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Gold Provides Invaluable Insight

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Its relationship with the USD Index suggests that precious metals are ready to move higher.

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In China News and Recent Moves in the Dollar Index, I analyzed the situation on the USD Index, and because it has just moved sharply higher, I believe you'd appreciate an update. After covering the situation on the US Dollar market, I'll move to the implications it may have on the precious metals sector.

Moving on to the technical part of this week's update, let's begin with the long-term chart:


Source: StockCharts.com

Previously I mentioned that I saw the USD Index break below the up-trending channel line. This move was confirmed with three consecutive closes below the lower channel trend line, so the next significant move in the index is likely to be down.

Well, by definition, from time to time unlikely has to occur, and this is what we've seen this week as the USD Index rallied dramatically higher. This week the USD Index pierced the lower border of the previous trading channel and once again moved inside of it. However, there is still a lot of evidence that this rally isn't going to last because the latest upswing is knocking up against resistance at the Fibonacci 50% retracement level of the previous decline (March to December 2009). Key Fibonacci levels have historically been reliable in identifying key support and resistance, especially on the US Dollar market.

In addition, the Relative Strength Index (RSI) is right at the 70 level and, looking at when this was the case, in the past four out of five times at least a small rally took place in the precious metals market. Therefore, the long-term USD Index chart suggests higher precious metal prices. Let's take a look at the short-term chart for more detailed view.


Source: StockCharts.com

What is even more visible on the short-term chart than it was with the long-term one is the way precious metals reacted to the recent strength in the US Dollar. Please note that even though the USD Index had a significant rally, Gold and Silver were basically unharmed as they moved down just slightly. I realize that the very recent downswing in precious metals might have appeared dramatic on a day-to-day basis; it's much less so when one compares it to the analogous move in the US Dollar. This certainly bodes well for the possibility of higher prices in the precious metals going forward.
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No positions in stocks mentioned.
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