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Has Gold Started to Respond to US Dollar Price Moves?

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A US dollar rally seems likely in the short term, and this will probably have a very negative impact on the precious metals.

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The most important factor on the above chart supporting the bullish case is the cyclical turning point which is in play right now. It's quite possible that we will see its impact on the dollar this week, and this can lead to a bigger pullback. This provides us with strong bullish implications from this perspective.

Combining both perspectives, a move to the upside is still likely to be seen. If the buyers manage to push the USD Index higher, we might see an increase to the level of the June top or even to the rising resistance line based on the May high and June peak before another pause is seen. Taking a look at the long-term charts, however, we see that the next significant resistance is currently close to 86 (86.4) – the declining red line in the chart.

Consequently, from the short-term perspective, we see that the recent decline still seems to be a countertrend bounce. When we factor in the cyclical turning point, we could see another rally soon. Taking a look at medium- and long-term charts, both outlooks for the dollar remain bullish. This is a bearish piece of information for metals and miners.

To make the US dollar perspective complete, let's analyze the impact of the American currency upon the precious metals sector. Let's take a look at the Correlation Matrix (namely: gold correlations and silver correlations).



We have seen negative correlation between the metals and the USD Index. Taking the short-term, bullish outlook for the USD Index into account, the implications for gold, silver, and the mining stocks are clearly bearish at this time.

Once we know the current situation in the US currency and its impact upon the metals, let's turn to our final chart. Today, I would like to present you with an interesting chart which may provide important clues about gold's further price movements: the chart of gold from the perspective of the Australian dollar.


Click to enlarge

On the above chart, we see that the price of gold in Australian dollars has moved up and almost reached the declining resistance line. At this point, it's worth mentioning the previous local top. We saw a pullback to this resistance line in June, but the buyers didn't manage to push gold above it. This resulted in strong declines which took the price all the way down to the April bottom area. If we see similar price action here, gold priced in Australian dollars will likely decline once again. Such a triple-bottom, in this case, would likely mean a breakdown below the previous lows in the price of gold seen from our regular USD perspective, similar to what was seen in June.

Summing up, the situation in the USD Index is particularly interesting this week. Prices are close to the final Fibonacci retracement level and right at the cyclical turning point (and following a sharp decline). A rally seems quite likely in the cards for the short term, and this will probably have a very negative impact on the precious metals.

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

Twitter: @SunshineProfits
No positions in stocks mentioned.
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