while gold is overbought, every time a large correction occurs. The slow stochastic indicates that the dollar should rise, but note that we may be crossing over into bearish territory (if the black line turns down and crosses the red line, then it will imply a bearish trend). Meanwhile, the RSI is below 50 and has opportunity to move down further, but you can see a bullish trendline (in red) showing a series of higher lows. In summary, a bullish case for the dollar here is fairly solid (a relief rally, if you will), except for that little euro problem in the index...
As we've mentioned before, there was a bullish and bearish possibility for the euro. It appears to have broken out in a bullish pattern based on the above chart. The implication is that we favor a bearish dollar case right now. Let's look at that possibility specifically.
In this case, there is another pennant (flag) formation in the dollar charts with a downside target of 73, which is getting very close to our target range near 72. Watch the RSI for a break below the trendline as confirmation of a breakdown in this pattern.
Meanwhile, gold itself continues in a relentless bull run.
This chart is a few days old, but note that it depicts the monthly gold price for the last 10 years and the impact when the RSI moves into overbought on the monthly charts. In every case, the sell-off was substantial. The "lightest" sell-off was 17%. The "heaviest" sell-off was 35%. Factors influencing the magnitude of the sell-off: seasonality, length and depth of the run while overbought, and the state the dollar.
Here's the last 2.5 years of gold on the weekly charts, with corresponding peaks and lows.
And on the monthly, same period.
What does this mean? First, it means that gold goes through euphoric periods like everything else, and when it does, it corrects back to the mean. Ideally, we'll see a 5-10% correction in gold soon. That would be very healthy for the gold market. If it continues at this pace, we will see our 1300 target and then get a big correction. Although this is what we already forecast would happen, we'd rather see a more sustainable move by seeing run ups, consolidations, and then further run-ups. Since the lack of correction at the 1100 level, gold has gotten a bit euphoric--either that, or currencies are in trouble this holiday season. We believe it's a bit premature for that, though that time may well come (which is why you need to own physical gold...).
It's a short week with a lot of travel, so reporting will be light this week. Watch the currency markets for clues as to what's coming up. Equities remain in a consolidation phase which will likely only be sideways trading as long as the dollar remains weak. Let's hope we get a reasonable pull back in gold before it runs its entire seasonal bullish period in a parabolic state. That's not healthy for its sustainable price activity.
