The recent situation in the currency markets is exactly what precious metals investors like to see – for some time now we have been witnessing the strength in euro and weakness in the U.S. dollar. Unfortunately, what we did not see was the usual rally in gold, silver and other precious metals that normally accompanies such a set-up. That is mainly because of the unnatural state of correlations that we already discussed before.
But there were exceptions, such as the rally at the beginning of January, sparked by a plunge in dollar. These exceptions are a good sign – a sign that correlations are returning to what we are used to, i.e. negative correlation between precious metals and dollar and positive one between stocks and precious metals. Maybe a strong signal from the market is what is needed to push correlations back to normalcy. For now, let’s take a look where will the pressure from the currency markets may be and in which way gold, silver and mining stocks likely will move eventually.
The situation on the USD Index is interesting because of the unusual way three charts align to flash three different, yet consistent bearish signals. And we believe that the subsequent moves downward are likely to eventually translate into higher precious metals prices. Let us see why — we will start with the short-term chart (charts courtesy of http://stockcharts.com).
The index is now at its declining resistance line and cyclical turning point. With the previous short term move to the upside, there is a bearish combination in place and index values are likely to reverse right now since the resistance line has been reached. This means that declines are likely to be seen in the days ahead or at least very soon. The index has already declined quite a bit on Friday, after two days of slightly higher prices.
About the Author
Przemyslaw Radomski, CFA, is the founder, owner and the main editor of SunshineProfits.com.