With the Fed’s
latest decision regarding interest rates the question on precious metals
investors’ minds in how it will affect prices of gold and silver in the
future. On one hand it means that there is no immediate rise in the
amount of money chasing tangible assets. This would very likely mean a rise
in the price of most commodities, including precious metals. On the other
hand it is also true that during the previous bull market we had precious
metals rising along with interest rates, so higher interest rates would not
necessarily mean plunging prices.
The Fed did what the
market was expecting it to do, so this decision has already been in the price
for some time. That doesn’t mean that market’s perception will
not change in the future – on the contrary, it probably will, and we
are watching for clues that might tell us that this situation has
materialized.
Since this
information has already been in the price, the prices themselves can tell you
a lot about this decision and especially – market’s attitude
toward it. This is where we come in. Knowing market’s perception toward
current events might give us indication of the future direction of the price.
Where does one look
if one wants to check what the tendencies are? The charts – of course.
In this essay we have prepared two charts (courtesy of stockcharts.com), on
which you can see how gold reactions changed along with dollar’s rise.
We have discussed the
correlation between US Dollar Index and the price of gold in one of our previous essays.
Since understanding it is crucial grasp the following analysis, here’s
a quick reminder:
'Let's say
(theoretically - just for the sake of this essay, as the fundamental
situation is way more complicated) that the main factor that decides where
the price of gold will go is the value of the US Dollar Index. The undeniable
reason is that gold is priced in the USD and, therefore, virtually has to
respond to its up- or downswings, by moving in the opposite direction. If the
value of gold was perceived as constant by the investors from all over the
world and the value of the currency in which it is priced, falls, then in
order for the price of gold in their respective national currencies to be
stable, it has to rise in terms of US Dollars. If the price of gold did not
rise as the US Dollar falls, then foreign investors would see price of gold
fall in their national currencies. Unless foreign investors changed their
mind about the value of gold, they would start buying gold, as it now is
cheaper for them than it was when they thought the price reflected
gold’s value. As they would purchase, the price of gold in all
currencies would go up (including USD). For people who make transaction in
the US Dollar it would seem as if the price of gold as just went up out of
the blue, when in fact it would be their Dollars that lost value, while
gold’s 'real' price was not affected. Like we stated earlier,
there’s more to this correlation between USD and price of precious
metals than just what we mentioned above, but it's enough to make a few key
points in this essay.'
When one looks at the
US Dollar Index and compares it to the price of gold it becomes obvious that
gold stopped following its main fundamental factor. Gold has managed not to
establish a lower low despite a higher high in the US Dollar Index. This is a
very positive sign for all people, who are waiting to see some strength in
the yellow metal. Please take a look yourself.
![](http://www.24hgold.com/24hpmdata/articles/2008/06/img/20080627465.jpg) ![](../style/all/img/bouton/Zoom_in_6.png)
The scale on the US
Dollar (right) axis is inverted, so that you can better see how gold’s
reaction toward USD changes.
Since the beginning
of May, gold mostly stopped reacting to USD strength. Sure – we had
days, when dollar was rising and gold was falling and vice-versa. However
generally speaking, dollar’s rise was not accompanied by falling gold
prices. Though we expected it, no new lows were made in gold and silver.
This can be also
observed in the Gold to Anti-Dollar Ratio (Gold to USD Index but in reverse
order, such as on the chart above) – please see chart below.
![](http://www.24hgold.com/24hpmdata/articles/2008/06/img/20080627466.jpg) ![](../style/all/img/bouton/Zoom_in_6.png)
Clearly gold’s
attitude toward rising dollar has changed since the day it established a low
at the beginning of May.
This means that gold
is likely to rise in the future and the breakout which has just occurred has
a high probability of NOT being another fakeout
leading to further declines. This has now been confirmed by numerous factors,
especially the precious metals stocks. In our last commentary we outlined a
resistance level that was supposed to stop the fall. Despite the steep
decline in the general stock market, PM stocks refused to go lower. This,
combined with yesterday’s breakout on high volume gives us a high
probability that we will not go lower for at least several days, more likely
weeks. That is IF we get lower, which is not that probable given
aforementioned factors.
Summing up, our best
guess is that we have just witnessed a breakout, which could take gold again
into four digits, or very close to that level. Time will tell whether new
highs will be achieved right away, but we would be cautious
with predicting that. We will be monitoring the situation closely.
Of course the market
might prove us wrong, as nobody can be right 100% of the time. We have just
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method of profiting on this situation. Should our view on the market
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Przemyslaw
Radomski
Editor, www.sunshineprofits.com
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