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For Gold, Look to the Euro


Since the dollar index is very heavily weighted towards the Euro, it would make some sense if gold and the Euro were positively correlated.


One of the wise nuggets Todd 'Toddo' Harrison continuously dispenses is the importance of watching multiple asset categories in order to get a more complete picture of any particular trade you're stalking.

I've seen a lot of confusion over the recent drop in gold, but as Toddo and others have pointed out, gold is greatly influenced by moves in the dollar. Since the dollar index is very heavily weighted towards the Euro, it would make some sense if gold and the Euro were positively correlated.
Over the past decade, that has proved to be true. The correlation between 10-day moves in the Euro and continuous gold futures has been +0.4 (on a scale from -1 to +1). Given the size of the sample, it's highly unlikely that this is due to random chance.
So by looking at the prospects for the Euro, we can maybe glean some insights into gold. One small part of that analysis should be a glance at the Commitments of Traders data for foreign currencies, which has been showing some extreme positions over the past few weeks, most notably in the Euro.
The chart below shows the net position for large commercial hedgers in the Euro (bottom pane, in green) compared to continuous gold futures.
Commercials are at their most net short the Euro in history. The last time they had a truly extreme position, November 2004, gold futures soon went into a swoon and entered a trading range that lasted around nine months.
As I noted, this is only one small part of an overall analysis of the likelihood of a further rise in gold, but by watching this data, one would have perhaps been spared from the falling knife over the past couple of weeks.
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