The EUR/USD Effect: It Ain't An April Fool's Joke

Piecing together the puzzle, because the EUR/USD accounts for nearly 58% of the movement of the USD Index and gold has a strong negative correlation with the U.S. dollar, the euro’s plight is profoundly bearish for the yellow metal.

Please see below:

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To that point, amid the surge in U.S. Treasury yields and the recent follow-through by the USD Index, gold has delivered its worst YTD performance since 1982.

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If that wasn’t enough, Commodity Trading Advisors (CTAs) continue to reduce their exposure to the yellow metal. For context, CTAs manage professional futures portfolios and often employ computer-driven (quant) strategies in their attempts to deliver alpha. And while the latest reading is relatively stretched, history implies that CTA’s allocation still has room to move lower.

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In conclusion, the PMs’ strength on Mar. 31 was likely a mirage. Wrapping optimistic equities, subdued Treasury yields, and a dormant USD Index into the perfect package, the daily price action was gold’s version of paradise. However, with the tranquility unlikely to last, the yellow metal will soon have to test its mettle against its fiercest opponents. And for the time being, gold is likely ill-equipped to handle the forthcoming challenge.

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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Erikas Ivan 1 month ago Member's comment

Thank you for helping me better understand the precious metal market recently. Your perception on precious metals just shows how experienced you're in this field, unlike permabulls that only rely on headlines.