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Can Future Dollar Moves Fuel the Rally in Precious Metals?

Friday November 16, 2012 13:59

The U.S. currency is one of the most influential factors behind the price of gold, silver and other precious metals. When dollar rises the latter usually fall in value and  when it declines, precious metals usually go up.

While the shape of correlation seldom changes, the strength of it is quite often subject to fluctuations. That’s why it should be constantly monitored and this is precisely the reason behind our proprietary tool – Correlation Matrix, that’s intended to gauge both current and historical correlations between precious metals and other assets such as stocks and currencies. Knowing current relations, one can act with greater awareness of what’s going on in the market and consequently make better investment and speculative decisions.

Correlation measures the average relation between two assets in a given period – this means that there can be times when market action is different from what the value of correlation would suggest. Such times can be insightful – for instance when dollar rallies and gold refuses to decline, it can be viewed as a sign of the yellow metal’s strength. And such a situation took place recently in the precious metals sector – we’ll comment on it further in this essay.

For now, let’s move on to the technical part to see what we can expect in the U.S. Dollar market and how it could translate into precious metals. We’ll use the USD Index as a proxy for the U.S. currency and start with its long-term chart (charts courtesy by http://stockcharts.com.)

We see that the USD Index moved to the declining resistance line once again. Since this line was reached, the upside direction of the Index will likely change and a move to the downside is probable.

Now, let’s have a look at the short-term chart.

In the chart, we see a further confirmation of probable moves to the downside. Our target area has been reached (and even slightly surpassed – at the moment of writing this essay the USD Index is at the 81 level) and the index has corrected to the first Fibonacci retracement level. This means that 38.2% of the preceding decline (actually, almost 50%) has been corrected, and the Index will likely move lower once again given the bearish fundamental situation of the USD Index.

The most important implication from this chart is not what will happen to the dollar but rather the relationship with gold and silver. The precious metals rallied today and last week even without a decline in the USD Index. In fact, the index moved a bit higher last week, but the metals soared strongly. All-in-all, this is a very positive sign for the precious metals sector.

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. We have a very interesting picture this week in the very short-term columns. The correlation between the precious metals and the USD Index changed and is now moderate to moderately weak. What used to be strongly negative is now simply somewhat negative. The reason for this is that gold recently managed to rally without declines in the USD Index and in spite of an actual small rally in the USD Index. This is a positive factor for the precious metals sector, so any implications here are bullish this week.

A slightly negative correlation in the last ten days (the very short term) is seen between the precious metals and the general stock market. This is also a positive sign as stocks declined heavily and the precious metals refused to follow. This is indeed a bullish combination for the weeks ahead.

Summing up, the case for the USD Index is now slightly more bearish than not, and the implications for the precious metals are bullish at this time. It seems that if the dollar rallies or trades sideways, precious metals will consolidate or rally slightly and if the USD declines, metals will soar.

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

By Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

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.

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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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