According to CNBC, the recent volatility in gold prices has left
not only investors and traders puzzled about what is going on with
the precious metal.
"Nobody really understands gold prices and I don't pretend to
understand them either," Federal Reserve chief Ben Bernanke told
the Senate Banking Committee on Thursday in response to a question
on why gold prices have been volatile.
Today, gold climbed up over $1,322 per ounce after the US dollar
slipped against other currencies. It is the yellow metal's highest
level since June 20. In this way, gold broke above a key technical
level at $1,300. That level had been tested a few times in the last
one-and-half weeks, and after today's breakout, investors are
probably wondering what to do next. Can we find any guidance in the
In today's essay, I'll examine other markets to see if there's
anything on the horizon that could drive gold prices higher or
lower shortly. Let's start with the USD Index very long-term chart.
(Charts courtesy of
The situation in the long-term chart hasn't changed recently. The
breakout above the declining support/resistance line (currently
close to 79) has not been invalidated. Therefore, the situation
Now, let's zoom in on our picture of the USD Index and see the
On the weekly USD Index chart, we see that the recent declines
didn't take the index below 82, so the medium-term uptrend is not
threatened. The reason is that the medium-term support line was not
broken; it was not even reached. From this perspective, the
situation remains bullish and my firm expects the dollar to
strengthen further in the coming weeks.
Let's check if the short-time outlook is also bullish.
From the short-term perspective, we see that the USD Index dropped
last week, but it hasn't declined below the 61.8% Fibonacci
retracement level based on the June - July rally. Despite the
dollar increase after Ben Bernanke's testimony, the US currency
slipped against other currencies once again in the recent days.
Although the dollar declined below the Wednesday's intraday low at
82.47 today, the 61.8% Fibonacci retracement level close to 82.20
is still valid and serves as support.
If the buyers manage to push the USD Index higher, we might see an
increase to the June top or even to the rising resistance line
based on the May high and June peak before another pause is seen.
However, taking a look at the long-term charts, we see that the
next significant resistance is currently close to 86 (86.4) -- the
declining red line.
Consequently, from the short-term perspective, the recent decline
still seems to be a countertrend bounce. It means that we could see
another rally soon, especially when we factor in the cyclical
turning point, which is just around the corner. Taking a look at
medium-term and long-term charts, both outlooks for the dollar
remain bullish. This is a bearish piece of information for metals
Once we know the current situation in the US currency, let's find
out what happened during the last several days and check the
current situation in stocks. To begin, let's take a look at the
Click to enlarge
In recent days, stocks moved up once again and broke above the May
top. At this moment, the breakout is still not invalidated, but
from this perspective, we see that the recent decline was likely
nothing more than another correction and the outlook continues to
We would prefer to see two more weekly closes before saying that
another upswing is very probable. It is likely at this time but not
to any great extent.
Let's check if the short-time outlook is also bullish.
During the past week, the S&P 500 has continued its rally as
expected. Prices climbed up to new historical highs on Thursday.
The S&P 500 gained 0.5%, after reaching a daily high at
1,693.12. The breakout above the May 22 local top is a positive
sign, but some short-term uncertainty cannot be excluded here.
Let us move on to the financial sector, which often leads the
general stock market, for more clues regarding the future moves of
the S&P 500.
We'll use the
(INDEXNYSEGIS:XBD) as a proxy here.
As I wrote in my
essay on gold, stocks and the dollar on July
"[F]inancials broke above the resistance level at 130. This could
fuel further gains in the stock market."
On the above Broker-Dealer index chart, we see that last week's
breakout is still not invalidated. The situation improved a bit
(it's closer to being verified), and the outlook is a bit more
The situation for stocks in the medium term is still quite bullish
although it's a bit uncertain in the short term. It seems that we
could see further gains in the stock market, but then again, a
consolidation could be seen first. It might seem that gold started
to trade along with the stock market and the bullish implications
are already resulting in higher prices of the yellow metal.
Now that we know the current situation in the dollar, the stock
market, and the financial sector, let's take a look at the
Correlation Matrix. This is a tool that we have developed to
analyze the impact of the currency markets and the general stock
market upon the precious metals sector (namely gold correlations
and silver correlations).
The short-term correlation between the metals and the USD Index is
negative at this time and has been very weak recently. Gold started
to respond to the dollar's price moves (up when the dollar declined
and down when the dollar rose), but we feel that was just a
temporary phenomenon and the metals will likely continue
All in all, with a bullish outlook for the dollar and regardless of
whether the negative correlations between the metals and the dollar
persist or not, the overall implications for the precious metals
Summing up, the USD Index corrected almost to the final 61.8%
Fibonacci retracement level but didn't decline below it. If the
buyers manage to push the USD Index higher, we might see another
rally soon. This is in tune with the medium-term and long-term
trends and also with dollar's cyclical turning point. The
implications are bearish for the precious metals sector.
Have a great and profitable week!
For the full version of this essay and more, visit