Last week, gold rose to its highest level since mid-May as
possible military action against Syria prompted safe-haven buying.
It's worth noting that the yellow metal gained over $250 per ounce
from its June low of $1,180.71. But in spite of this growth, it is
still down about 17% for the year.
According to Reuters, gold gave up some gains after British
lawmakers voted against any involvement in Syria. Additionally,
over the weekend, President Obama stepped back from the brink and
delayed an imminent military strike against Syria to seek approval
from the US Congress. Our firm's take is that it won't happen
anytime soon. You will find more details about this issue, and
extensive coverage of the crude oil market, in this week's
As the prospect of attacks on Syria receded, gold extended losses
and dropped below $1,400 per ounce on Friday. Will this drop
trigger further dips?
In order to answer this question, we'll need to examine gold's
charts to find out what the current situation in the yellow metal
is. We will also take a closer look at the US Dollar Index and the
Euro Index to find out what impact they could have on future price
of the yellow metal. Could they drive gold prices lower in the near
Let's start today's analysis with the US Dollar Index long-term
chart (charts courtesy of
Quoting our firm's
essay on gold, the dollar, and mining stocks
on August 28:
The situation in the long-term chart hasn't changed much
recently. The breakout above the declining support/resistance line
(currently close to 79) hasn't been invalidated and, from this
perspective, the situation remains bullish.
Now let's examine the weekly chart.
Click to enlarge
Despite the fact that the USD Index declined once again last week,
the medium-term support line was not breached. Although we saw a
small move below the upper support line, even this small breakdown
was quickly invalidated, which is a bullish signal. These positive
circumstances encouraged buyers to act, and the dollar came back
above the 82 level.
From this perspective, the medium-term uptrend is not threatened,
and the situation remains bullish. Therefore, we can expect the
dollar to strengthen further in the coming weeks. Looking at the
above chart, it seems that the USD Index has started its rally and
that this rally will be fueling declines in the precious metals
Now let's check the short-term outlook.
From this perspective, we see that the recent decline once again
took the USD Index below the 61.8% Fibonacci retracement level
based on the entire February - July rally.
Despite this decline, buyers managed to push the USD Index higher,
and the short-term breakdown below the Fibonacci retracement level
When we take a closer look at the daily chart, we see a small
inverse head-and-shoulders pattern underway (based on three August
lows). As you can see on the above chart, the US currency has moved
higher in the recent days and broke above the 82 level, which means
that this bullish formation is confirmed.
Additionally, when we factor in the cyclical turning point (which
we're seeing after a monthly decline), the outlook here looks very
bullish. In fact, from this perspective, we see that the USD Index
already started to move higher right at the turning point.
Now that we know the current situation in the US Dollar Index,
let's take a look at the Euro Index.
On the above chart, we can see that the Euro Index attempted to
move above the 200-week moving average in the previous week, but
this attempt failed for the second time, and the breakout was
Looking at the above chart, we can clearly see that the European
currency dropped below the 61.8% Fibonacci retracement level based
on the January - July decline. At this time, we can also see an
invalidation of the breakout above the declining support/resistance
line based on the January and June highs, which is also a bearish
Let's take a look at the gold market.
Click to enlarge
On the long-term gold chart, we see that the yellow metal has
climbed up once again and reached the previously-broken rising
support/resistance line based on the July 2005 low and the October
2008 bottom (on an intraday basis). At this point, it's worth
noting that this area is strengthened by the 38.2% Fibonacci
retracement level based on the September 2012 - June 2013 decline.
Although gold broke above this resistance zone at the beginning of
the previous week, the breakout was invalidated in the recent days
and the yellow metal dropped below $1,400 per ounce.
On Tuesday, we saw another attempt to move above the resistance
levels, but gold didn't even reach them
From this perspective, the medium-term downtrend remains in place.
Now let's take a look at the medium-term picture to see more
On the above chart, we see that gold continued its rally in the
previous week and reached the 61.8% Fibonacci retracement level
based on the entire April-June decline. Although the price of gold
managed to break above its June top, this breakout was quickly
Additionally, when we factor in the Fibonacci price projections, we
see that the recent rally from the August 7 low to the August top
is similar to the upward move seen in July. If history repeats
itself, we will see a downward move, which would be similar to the
July - August decline.
From this point of view, it seems that the strong resistance range
based on the June top and the 61.8% Fibonacci retracement level
will keep the rally in check as it further strengthens the
resistance created by the rising long-term line marked in red on
the previous (long-term) chart.
in recent days, the Euro Index has declined back below the
declining red support line, which makes the outlook for the USD
Index even more bullish. These circumstances will likely have
bearish implications for the precious metals sector. With a bullish
outlook in place for the dollar, it doesn't seem likely that gold
will have enough strength to move above the previously mentioned
resistance levels. Therefore, despite the recent show of strength,
the medium-term outlook for gold remains bearish.
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