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Why Gold Is Still the Ultimate Currency


Despite reaching its all-time high, the stock market has provided investors with zero return over the last five and a half years. Gold, however, has provided a return of approximately 119%.

Let's take a look at the intermarket correlations to see how this rather bearish outlook for the dollar could translate into gold and silver prices.

The Correlation Matrix is a tool which my firm has developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector, (namely: correlations between gold and other assets). The precious metals and the USD Index show a strong, negative correlation for the past 30 days. In the last several days however, gold prices did not continue their decline, that is, did not respond to the USD Index strength. This is a bullish combination and provides an indication that gold prices will rally if the dollar declines significantly (!). It also suggests that additional small (!) daily rally in the USD Index may not really hurt the price of gold (just like it was the case on Friday).

Speaking of gold, let's take a look at the yellow metal from the long-term perspective.

Click to enlarge

In this chart, very little change was seen, compared to two weeks ago. Gold's price moved $0.10 higher last week, an increase of 0.01%, basically flat. With USD Index values moving up a bit last week, the situation isn't all that bad here. It seems that gold prices bottomed in late February by correcting to the declining support line seen on the above chart.

RSI levels continue to describe the situation as very similar to 2008 when a major bottom formed. Back then, it took just a few months for gold to rally from about $700 an ounce to $1,000 an ounce. If a similar percentage increase is seen this year, gold could rally to $2,250 in just a few months (that's not our official target, though). This appears possible based on the long-term cycles still present here as indicated by the vertical lines in our chart.

Summing up, although the cyclical turning point has passed for the USD, it still seems as though the index will soon reverse and move to the downside as it is now considerably overbought on a short-term basis. If the coming decline turns into a bigger one and the medium-term head-and-shoulders pattern is completed, it will likely translate into higher gold and silver prices. For now the bullish piece of information is that gold doesn't seem to react to daily rallies in the USD Index.

Gold appears poised to move to the upside, but the exact timing of such a move is still not crystal clear. Some indicators point to higher prices quite soon; there's a possibility of a very sharp rally over the next few months, but it's also possible that nothing major will happen for a week or two.

(See also: Gold, Silver, and Mining Stocks: Keep an Eye Out for Signs of a Bottom)

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

Twitter: @SunshineProfits
No positions in stocks mentioned.
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