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Gold's Relationship With US Currency and Stocks


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

Let us move on to the financial sector, which often leads the general stock market, for more clues regarding the future moves of the S&P 500.

We'll use the Broker-Dealer Index (INDEXNYSEGIS:XBD) as a proxy here.

As I wrote in my essay on gold, stocks and the dollar on July 12, "[F]inancials broke above the resistance level at 130. This could fuel further gains in the stock market."

On the above Broker-Dealer index chart, we see that last week's breakout is still not invalidated. The situation improved a bit (it's closer to being verified), and the outlook is a bit more bullish.

The situation for stocks in the medium term is still quite bullish although it's a bit uncertain in the short term. It seems that we could see further gains in the stock market, but then again, a consolidation could be seen first. It might seem that gold started to trade along with the stock market and the bullish implications are already resulting in higher prices of the yellow metal.

Now that we know the current situation in the dollar, the stock market, and the financial sector, let's take a look at the Correlation Matrix. This is a tool that we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector (namely gold correlations and silver correlations).

The short-term correlation between the metals and the USD Index is negative at this time and has been very weak recently. Gold started to respond to the dollar's price moves (up when the dollar declined and down when the dollar rose), but we feel that was just a temporary phenomenon and the metals will likely continue underperforming.

All in all, with a bullish outlook for the dollar and regardless of whether the negative correlations between the metals and the dollar persist or not, the overall implications for the precious metals are bearish.

Summing up, the USD Index corrected almost to the final 61.8% Fibonacci retracement level but didn't decline below it. If the buyers manage to push the USD Index higher, we might see another rally soon. This is in tune with the medium-term and long-term trends and also with dollar's cyclical turning point. The implications are bearish for the precious metals sector.

Have a great and profitable week!

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

Twitter: @SunshineProfits
No positions in stocks mentioned.
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