Gold Gets Boost From Euro Strength

Includes: FXB, FXE, GLD, IAU
by: Clif Droke

The Brexit battle is helping to boost gold's near-term prospects.

Euro and pound currency strength is stimulating overseas gold demand.

U.S. dollar is also weakening, removing gold's biggest rally obstacle.

After yet another setback for Britain’s exit from the European Union, the euro currency has staged a rally in recent days. This has been extremely beneficial for the gold price, as we’ll see here. In today’s report, we’ll discuss the positive aspects that a delayed Brexit is having for gold. We’ll also look at gold’s much-improved currency component, which has removed a major obstacle in gold’s path and is making it easier to continue its recovery.

The British Parliament once again rejected a “no deal” Brexit on Wednesday, which set up yet another vote on whether to extend the Brexit deadline. Britain’s lawmakers then voted to delay the Brexit process in an admission that more time is needed to finalize the country’s departure from the EU. The latest setback for British Prime Minister May’s plans also raises the possibility that Brexit might be cancelled altogether.

While the ongoing political drama in the U.K. has done little to boost equity prices, it has done plenty to bolster the British pound and the euro currency. The uncertainty generated over Brexit did considerable damage to Britain’s pound last year, as well as to the euro. The Invesco CurrencyShares British Pound Sterling Trust (FXB), a useful proxy for the pound, shows just how much last year’s geopolitical uncertainty undermined confidence in the currency.

Invesco CurrencyShares British Pound Sterling Trust

Source: BigCharts

Since bottoming in December, however, the pound ETF has commenced a turnaround and FXB has recently established a series of higher highs and lows. Meanwhile, its psychologically significant 50-day moving average (blue line) has turned up in reflection of the positive reversal in the pound’s momentum. The strengthening pound suggests that forward-looking investors are presumably no longer worried about the negative potential of Brexit on the British economy.

The euro currency, meanwhile, is trying to stage its own turnaround. While the euro has a long way to go before catching up with the pound, the latest euro rally implies that investors aren’t particularly concerned over Brexit’s immediate impact on the eurozone, either. This is worth noting through the Invesco CurrencyShares Euro Currency Trust (FXE), a euro-tracking ETF which reflects the currency’s latest rally attempt. The FXE rally also helps explain why gold is having a much easier time reversing its recent losses, since a stronger euro typically benefits gold prices by making the dollar-denominated metal cheaper for European investors, thereby stimulating bullion demand.

Invesco CurrencyShares Euro Currency Trust

Source: BigCharts

Also giving gold a needed shot in the arm is the latest setback in the U.S. currency, in which gold is priced. The U.S. dollar index (DXY) has significantly weakened in recent days while the euro has strengthened. The dollar has declined in value against a basket of currencies in the last four trading sessions. Based on gold’s currency component, a weaker dollar and a stronger euro will make it easier for the metal to rally in the immediate term. What’s more, a renewed immediate-term buy signal is within reach before the week is over.

As can be seen in the April 2019 gold futures chart, the gold price managed to climb back above its 15-day and 50-day moving averages in the latest session. This is the first major sign that the bulls are on the cusp of recovering their control over both the immediate term (1-4 week) and intermediate-term (3-9 month) gold trend. By closing above its 50-day MA on Friday, the gold price will establish its first weekly close above this widely-watched trend line since February. This would also likely result in additional short covering next week due to the popularity of the 50-day moving average as a stop-loss guide and turning point indicator for technical traders and fundamental investors alike.

April 2019 Gold

Source: BigCharts

On the ETF front, the iShares Gold Trust (IAU) finally closed back above its 15-day and 50-day moving averages on Wednesday after confirming an immediate-term sell signal on March 1. IAU pulled back on Thursday, but the bulls still have a chance at regaining control of the immediate trend. A higher close for IAU (above the $12.56 level) in the next couple of trading sessions will technically confirm another bullish breakout signal. Until that happens, however, I recommend remaining in a cash position until we have confirmation that the buyers have taken full control of gold’s immediate trend.

iShares Gold Trust

Source: BigCharts

Gold ETF demand, meanwhile, is improving which makes a renewed buy signal more likely in the days ahead. Holdings in the world's largest gold ETF, the SPDR Gold Trust (GLD), increased by around 0.4 percent on Tuesday for the second consecutive day.

Although the gold price pulled back sharply earlier this month due to the dollar’s surge, the pullback had the salutary effect of shaking out weak-handed participants from the market. It also helped cool off gold’s previously overheated technical condition and has allowed the metal to consolidate its gains from the last two months. Gold’s important fear component, moreover, remains as strong as ever since investors still have plenty of things to worry about and therefore have lots of incentive to make safety-related bullion purchases. The factors discussed above should keep the yellow metal price buoyant, while additional weakness in the dollar index will make it even easier for gold to rally.

On a strategic note, participants should continue to keep their powder dry while we wait for the necessary 2-day higher close above gold’s 15-day moving average as discussed here. Gold ETF traders, meanwhile, should also remain in a cash position. By next week, however, we may have our next confirmed re-entry signal for the IAU.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.