Are Correlations Between
Currencies and Precious Metals Returning to Normalcy?
By Przemyslaw Radomski, CFA
We have been
witnessing the abnormal situation in the intermarket correlations for quite some
time now, i.e. positive correlation between dollar and gold and silver (or
virtually no correlation at all) , and negative one between the general stock
market and precious metals sector. Such a set-up is not the best from the
precious metals perspective, as the overall medium-term outlook is bullish for
stocks and bearish for dollar. But last week seems to have brought some
important changes to the structure of correlations. Before we analyze them,
let’s see what happened on the currency market last week – we’ll focus on the
USD Index (charts courtesy by
On the very
long-term chart we see a move above the declining long-term resistance line
which normally would be a big deal. However, in the middle of last year when
this happened, it was followed by an invalidation of the breakout and a
subsequent decline. We expect to see the same thing here once again. Keep in
mind that we have not seen a weekly close above this resistance line and really
need to see several before stating that the breakout is truly confirmed.
Let us see how
the medium-term perspective looks like.
We include this
chart in today’s article so that we could make some points about the
head-and-shoulders pattern. We see that it is no longer perfectly symmetrical,
but this does not invalidate the pattern. It could still be the case that a
double right shoulder is forming. If the index declines below the 79 level, the
pattern and the outlook will once again be just as bearish as if the breakdown
took place last month.
Finally, let us
take a look at the short-term picture.
In the short-term
USD Index chart, we see the index right at its cyclical
turning point. The sharp rally this month brought the index to
its November high and the last part of this rally severely exacerbated the
decline of gold.
With the index at
its November 2012 high, at a cyclical turning point, and with RSI levels above
70, a decline here is quite likely very soon if not immediately.
Let us take a
look at gold and silver correlations to see how such a decline in the U.S.
dollar could translate into precious metals prices.
Matrix is a tool which we have developed to analyze the impact of the currency
markets and the general stock market upon the precious metals sector (namely: gold
& silver correlations). We continue to see some return to
normalcy between the precious metals and the USD Index. Unfortunately the reason
is that precious metals declined as the USD Index rallied. Of course, this must
be considered a better scenario than if the metals had declined in price for no
apparent reason. The indications are that when the USD Index reverses, the
precious metals will do the same. With the USD Index at a cyclical turning point
therefore, we could very well see higher prices for precious metals and mining
stocks in the coming weeks.
We have mentioned
the importance of cyclical turning points in the analysis of the currency
markets and we would like to address one of our subscriber’s question regarding
that matter, as this technique seems to raise doubts among our readers.
Hi there, I was wondering if sometimes cyclical turning points just don't happen
at all. For example, we've been waiting for a cyclical turning point in the USD
but it just hasn't happened. And it now seems to be forming a right shoulder of
head-and-shoulders pattern. Is
there a variable or certain rule about cyclical turning points that I don't know
about and would like to understand?
Yes, sometimes cyclical turning points just don't happen - just like any
technical tool. Good tools work most of the time and excellent tools can be
expected to work 80% of the time or so (and it can be the case that something
doesn't work a few times in a row only to then work 20 times in a row).
Expecting anything more than 80% is not really realistic and thus cyclical
turning points also have to not happen at times. It still seems that they will
work this time, though.
up, the outlook remains bearish for the dollar. The
implications from the currency markets appear quite bullish for the precious
metals sector in the weeks ahead.
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Thank you for reading.
Have a great and profitable week!
Gold & Silver Investment &
Trading Website - SunshineProfits.com
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All essays, research and information found above represent
analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits'
associates only. As such, it may prove wrong and be a subject to change without
notice. Opinions and analyses were based on data available to authors of
respective essays at the time of writing. Although the information provided
above is based on careful research and sources that are believed to be accurate,
Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
thoroughness of the data or information reported. The opinions published above
are neither an offer nor a recommendation to purchase or sell any securities.
Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw
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