WHAT DO CURRENCIES HAVE TO DO WITH METAL PRICES?
Seeking Alpha Analyst Since 2008
So many markets seem to hinge on the currencies, particularly the US Dollar. Perhaps this is because so much information is ultimately translated into the behavior of a currency, such as the health of the economy, movements in the underlying credit markets and government or Fed policy. Below we show a number of weekly charts that portend a possible new direction that can have a meaningful impact on the precious metal and commodity asset classes.
First the US Dollar, the price chart shows that it is still considered in an uptrend since Apr 2011 as indicated by the higher troughs and higher peaks. However, it appears to be having difficulty making those higher highs recently and one can also see a possible bearish Wedge pattern that is supported by negative divergences in the second window from Jan~Aug 2012 and May~Jul 2013, not to mention from Jul 2012~Jul 2013. Also the momentum indicator has crossed below its signal line moving average in Jul 2012 indicating a continuation down. If the USD manages to break below its Jun 2013 low and more importantly below the 80 level, it could mean that the USD bear market has resumed.
US DOLLAR - Weekly Chart
EURO - Weekly Chart
The Euro has opposite similarities that should help move the USD downwards, given that it has a 58% weight in the USD Index. The underlying momentum in the $XEU chart shows positive divergence from Jan~Aug 2012 and this Jul 2013 the momentum crossed above its signal moving average line that should portend a break above the $XEU downtrend line and dotted green horizontal resistance line.
CANADIAN DOLLAR - Weekly Chart
AUSTRALIAN DOLLAR - Weekly Chart
The Canadian and Australian Dollar are known as the Commodity Currencies, hence Metals have a tendency to have a good correlation to those currencies. Oddly, in the past the Canadian and Aussie tended to mirror each other pretty well, but since mid-2011 they haven't been looking at each other as much. The Canadian Dollar appeared to have broken down out of a Head & Shoulders pattern, but in Jul 2013 it powered back up through the neckline, essentially negating the pattern and implying that it is resuming its bull market. What does that mean for the US Dollar and Metals? The Aussie Dollar on the other hand dropped sharply during the last quarter and has now bounced off a support level. It has a long way to go up-about 7 cents-in order to negate its bearish trend.
Copper & Precious Metals
There has been a lot of conjecture across the internet about the massive manipulation of the precious metals market that caused its decline in order to help the banks et al cover their short position. Certainly when one looks at the magnitude of the drop in the Canadian Dollar and Copper charts, it would be difficult to dispute that assumption if there is any correlation between these sectors.
We would like to point out the similarity between the Copper chart (below) and the Canadian Dollar chart (above) by drawing your attention to the same Head & Shoulders pattern as indicated by the red neckline in Copper and blue neckline in Canadian Dollar. The Copper similarly has come down to the centerline of its downtrend channel and has now set a positive divergence in its True Strength momentum indicator (green) below. This should generate the power required to move the price back above its neckline, thereby negating the Head & Shoulders pattern just as in the Canadian Dollar. If that is the case, it can be assumed that the entire decline from the peak in Jan 2011 to Jul 2013 is a very large A-B-C pattern that will launch the next bull market in Metals, lasting perhaps 6~7 years. One should keep an eye on Copper for confirmation by its price moving above its previous recent May 22 high of $3.42/lb.
COPPER - Weekly
Silver and Gold on the other hand, look a lot more similar to the Australian Dollar, with the former being the easier chart to read. Silver has a well defined downtrend channel that it has touch at the same time as horizontal support came in at $18/oz. The chart also has a potential A-B-C pattern shown, and note in the underlying True Strength(TSI) green indicator that momentum has a positive divergence against price - similar to Copper and even the Australian Dollar.
The Gold chart is more difficult to interpret due to the downward spikes it experienced. It appears to have hit support in the $1200 area, although it would have been preferable for it to reach the $1155~1165 level and perhaps that still may happen. The much greater support level can be seen around the $1000 area indicated by the green shaded horizontal channel. If this is an A-B-C corrective wave, then we may have seen the bottom or it might have one more pullback to either the $1300 area with the off-chance of a lower-low to the $1155~1165 area. Again, note the similarities to the Australian Dollar chart above.
SILVER - Weekly Chart[/one_half]
GOLD - Weekly Chart
The Currencies are foreshadowing imminent weakness in the US Dollar that should lead to the beginning of a new bear trend, however, it likely will be choppy at its beginnings. The Canadian Dollar, having recently negated a bearish Head & Shoulders pattern, suggests it may be resuming its long-term bull trend. While the Canadian Dollar exhibits good correlation with Copper, the Australian Dollar correlates best with Gold and Silver. Presuming that the worst is over for the foreign currencies and gold, silver and copper, any retracement to key levels should be watched for support and positions entered where risk can be minimized.
Authored By InvestorKey.com
Disclosure: I 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. I have no business relationship with any company whose stock is mentioned in this article.
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