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Why Gold and Silver Correlations Must Be Monitored Constantly

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Correlations should be constantly monitored in order to avoid formulating conclusions and forecasts automatically.

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Correlation is a useful measure – it helps us make predictions about a variety of events. But it's also a bit tricky – while there are relationships that seem stable (such as the fact that rich people tend to spend more on luxury goods than the less wealthy), there are some that do experience some volatility. These require special caution, as relying blindly on what was seen in the past without checking whether it is still true can lead to disaster.

Unfortunately, precious metals markets fall into the latter category, hence the relationships between particular assets need constant monitoring in order to be useful and – which is even more important – not to be harmful to the investors. We have already written about the correlations between gold, silver and US dollar turned upside down, and it seems that a lot of what was written then is still in place, however, due to the fact that markets change every day, it is a good idea to see if there are any indications that the situation will soon return to normalcy.

To do so, let us move on to the technical part of today's essay – we'll start with the analysis of euro's long-term chart (charts courtesy of http://stockcharts.com).



We saw a sharp rally last week as the declines of late 2012 were erased and the index is back to levels not seen since December 2012. With the correction behind us, it now seems that higher values are likely as a short-term uptrend is in place.

The most recent declines stopped at two Fibonacci retracement levels. The first was the 38.2% level based on weekly closing prices and the second the 50% level based on intra-day lows. The Fibonacci retracement levels once again have shown their value as a useful technical tool.

Let's move on to the US currency and see whether the rally in euro has had any influence on the USD.



We begin the analysis of the USD Index with the long-term chart since it gives us a bigger perspective. With the situation bullish for the euro, it seems that a bearish outlook here would be no surprise. This is very much the case as the index closed below the resistance line yesterday. No breakout has been seen and a recent attempt to move above this line was invalidated. The outlook here is clearly bearish at this time; the resistance line appears strong enough to hold a possible short-term rally in check.
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No positions in stocks mentioned.
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