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Plunging Euro, Rising Dollar and Their Impact on Gold’s Future Moves

November 12th, 2013

gold AAAPrzemyslaw Radomski: At the end of October, in our essay on dollar and the general stock market we discussed the USD and S&P 500’s implications for the precious metals market. After that, in our essay on gold price in November we examined the long- and the-short-term outlook for gold. And finally, in our Wednesday’s essay we discussed the situation in the Euro Index and mining stocks. Back then, we wrote that the bearish outlook for the Euro Index was also bearish for gold, silver and mining stocks.

After that essay was published, gold dropped below an important support level at $1,300. Please note that the yellow metal has been trading below $1,300 since Friday and has fallen about 3% in the last four sessions as data on strong U.S. economic and jobs growth boosted speculation that the Federal Reserve will move to reduce its bond purchases and remove a long-running source of support from the gold market. Taking the above into account, investors are probably wondering whether the final bottom of the recent corrective move is already in or not. Will gold test the strength of the October low in the coming days?

Before we try to answer this question, we’ll examine the US Dollar Index and the Euro Index (from many perspectives) once again to see if there’s anything on the horizon that could drive the price of gold higher or lower in the near future. After that, we’ll check what the current situation in the gold market is. We’ll start with the long-term USD Index chart (charts courtesy byhttp://stockcharts.com).

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Long-term USD Index chart

On the above chart, we see that the long-term breakout above the declining long-term support line was not invalidated. Additionally, the USD Index reversed right in the middle of our target area. Therefore, from this perspective, it seems that the downward move will be quite limited – if it’s not already over – because the long-term support line will likely stop any further declines.

Now, let’s examine the weekly chart.

Weekly US Dollar Index chart

Looking at the above chart, we clearly see that the situation has improved. In our last Premium Update published in October we wrote that the USD Index had moved higher and the move below the lower support line had already been invalidated. The invalidation by itself is a bullish signal. Back then, we assumed that if we saw a bold move back above the 80 level, the breakdown would be fully invalidated and the implications would be clearly bullish for the weeks to come.

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