Based on the August 17th, 2012 Premium Update. Visit our archives for more gold & silver analysis.
The summer dog days are upon us leaving investors cooling off in the shade waiting for a refreshing breeze of market-moving news. They are anticipating something important that will energize the gold price for an upward move, perhaps another round of quantitative easing by the U.S. Federal Reserve that could possibly be announced at the Fed's Jackson Hole, Wyoming annual gathering in late-August, or at the next meeting of the Fed's Federal Open Market Committee in September. Several U.S. economic reports released Wednesday failed to significantly impact the precious metals.
At least two heavyweight investors are not waiting on the sidelines to see what the Fed will do. Doing some bargain shopping, billionaire investors George Soros and John Paulson increased their holdings in the gold-backed exchange traded fund, SPDR Gold Trust. According to U.S. Securities and Exchange Commission filing for second-quarter, Soros Fund Management more than doubled its investment in the SPDR Gold Trust to 884,400 shares as of June 30, compared with three months earlier. Paulson & Co. increased its holdings by 26 percent to 21.8 million shares.
However, hedge funds have cut their net-long position by 66 percent from a record in August 2011. So who is the "smart money" in this case? We'll find out soon enough.
To see how precious metals are expected to fare in the August heat we now turn to the technical portion with the analysis of the Euro Index - after all the latter often moves similarly to gold. We will start with the long-term chart (charts courtesy by stockcharts.com)
We begin this today's essay with a look at the long-term Euro Index chart. This week we've seen a move higher which appears to have resulted in a breakout above the declining short-term resistance line. "Appears" because the week is not over yet, but unless the Euro Index declines below the 122 level, the short-term breakout will be a fact. This is not a major bullish factor medium term, but we could see further strength here in the short run.
A major medium-term resistance line is close at hand and could very well stop the recent move to the upside. Both the black and red lines in our chart could serve as resistance (the neck of the previously completed head-and-shoulders pattern).
Now, let's see if there's been any reaction of the USD Index on the Euro Index behavior.
In the medium-term USD Index chart (if you are reading this essay on sunshineprofits.com, you may click the above chart to enlarge), we do not see any invalidation of the bullish trend at all. The breakout above the long-term resistance line continues to be verified, and the medium-term direction appears to be to the upside.
If the short-term rally in euro is indeed seen, then the dollar could move lower and retest one or both of its long-term support lines.
To see how precious metals would probably react, should a short-term rally in the Euro Index and a short-term decline in the USD Index occur, let's take a look at our own tool intended for measuring intermarket correlations.
The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. The traditional correlations are in place at this time, meaning that gold and precious metals are negatively correlated with the USD Index and positively correlated with the general stock market.
Consequently, the change in the short-term situation on the USD Index makes the short-term case for metals a bit more bullish than not. The influence remains negative in the medium term, though.
Summing up, the medium-term outlook for the dollar is unchanged and remains bullish. The short-term picture has become mixed and a bit bearish based on this week's Euro Index move. This could in turn translate into short-term improvement in gold and other precious metals. However, we advise caution, as the medium-term uptrend in the USD is still in place. More in-depth analysis of the currency market as well as the critical situation in the general stock market and their possible influence on precious metals are discussed in the full version of this article.
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Thank you for reading. Have a great and profitable week!