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Rising Euro, Falling Dollar, and Correlations Turned Upside Down

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If precious metals begin to respond positively to this weakness in the dollar, the short-term picture could quickly become bullish for gold, silver, and mining stocks.

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To put the above analysis into proper perspective, let's check the current correlation values.



The Correlation Matrix 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.

The Correlation Matrix is quite confusing this week as it shows that the coefficients have truly turned upside down. They are pretty much neutral for silver when it comes to the 30-day period, but clearly upside down for the 10-day period, as well as for gold and the precious metals mining stocks.

The strangest picture here is between gold and the USD. Gold generally moves opposite of the USD Index, but gold has been pretty much in tune with the USD Index for the last 30 days and has moved in the opposite direction of stocks. In short, the situation is far from normal. However, it seems that this situation will turn back to normal quite soon; the chart below explains why.



The decline in the above chart does quite a good job of representing the simultaneous slide in the dollar and the price of gold, which is what made the correlations turn upside down in the past 30 trading days. In the above chart, we see that the decline is excessive and likely to end or at least pause very soon, so the correlation might return to its normal state in a week or two.

The RSI levels are not much above 30, so further short-term strength is suggested here. If the breakdown is invalidated, the picture then would become clearly bullish.

Summing up, the situation in the Euro Index improved this week while it deteriorated in the USD Index. Since the cyclical turning point in the latter is quite close and a small rally was seen this week, the implications are bearish. If the precious metals sector begins to respond, then much more strength will likely be seen in gold, silver, and mining stock prices.

We expect to see a return of the negative correlation between the USD Index and the precious metals very soon.

Thank you for reading. 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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