EC How Euro’s Troubles Can Exacerbate Gold’s Woes

The EUR/USD currency pair faces significant headwinds. How does this affect the precious metals? What does it spell for gold?

Many people, analysts included, often overlook the multitude of external factors influencing the precious metals. It’s something that I point to and stress in many analyses. These factors can include the shape of the European economy, for example. One has to look at the big picture.

Here’s how it works. Because the EUR/USD accounts for nearly 58% of the movement in the USD Index, anytime that Europe’s economy underperforms that of the U.S. (which is what it’s currently doing), it’s a negative for the euro and bonus points for the dollar. Because the precious metals have a strong negative correlation with the USD Index, a rise in the dollar in the very near future will further serve as downward pressure on the metals.

Additionally, higher inflation and resultant higher interest rates in the U.S. are another negative factor for the euro and a positive one for the USD.

However, before we travel to Europe, let’s take a look at how the precious metals are currently doing, starting with gold.

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Gold rallied strongly after bottoming right in the middle of my target area and after moving almost right to its June 2020 bottom, and after almost doubling its initial January decline. Yesterday’s rally also meant invalidation of the brief breakdown below the 61.8% Fibonacci retracement level based on the entire 2020 rally. Thus, the very short-term trend is up.

Please keep in mind that the upswing might be relatively short-lived – perhaps lasting only one week or so. There’s a triangle-vertex-based reversal point coming up this Monday (Mar. 15), so it wouldn’t be surprising to see an interim top at that time, especially considering that:

  1. The triangle-vertex-based turning points have been working particularly well in the recent past – they marked the January and February tops.
  2. The corrective upswings during this medium-term decline (especially in mining stocks) often took about a week to complete – at least the easy part of the upswing took a week.

The thing that I want to add here – that already takes us to the part where I discuss the gold-USD link – is that gold rallied overnight. It’s currently up by about $10. This doesn’t mean much by itself, but it does mean a lot, when we compare it with the analogous action in the USD Index.

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Namely, the USD Index is up by 0.06%. It’s not important that it’s 0.06%, but it’s important that it’s a tiny upswing and not a decline.

In other words, gold just continued to move higher, even though the USD Index paused after a brief decline. This tells us that the shape of both price moves doesn’t have to be identical. Well, to be clear, it was known right from the start, but it’s often the case that the daily price moves in gold and USDX mirror each other.

So, can the bottom in the USD Index form at about 91.6 while gold rallies to ~$1,770. Of course.

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Linda Willis 4 weeks ago Member's comment

ECB buying down rates means Fed free to do the same w/o harming bond demand. Lower world wide bond rates is good for Gold. All eyes on Fed next week.

Przemyslaw Radomski, CFA 4 weeks ago Author's comment

We'll see. So far, the markets were expecting another Operation Twist and they didn't get it (and gold declined in the aftermath).