Saturday, June 23, 2007

The Euro and Gold

The Euro is a very important part of my analysis of gold stocks. The reason is that the Euro trends in the opposite direction of the US Dollar. Since the US Dollar and Gold are inversely correlated, the Euro and Gold are positively correlated. Therefore, when the Euro chart is looking bearish, it could have a negative influence on your gold stock. The chart below is a weekly chart of the Euro.

People who do not look at the Euro are going to be missing a key piece of the puzzle. A prime example of this occurred in the above chart in the middle of April, 2007. The Euro was approaching its December, 2004 high. One of my favourite stock market legends, WD Gann, stated to always watch for double tops, and that the greater the space between 2 tops, the greater the resistance. Like clockwork, as soon as the Euro reached this point, as represented by the blue horizontal line, it began to descend. If you look at the XAU chart, it topped out at this time, and I think this Euro chart provides the best explanation as to why this happened.

I have drawn another blue line, this one diagonal. This line represents a major line of support for the Euro. The currency has bounced 3 times off this line, which means that it is quite solid. The Euro made a nice weekly hammer right on this line, as shown by my comments. In the subsequent week, the Euro put in a weekly shaved head candle. Both these developments are highly gold bullish. It will be interesting to see what the Euro does from here.

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