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Gold's Relationship With US Currency and Stocks

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The short-term correlation between the metals and the USD Index is negative at this time and has been very weak recently.

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According to CNBC, the recent volatility in gold prices has left not only investors and traders puzzled about what is going on with the precious metal.

"Nobody really understands gold prices and I don't pretend to understand them either," Federal Reserve chief Ben Bernanke told the Senate Banking Committee on Thursday in response to a question on why gold prices have been volatile.

Today, gold climbed up over $1,322 per ounce after the US dollar slipped against other currencies. It is the yellow metal's highest level since June 20. In this way, gold broke above a key technical level at $1,300. That level had been tested a few times in the last one-and-half weeks, and after today's breakout, investors are probably wondering what to do next. Can we find any guidance in the charts?

In today's essay, I'll examine other markets to see if there's anything on the horizon that could drive gold prices higher or lower shortly. Let's start with the USD Index very long-term chart. (Charts courtesy of http://stockcharts.com.)



The situation in the long-term chart hasn't changed recently. The breakout above the declining support/resistance line (currently close to 79) has not been invalidated. Therefore, the situation remains bullish.

Now, let's zoom in on our picture of the USD Index and see the medium-term chart.



On the weekly USD Index chart, we see that the recent declines didn't take the index below 82, so the medium-term uptrend is not threatened. The reason is that the medium-term support line was not broken; it was not even reached. From this perspective, the situation remains bullish and my firm expects the dollar to strengthen further in the coming weeks.

Let's check if the short-time outlook is also bullish.



From the short-term perspective, we see that the USD Index dropped last week, but it hasn't declined below the 61.8% Fibonacci retracement level based on the June - July rally. Despite the dollar increase after Ben Bernanke's testimony, the US currency slipped against other currencies once again in the recent days. Although the dollar declined below the Wednesday's intraday low at 82.47 today, the 61.8% Fibonacci retracement level close to 82.20 is still valid and serves as support.
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No positions in stocks mentioned.
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