There are many factors that come into play when trying to determine the direction of gold and silver prices that go beyond supply and demand. As we know gold has an inverse relationship with the US dollar (NYSEARCA:UUP) (NYSEARCA:UDN), although there are historical exceptions such as the one we witnessed in the gold bull market of the 80's, when both were rising at the same time. We may well see both gold and the dollar rise in tandem in the future, but for now they are tending to move in opposite directions.
The performance of the USD can be observed when we view it against a basket of currencies as per the US Dollar Index. The US Dollar Index provides us with a value of the USD relative to a basket of foreign currencies. The performances of those currencies within this basket have an effect on the dollar. There are only 6 currencies in this basket and they are weighted as follows:
Euro (EUR), 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP), 11.9% weight
Canadian dollar (CAD), 9.1% weight
Swedish krona (SEK), 4.2% weight and
Swiss franc (CHF) 3.6% weight
We can see that the Euro is by far the largest component representing 57.6% of this Index and therefore merits being watched closely, so we will take a quick look at it today.
The Euro Chart
We can glean from the chart that the Euro has lost some ground recently, which in turn has had a knock-on effect on the USD. Speculation over a rate cut gained some traction when inflation in the Eurozone dropped 0.7% for October, raising the ugly specter of deflation. Should we get more in the way of dovish comments from the ECB then we would expect the euro to continue its decline.
While all eyes are on the US employment figures due out this week, we should also keep one eye on Mario Draghi, President of the European Central Bank, and his pronouncements on monetary policy. Up to now his words have had a calming effect on the Eurozone but just maybe they are wearing a tad thin, so some decisive action may be imminent.
The US Dollar Chart
The USD chart shows us that it has support at the '79' level which it has tested no less than 5 times in recent months. Each time it has managed to bounce and rally to higher ground suggesting that it could be difficult for the USD to fall further.
Once again the employment numbers will take center stage. Good, bad or indifferent they are a major consideration for the policy makers at the Federal Reserve. Any hint of tapering the bond buying program would add support to the USD but we doubt that this will occur this year. Conversely, further relaxation of monetary policy with the Fed becoming even more accommodative would lead to the USD weakening, putting upward pressure on gold prices.
Our central planners are playing an increasing bigger role in the determination of the future direction of their own countries' currency. It is a widely held belief that inflation is a more favorable condition to have to manage than deflation. By weakening their currency they hope to boost exports, thus creating employment for their citizens. The manipulation of currencies is set to continue with the race to the bottom being alive and well.
When trying to analyze the future direction of gold it is now critically important that we include the currency war, as this arena in dollar terms dwarfs many of the other considerations. Try not to ignore the actions of our political masters and the central planners as their words and actions will impact upon currency gyrations, which will spill over into the precious metals market.
Also be aware that this is a tiny sector of the market and can be pushed in either direction should it be deemed a requirement by those who think they know what is best for us.
The bear trend within the gold bull market is still with us and gold's near term direction remains somewhat hazy, however, we think there could more to go on the downside and that the bottom still lays ahead of us. Also be aware that a sudden increase in QE could blow this scenario out the water.
In a nutshell we need to be patient and to do the hard yards in terms of due diligence, so sleeves up, head down, game face on and hit it. Also keep your powder dry as bargains do come along from time and you will need the cash to take full advantage of those opportunities.
Got a comment, fire it in, the more opinions that we have, the more we share, the more enlightened we become and hopefully our "well informed" acquisitions will bear the fruits of our labor, sooner or later.
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