The summer dog days are upon us leaving investors
cooling off in the shade waiting for a refreshing breeze of market-moving
news. They are anticipating something important that will energize the gold
price for an upward move, perhaps another round of quantitative easing by the
U.S. Federal Reserve that could possibly be announced at the Fed’s
Jackson Hole, Wyoming annual gathering in late-August, or at the next meeting
of the Fed’s Federal Open Market Committee in September. Several U.S.
economic reports released Wednesday failed to significantly impact the
At least two heavyweight investors are not waiting
on the sidelines to see what the Fed will do. Doing some bargain shopping,
billionaire investors George Soros and John Paulson increased their holdings in the
gold-backed exchange traded fund, SPDR Gold Trust. According to U.S.
Securities and Exchange Commission filing for second-quarter, Soros Fund Management more
than doubled its investment in the SPDR Gold Trust to 884,400 shares as of
June 30, compared with three months earlier. Paulson & Co. increased its
holdings by 26 percent to 21.8 million shares.
However, hedge funds have
cut their net-long position by 66 percent from a record
in August 2011. So who is the “smart money” in this case?
We’ll find out soon enough.
To see how precious metals are expected to fare in
the August heat we now turn to the technical portion with the analysis of the
Euro Index – after all the latter often moves similarly to gold. We
will start with the long-term chart (charts courtesy by http://stockcharts.com.)
We begin this today’s essay with a look at the
long-term Euro Index chart. This week we’ve seen a move higher which
appears to have resulted in a breakout above the declining short-term
resistance line. “Appears” because the week is not over yet, but
unless the Euro Index declines below the 122 level, the short-term breakout
will be a fact. This is not a major bullish factor medium term, but we could see
further strength here in the short run.
A major medium-term resistance line is close at hand
and could very well stop the recent move to the upside. Both the black and
red lines in our chart could serve as resistance (the neck of the previously
completed head-and-shoulders pattern).
Now, let’s see if there’s been any
reaction of the USD Index on the Euro Index behavior.
In the medium-term USD Index chart, we do not see
any invalidation of the bullish trend at all. The breakout above the
long-term resistance line continues to be verified, and the medium-term
direction appears to be to the upside.
If the short-term rally in euro is indeed seen, then
the dollar could move lower and retest one or both of its long-term support
To see how precious metals would probably react,
should a short-term rally in the Euro Index and a short-term decline in the
USD Index occur, let’s take a look at our own tool intended for
measuring intermarket correlations.
Matrix is a tool which we have
developed to analyze the impact of the currency markets and the general stock
market upon the precious metals sector. The traditional correlations are in
place at this time, meaning that gold and precious metals are negatively
correlated with the USD Index and positively correlated with the general
Consequently, the change in the short-term situation
on the USD Index makes the short-term case for metals a bit more bullish than
not. The influence remains negative in the medium term, though.
Summing up, the medium-term
outlook for the dollar is unchanged and remains bullish. The short-term picture has become mixed
and a bit bearish based on this week’s Euro Index move. This could in
turn translate into short-term improvement in gold and other precious metals.
However, we advise caution, as the medium-term uptrend in the USD is still in
place. More in-depth analysis of the currency market as well as the critical
situation in the general stock market and their possible influence on
precious metals are discussed in the full version of this article.
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Thank you for reading. Have a great and profitable week!