Have Gold and Silver Stopped
Responding to Dollar’s Price Action?
By Przemyslaw Radomski, CFA
Based on the June 14th, 2013 Premium Update.
Visit our archives for more
gold & silver articles.
Gold cannot be
printed or manufactured in contrast to the currency. That’s why over the long
term it has kept its value as the ultimate currency. There can be no “gold war.”
However, we often hear about a currency war. Sounds familiar, were did we hear
“currency war” was coined by Brazilian Finance Minister Guido Mantega after the
financial crisis of 2008. The idea is that highly indebted nations weaken the
value of their currency by cutting interest rates down to zero and printing fiat
currency in order to gain trade advantages (cheaper products to export) and to
pay less debt service on their bonds. Countries compete against each other to
achieve a relatively low exchange rate for their own currency. The policy can
trigger retaliatory action by other countries that in turn can lead to a general
decline in international trade, harming all countries.
Concerns over a
currency war prompted the Group of Seven and Group of 20 economies recently to
formulize what constitutes appropriate behavior by central banks in influencing
Let’s look at
some numbers. Global currency reserves have swelled from $1.9 trillion in the
year 2000 to a whopping $11.2 trillion by the third quarter of 2012. But most of
that gain took place in the past six years with global currency reserves
doubling to the current levels from $5.6 trillion at the beginning of 2007. If
that is not evidence of the global currency war then what is? We can see two
different aspects. The first is undeniable evidence of aggressive money
printing, but we already know that. The second, is an indication of determined
stockpiling of the currencies of other countries in order to weaken your own
For a widespread
currency war to occur a large proportion of significant economies must wish
to devalue their currencies at once. This has so far only happened during a
global economic downturn.
economic conditions countries tend to overlook a small rise in the value of
their own currency. However, during a time of recession, nations can take
umbrage at other countries’ devaluations.
Let’s begin this
week's technical part with the analysis of the U.S. Dollar (charts courtesy by
today’s analysis of the U.S. Dollar with its long-term chart.
When we take a
look at the above chart we can see that the USD Index declined once again this
week. Despite that fact, the January breakout was not invalidated. As we see,
the index is still above the declining support line, and thus the medium-term
outlook remains bullish.
Let’s take a look
at the medium-term situation. Has it changed since last week?
perspective we can see that the USD Index moved to its medium-term support line
(marked with the thin black line), which is currently close to 80.4. It is very
possible that this line will pause the decline, at least for a while, and it’s
quite possible that it will actually stop it.
remains bullish for the USD Index in the long and medium term, so let’s check to
see if the short-time outlook is the same.
During the last
several days, the USD Index declined and moved slightly below the short-term
support line. There is a medium-term support line visible on the previous chart
that is much more important so the above is actually not a big deal.
important factor on the above chart supporting the bullish case is the cyclical
turning point which is very close – about a week away. It is possible that we
will see its impact on the dollar next week and this can lead to a bigger
pullback or – more likely – the end of the current decline. If we move back in
time a bit, we will see similar situation in August and September 2012 when the
cyclical turning point worked very well after a significant decline.
please note that the RSI Indicator is now at the 30 level, which is a classic
Let's find out
what impact has this decline had on the two most popular
In this week’s
very long-term gold chart, comments made in last week’s Premium Update
continues to be bearish and the trend remains down. Gold could still decline
heavily based on the long-term cyclical turning point (…). In both 2008 and
2009, local tops formed slightly after the cyclical turning point, so it is
possible that the reversal in the downtrend won’t be seen until after the
cyclical turning point once again, leaving a number of days in which further
declines could be seen.
We are still
likely to see declines after the cyclical turning point from this long-term
perspective. The turning point should work on a “near to” basis and declines
will likely be seen sooner rather than later (and the bottom is likely weeks
away, not months away).
Now let’s take a
look at the white metal.
In this week’s
very long-term silver chart, not much really happened as prices declined
slightly, less than half of 1 percent overall. The intra-day high for the week
was lower than last week once again and from this perspective, the declines
clearly go on.
No confirmed move
has been seen below the level of the 2008 highs, but silver’s price is only
slightly above it at this time. It seems that we’ll have another sharp decline
once the breakdown below this support level is seen and confirmed.
up, the most important event in the currency market
was further decline of the dollar. Although the decline visible on the USD Index
chart has been quite heavy, we have not seen a rally in gold and silver so far
this week – they moved lower. Gold’s underperformance has become even more
significant this week and we think that this makes the outlook even more
bearish for the short term. Although recent declines in silver have been small,
the downtrend remains in place. The implications of the above-mentioned
underperformance are bearish for the precious metals sector.
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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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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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