HH How The Eurozone Affects Gold, And Why You Should Care

In our globalized economy, currency pairs have a negative correlation with gold, so how does the current EUR/USD situation impact the yellow metal?

It pays to pay attention to what is happening in Europe. As is well known, there are many currency pairs in the world, but the most traded one is the EUR/USD. How does that affect you as a gold investor? The equation goes something like this: if the economy of the Eurozone sinks and takes the EUR down with it, the USD rises – and vice-versa. Gold, which is usually inversely related to the dollar, will also either rise or decline based on the latter’s behavior.

Before we get to Europe though, let’s take a look at what gold is currently doing.

Once again, yesterday’s (Jan. 26) session was relatively uneventful on the technical front, but that doesn’t mean that the outlook is any more bullish.

Conversely, it remains bearish because of multiple developments that happened before the current pause. For instance, the invalidation of gold’s breakout above its 2011 high. Even though it had help from a sliding USD Index, the yellow metal still failed to hold above this critical support level.

It seems that the only thing that made gold rally in the recent past was the U.S. inauguration-based uncertainty. As it fades away, gold is losing its gleam. In fact, the previous relative weakness seems to have already returned.

Figure 1 – USD Index futures (DX.F)

Taking the previous two days into account (precisely: yesterday and today’s pre-market trading), we see that the USD Index declined. In such a situation, gold should have rallied or at least paused, but what did it do?

Figure 2 - COMEX Gold Futures (GC.F)

Gold declined. This means that gold’s weakness relative to the USDX is back.

Looking at the above chart, I marked the November consolidation with a blue rectangle, and I copied it to the current situation, based on the end of the huge daily downswing. Gold moved briefly below it in recent days, after which it rallied back up, and right now it’s very close to the upper right corner of the rectangle.

This means that the current situation remains very similar to what we saw back in November, right before another slide started – and this second slide was bigger than the first one. Consequently, there’s a good reason for gold to reverse any day (or hour) now.

Let’s get back to the USD Index for a minute.

I think that the USD Index is likely to rally in the following weeks, but as far as the next several days are concerned, the situation is relatively unclear.

The USD Index finds itself after the breakout above the declining medium-term resistance line, but it’s also after a breakdown below the rising short-term support line. Consequently, it’s very short-term outlook is relatively unclear. In all cases, I don’t see it moving visibly below the previous 2021 low.

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Disclaimer: All essays, research, and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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Monica Kingsley 4 weeks ago Contributor's comment

I am not really sharing such a bearish $GOLD and GDX view, and in my today's stocks and gold analysis, I lay out why