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In continuation to our
latest free commentary Breakout Or
Breakdown – What’s Next For Gold? let’s have a look at
the currency moves and its influence on precious metals market.
Let’s begin with some of the recent
developments associated with gold. Following George Soros gold selling,
precious metals blogosphere was recommending that the U.S. sell its gold
reserves to pay off its massive $14 trilling debt. Congressman Ron Paul was
asked about the possibility of selling the contents of Fort Knox and he
responded that it would be a 'good and moral decision'. While we respect some
of Congressman Paul’s ideas, this one seems far-fetched. With about 147
million ounces in reserves the value of all that gold if sold would come to
$220.95 billion dollars, which would cover only between 2-3% of the national
debt. (Of course, selling off that kind of amount would lower the price.)
That would leave the U.S. with a huge mountain of debt and little of offer as
collateral.
Meanwhile, a Bloomberg report stated that sales of
gold coins are on track for the best month in a year and this during a
commodity rout. The U.S. Mint sold 85,000 ounces of American Eagle coins
since May 1 at the same time that the Standard & Poor's GSCI Index of 24
raw materials fell 9.9 percent. History shows that the last time sales
reached that level, bullion rose 21 percent in the following year. In a
Bloomberg survey of 31 analysts, traders and investors the median estimate
for gold was that the yellow metal gold will advance 17 percent to a record
$1,750 an ounce by Dec. 31 and keep gaining in 2012.
Currency depreciation is the
“unofficial” policy of today’s monetary leaders, both the
American Federal Reserve and the central banks of other countries. Gold is
doing what it is supposed to be doing--its price is adjusting upward in
correlation to the depreciation of fiat currencies. We believe that
governments will continue to debase the currencies and therefore gold still
has a long way to go.
With a lot of things happening with precious metals,
let’s have an overview of the currency dependence on the metals.
Recently gold has been positively correlated with the Euro Index, so
let’s take a look at the long-term chart featuring the latter (charts
courtesy by http://stockcharts.com).
 
In the long-term Euro Index chart, index levels have
moved above the resistance line, declined soon thereafter and verified this
line as support. We’ve based this support line on weekly closing prices
(the most important implications are based on these prices) - 159.35 / July 7th
and 149.62 / Nov 23rd.
Although the above chart doesn’t allow for
much precision because of its long-term nature, taking a closer look at the
key support level that is currently in play provides us with a strong support
right at the 140 level. This is where euro bottomed on Monday and reversed on
Tuesday. This is a bullish development.
Additional bullish phenomenon is seen in the RSI
level which is no longer short term overbought. This implies that a rally
from here is quite likely. We also note that the index moved below the
support line but then quickly reversed; thus what we have seen so far is
nothing more than a verification of the breakout. Again, this is bullish
phenomenon, not a bearish one. Although not a certainty, it appears that a
rally from here is likely.
Since euro has been moving rather in tune with gold
and silver in the previous months, the above analysis provides us with
bullish implications also for the precious metals sector.
Moving on, let’s try to figure out the
possible outcome of favorable currency support on gold and silver seasonality.
Let’s look into Sunshine Profit’s True Seasonals tool (combining
seasonality +derivatives’ expiration effect).
On the above HUI (gold stocks) seasonal chart, it
appears that we are right before a considerable rally that would likely take
place until the end of the month. It doesn’t seem that gold stocks will
move to or above their previous highs (as seen on the above chart), but
nonetheless a rally appears likely.
On a side note, if you’re interested in
examining an analogous chart for gold seasonal pattern, please read our May
17th commentary.
Please note that the pattern for May played out
quite reliably so far – top at the beginning of the month small
correction in the first week of May and then a more significant bottom in the
middle of the month.
Again, the local top for mining stocks may not be as
high as the prior top but even if it is a bit lower, the situation still
appears to be bullish.
Summing up, the situation remains short-term bullish for euro
and precious metals and the true seasonal tendencies confirm that a
short-term rally is likely.
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Thank you for reading. Have a great and profitable week!
Przemyslaw
Radomski
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