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Analysis of Gold in Currencies Other Than the Dollar


Is it a breakout or a fakeout?

In one of the previous essays, I drew readers' attention to the fact that gold has now decisively broken above the $1,000 level, and that this profound action has important implications for all gold and silver investors. I've received many e-mails from investors (for which I am thankful) and several of them asked about the price of gold in currencies other than gold. Therefore, this week I'll provide you with analysis of gold with emphasis on its price in currencies other than US dollar (USD).

Let's begin with charts featuring gold in several key currencies along with the previously featured non-USD version.


The breakout is clearly visible in the popular gold chart on which gold is priced in US dollars.

From the short-term point of view, taking the Relative Strength Index (RSI) into account, we may be at a local top or a few days before it (which is more likely, taking the previously mentioned targets into account). Please note that in mid-September the value of this indicator hovered around the 70 level for a few weeks before the top emerged.

The other indicator included in the above chart, the Stochastic indicator, is one of the useful tools for timing bottoms in gold (its reliability for estimating local tops has been limited in the past), but since we're not near one, I won't analyze it deeply today.

Moving on to the non-USD (gold:UDN ratio) chart of gold we see that metal's value is not yet above its previous highs. UDN is the symbol for PowerShares DB US Dollar Index Bearish Fund, which moves in the exact opposite direction to the USD Index. Since the USD Index is a weighted average of dollar's currency exchange rates with the world's most important currencies, the gold:UDN ratio is the value of gold priced in "other currencies".


Gold didn't break past its previous high in the recent months, but that isn't the same high that one looks at when viewing the price of gold in the US dollar. The March 2008 high was the top that gold broke above in USD -- but taking other currencies into account, it has already broken this level in January. Consequently, the non-USD gold chart is different from its USD counterpart, but is just as bullish. After all, price broke higher almost a year earlier and has verified that breakout a few times over several months, which means that it's now set to rise higher, most likely above its 2009 high.

The Relative Strength Index is at the overbought level in the long-term perspective, but this doesn't concern me. The reason is because it's not the first time that it reaches the 70 level after a multi-month consolidation -- please take a look at September 2007 and the way RSI shaped at that time, I've marked it with a black ellipse. It's been overbought for about a month before a temporary top emerged. Therefore, taking the historical context into account, the normally bearish implications of the RSI at 70 don't really apply here.
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