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Will the Breakout in the USD Index Hurt Gold?

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A look at the US dollar's current technical situation, and its implications for gold and silver.

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I haven't touched on currencies for quite some time, but last time I did, I mentioned the long-term breakout in the USD Index. At that time it was starting to take shape, but as the time wore on it became more and more significant. This is why in today's article I'll focus mostly on the US currency, review its current technical situation, and its implications for gold and silver.

Let us then jump straight into the chart analysis – we'll start with the very long-term chart where the breakout is most clearly visible (charts courtesy of http://stockcharts.com).



The index has actually confirmed a breakout above the very long-term resistance line. It has closed above it now for three consecutive months (yes, months). While a correction to the 80 level is still possible in the short term, an eventual move to the upside is now more likely than not. The closest target level seems to be slightly above 85, and although the 90 level could be in the cards as well, for now, we will focus on the first target level at this time.

The situation in the United States has not improved dramatically and the value of the dollar will have to go down eventually because of the massive amounts thereof that were created in the recent months and years. However, please remember that the USD Index is a weighted average of currency exchange rates, so if other currencies depreciate faster relative to tangible assets such as gold, the USD Index could actually rally. Another possibility is if the US situation is bad but it is worse everywhere else, the index could also rally. Anyway, the above chart suggests the USD index will move higher in the weeks ahead, though not necessarily immediately.

Let us move on to the medium term now.



In this chart, the picture is not as clear. The bearish head-and-shoulders formation could still be completed here, but the index would need to move below 79 and then hold this breakdown. If it moves above 84, the bearish pattern would be invalidated. Since the long-term picture is more important and carries greater weight than the medium and short-term outlooks, it is more probable that a rally will be seen, although this may not happen right away.
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