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Recent Rally in Gold: Significant Improvement or Just a Bigger Pullback?

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As the prospect of attacks on Syria receded, gold extended losses.

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Last week, gold rose to its highest level since mid-May as possible military action against Syria prompted safe-haven buying. It's worth noting that the yellow metal gained over $250 per ounce from its June low of $1,180.71. But in spite of this growth, it is still down about 17% for the year.

According to Reuters, gold gave up some gains after British lawmakers voted against any involvement in Syria. Additionally, over the weekend, President Obama stepped back from the brink and delayed an imminent military strike against Syria to seek approval from the US Congress. Our firm's take is that it won't happen anytime soon. You will find more details about this issue, and extensive coverage of the crude oil market, in this week's oil update.

As the prospect of attacks on Syria receded, gold extended losses and dropped below $1,400 per ounce on Friday. Will this drop trigger further dips?

In order to answer this question, we'll need to examine gold's charts to find out what the current situation in the yellow metal is. We will also take a closer look at the US Dollar Index and the Euro Index to find out what impact they could have on future price of the yellow metal. Could they drive gold prices lower in the near term?

Let's start today's analysis with the US Dollar Index long-term chart (charts courtesy of http://stockcharts.com).



Quoting our firm's essay on gold, the dollar, and mining stocks on August 28:
The situation in the long-term chart hasn't changed much recently. The breakout above the declining support/resistance line (currently close to 79) hasn't been invalidated and, from this perspective, the situation remains bullish.

Now let's examine the weekly chart.



Despite the fact that the USD Index declined once again last week, the medium-term support line was not breached. Although we saw a small move below the upper support line, even this small breakdown was quickly invalidated, which is a bullish signal. These positive circumstances encouraged buyers to act, and the dollar came back above the 82 level.

From this perspective, the medium-term uptrend is not threatened, and the situation remains bullish. Therefore, we can expect the dollar to strengthen further in the coming weeks. Looking at the above chart, it seems that the USD Index has started its rally and that this rally will be fueling declines in the precious metals market.

Now let's check the short-term outlook.



From this perspective, we see that the recent decline once again took the USD Index below the 61.8% Fibonacci retracement level based on the entire February - July rally.

Despite this decline, buyers managed to push the USD Index higher, and the short-term breakdown below the Fibonacci retracement level was invalidated.

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No positions in stocks mentioned.
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