Gold's Price Moves from
By Przemyslaw Radomski, CFA
When we take into
account last weekís 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 U.S. economic data raised fears that the Federal Reserve may start to
taper its commodities-supportive stimulus measures. Losses pushed gold towards
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
Does it mean that
the Federal Reserve may have to push back plans to taper the current round of
quantitative easing? A push-back 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 maybe recent gains are just a result of speculation and goldís
position will deteriorate?
our previous essay we 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. Thatís why in todayís essay we examine
the gold chart from the European perspective and we 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? Letís take a closer look at the charts
below and find out for ourselves (charts courtesy by
We hit off with a
short recap of whatís 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 didnít 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,
itís 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 didnít 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.
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 the 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.
of the psychological resistance level and the above-mentioned declining
resistance line may have encouraged sellers to go short and thus trigger 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.
Once we know the
current situation in the European currency, letís take a closer look at gold
priced in the euro.
above chart, we see that the situation hasnít changed
much from what we saw in the previous weeks. Gold
priced in euro remains below the 50-day moving average, which still serves as
the yellow metal didnít break out above the previously
broken, important long-term support line which turned into resistance.
the European perspective, the situation looks quite bearish for the short term
and it doesnít look too optimistic. However, if we want to have a more complete
picture of the situation, we should examine another factor which is used to
provide important signals for the precious metals market - the way gold stocks
move relative to gold.
with the HUI-to-gold ratio, which is one of the more interesting ratios there
are on the precious metals market. After all, gold stocks used to lead gold both
higher and lower for years (which wasnít
the case on a very short-term basis in the past few months).
On the above
chart we see that the ratio moved above the 50-day moving average in the middle
of the June. However, the breakout didnít change the outlook. The
gold-stocks-to-gold ratio still remains below the 2008 bottom. Despite the moves
up we saw in July, the breakdown has not been invalidated and the downtrend
still appears to be in play here. A downtrend in this ratio indicates that the
gold stocks are underperforming gold, not outperforming it.
At this point,
itís worth mentioning that in the gold-stocks-to-gold ratio chart, we didnít see
a continuation of strength last week. Instead of further increases, we saw
declines which resulted in a big drop in the HUI:gold ratio on Friday. In this
way, the ratio moved below the 50-day moving average which now serves as
summarize, letís take a look at the GDX-to-GLD ratio chart.
medium-term miners-to-gold ratio chart, we initially saw a breakout above the
declining resistance line. However, the
RSI level was close to 70. When you take a
closer look at the top of the chart, you will see that this level coincided with
local peaks in the ratio this year, and the same was seen throughout the
precious metals sector.
decline (we see it clearly on the above chart) is consistent with our previous
observations. The fact that we did not see a huge drop in the recent days
doesnít mean that we won't see one in the near future. We saw similar price
action at the beginning of the June. After a slight decline, there was a major
In other words, the
previous breakout (in June) was followed by a decline, so the current one is not
as bullish as it might seem at first sight.
up, the situation is quite bearish for the short term
from the European perspective, and it doesnít look too optimistic - especially
when we take into account the combination of the psychological resistance level
at 133 and the strong declining resistance line. The outlook for the mining
stocks is also bearish and the trend is still down. The long-term breakdowns
have not been invalidated and it seems that lower prices for the whole precious
metals sector could follow soon.
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Thank you for reading.
Have a great and profitable week!
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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
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Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or
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