Based on the September 2nd, 2011 Premium Update. Visit our archives for more gold & silver analysis.
Just a few days ago, the Swiss National Bank effectively abandoned the floating exchange rate of the franc by imposing a lower limit of 1.20 on the EUR/CHF exchange rate. This means that the SNB will try to buy so much foreign currencies to bring the rate above that level. The immediate result was the rally of the euro, a rally that was also visible in the EUR/USD currency pair.
Usually the appreciation of the euro and the depreciation of the dollar is good news for precious metals investors. However, this time it seems that the investors are quickly coming to their senses. Switzerland is a relatively small country and it will not be able to artificially sustain a peg to the euro if the financial markets continue to buy francs. This is precisely what we are seeing at the moment - the franc starts to appreciate once again and may continue to do so because of the extremely tense atmosphere in the Eurozone. This is no good news for the euro itself.
The information coming from the USA is not consoling either. Last week the White House tapped Alan Krueger, a Princeton University professor and noted labor expert, to be chairman of the Council of Economic Advisers to help guide the White House through a jobs crisis. (The unemployment rate seems to be stuck at 9.1 percent.) Krueger's appointment might come in handy as President Obama's plans his speech to be delivered next week after the Labor Day holiday where he is expected to roll out a plan with "fresh ideas" to accelerate job growth and jump-start the economy. Obama is requesting a joint session of Congress for next Wednesday. In a letter to the leaders of both houses of Congress Obama said it is his "intention to lay out a series of bipartisan proposals that the Congress can take immediately to continue to rebuild the American economy by strengthening small businesses, helping Americans get back to work, and putting more money in the paychecks of the middle class and working Americans."
He will have to convince skeptical voters that he has something new to offer, but it is doubtful that he has a rabbit to pull out of a hat. He will probably be praying that Congress returns from it vacation willing to work with him.
Everybody gets to say "coulda, woulda, shoulda" at some point in their investing career. Certainly those who have not yet bought gold have said it to themselves more than once over the past couple of years.
One guy who was deep into lamentations and regrets last week was Pimco's Bill Gross. The manager of the world's largest bond fund has admitted that it was a mistake to bet so heavily against the price of U.S. government debt. Earlier this year Gross got rid of US related securities in his $244 billion Total Return Fund. The high profile call that made headlines has backfired as the bond market rallied. As of Monday last week, Pimco's flagship fund ranked in the 501 spot out of 589 bond funds in its category. No much to brag about. Gross, who is one of the most influential voices in the bond market, warned investors to avoid Treasuries. In the July edition of his widely read Investment Outlook, he warned that promises to American's aging population made them "debt men walking."
We appreciate a good play on words and it's not his fault that investors, for some reason, believe that Treasuries are a long-term safe haven. We would have to express some sympathy with Mr. Gross because we can't figure out why anyone would consider sovereign debt paper to be a better safe heaven than gold and silver.
The question for now is whether precious metals are a good bet in the short-term. To answer to that question, we will move on to the technical part of this essay. We will start with the long-term Euro Index chart (charts courtesy by http://stockcharts.com.)
On August 19th in our essay on the relationship between currencies and gold, we mentioned:
If the breakout does hold and is verified, a rally in the Euro Index will likely follow. This would almost certainly result in lower values for the dollar and perhaps higher precious metals prices. A breakdown however, will clearly be bearish and likely lead to further declines for this index and may have a negative impact on gold and silver prices as well.
Following the press release of the Swiss National Bank, which we have mentioned at the very beginning of this essay, the Euro Index rallied and briefly broke out above its declining resistance level. However, as the subsequent moves suggest that a move lower is likely, we do not see today's rally as a true breakout and would prefer to wait for a confirmation of the recent move up. Immediate declines would invalidate the breakout and suggest that the euro will not have a positive impact on precious metals. Based on the most recent price action this appears to be the case.
In the long-term USD Index chart, we see the index at the upper declining support line and trying to move higher. However, this price action does not take into account the following fake rally in the euro which turned into a decline. Consequently dollar rallied and moved above the declining trend channel.
If the breakout holds then it would likely mean a bigger rally for the USD Index and it will also likely mean lower values for the precious metals sector.
Summing up, the recent appreciation in the euro seems to be short-lived and we currently do not view it as a bullish signal for precious metals. The following rally in the USD Index took the dollar above the declining trend channel, which - if confirmed and no additional factors emerge - will likely correspond to a decline in the precious metals.
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Thank you for reading. Have a great and profitable week!