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Gold's Price Moves: For Clues to What's Next, Look to These Related Charts

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Are lower prices for the whole precious metals sector in the market's future?

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When we take into account last week's events, it seems that the yellow metal is more sensitive to signs of tapering than any other asset. According to Reuters, gold slipped to a two-week low on Friday after falling through a key technical level near $1,300 as strong US economic data raised fears that the Federal Reserve may start to taper its commodities-supportive stimulus measures. Losses pushed gold toward its worst weekly performance in a month. However, the shiny metal rebounded sharply from a low at $1,285 to $1,317 after weaker-than-expected US non-farm payrolls.

Does this mean that the Federal Reserve may have to push back plans to taper the current round of quantitative easing? A pushback of the plans is believed to be bearish for the US dollar and bullish for gold. Will we see a bullish scenario in the precious metals market? Or are recent gains just a result of speculation, and gold's position will deteriorate?

In a previous essay, I wrote that if you want to be an effective and profitable investor, you should look at the situation from different perspectives and make sure that the actions that you are about to take are really justified. That's why in today's essay I'll examine the gold chart from the European perspective and check how gold stocks move relative to gold. Do they provide us with interesting clues as to the next possible moves in the entire sector?

Let's take a closer look at the charts below and find out for ourselves. (Charts courtesy of http://stockcharts.com.)



Let's start with a short recap of what's been going on with the Euro Index recently. After an invalidation of the bearish head-and-shoulders pattern on July 10, the European currency continued its rally throughout the next two weeks. Although the euro climbed up and improved its position, the buyers didn't manage to push it above the 133 level on July 25. This psychological resistance level slowed the rally and triggered a consolidation.

At this point, it's worth mentioning that this price action in the euro led to further weakness in the dollar. Although these changes should have had bullish implications for gold, the yellow metal didn't move sharply above the highs it had established on July 23 and July 24. In the following days, metals declined even though the dollar moved lower, which is a strong bearish sign.

Another bearish factor on the above chart is the declining resistance line based on the January top and the June peak. We saw its impact on the euro last Wednesday. The European currency touched this declining resistance line without breaking it. From this perspective, it seems that the top may very well be in, which is a bearish factor for the precious metals sector.

In recent days, the Euro Index declined below the 132 level and is still trading below the previously mentioned 133 level. If the euro declines further, we might see another head-and-shoulders pattern on a smaller scale.

The combination of the psychological resistance level and the aforementioned declining resistance line may have encouraged sellers to go short and thus triggered a correction. In this case, the Euro Index will likely bounce off the psychological resistance level at 133 once again. If we see such a bearish scenario, it would likely lead to a strengthening in the dollar, which could then lead to medium-term weakness in precious metals.

Now that we know the current situation in the European currency, let's take a closer look at gold priced in euros.



On the above chart, we see that the situation hasn't changed much from what we saw in the previous weeks. Gold priced in euros remains below the 50-day moving average, which still serves as resistance. Moreover, the yellow metal didn't break out above the previously broken, important long-term support line which turned into resistance.
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No positions in stocks mentioned.
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