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Does Gold's Lack of Reaction to a Weak Dollar Invalidate Its Bullish Outlook?

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Gold will likely rally strongly in 2013, perhaps topping close to the $2,500 level. Here's the rationale.

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One concerning factor is that gold and silver moved lower along with the declines in this index. This is not a sign of strength for the precious metals. It means that the metals declined in terms of other currencies, mainly the euro. Let's take a closer look at the gold-euro relationship.



On the above chart we see that the 200-day moving average support line has been reached. This level has been above local bottoms many times in the past. More importantly, the RSI has touched 30 and this has usually been quickly followed by rallies (note red arrows in the upper part of the above chart) in the past so the local bottom may already be in here.

The above chart is important not only because of the signals that we can directly see and that we described in the above paragraph. It's important also because the decline that you can see in the last few weeks is directly linked to the simultaneous decline in the USD Index and the price of gold. Since the decline is likely over (support level being reached, buy signal from the RSI indicator), the same should be the case with the lack of positive reaction in gold to dollar's weakness. The USD Index declines could now begin to impact gold prices, and they could start to move higher any time now.

The limitation of the above analysis is that it doesn't have to be precise on a very short-term basis. In fact, it's based on medium-term price moves. We could see another small move lower that would take the RSI indicator slightly below the 30 level and the above picture would not be invalidated at all – it would become even more bullish based on this factor alone. This was the case in January and December 2011.

Summing up: The situation for the USD Index looks bearish, and this has bullish implications for the precious metals. Since no response was seen this week in gold and silver prices, however, an immediate rally may not be seen based on the above charts. The medium-term picture for gold appears very favorable.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
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