Monday, December 22, 2008

Gold v. EURUSD

In my previous post on gold, I provided a technical overview as to why I thought gold would undergo a pullback despite what seems like an excellent fundamental picture. The longer term picture suggests that gold is in a bear market, and last week's explosive upside move was nothing more than a strong bounce into resistance. When I made the "call", gold was probing $875, and since then, the precious metal is off about 5%.

Of course, this is all short term stuff, and admittedly, I believe that in 12 months gold should be higher than today's price; it just may take some more backing and filling before gold takes off from the launching pad.

One clue to the action in gold is to follow the movements of the EURUSD. In general, US Dollar weakness leads to strength in both gold and the Euro. Therefore, gold and the Euro tend to move together.

Figure 1 is a monthly chart of the EURUSD cross rate. Last week's Federal Reserve announcement "to do whatever it takes" saw the US Dollar plummet and the Euro and gold sky rocket. Like gold, the EURUSD cross rate failed at resistance levels - in this case, an upward sloping trend line and the down sloping 10 month moving average. The bear market for the EURUSD remains intact. The EURUSD, like gold, will need more backing and filling before old and significant resistance levels are taken out.

Figure 1. EURUSD/ monthly

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