Sunday, April 27, 2008

Analysis of the US Dollar and Gold Stocks

Gold dropped about $26.00 dollars an ounce this week, and gold stocks fared even worse, with the XAU losing 6.6% for the week. In the previous post I wrote on Tuesday, I said that an explosive move was likely due. Hopefully, from what I have been writing recently, you were able deduce which way I thought that move would be.

The following chart is a daily chart of the HUI index. I posted this same chart on April 13th, and I am posting it again since I think that it explains what has happened this week:

The central theme of the above chart is that gold stocks tend to correct in three waves, and this correction was no exception.

One of the reasons that gold stocks performed so poorly this week is because the USD has broken out of a triangle formation, which was building up for the last 3 weeks:


Notice how volatility, as measured by bollinger band width, signaled this breakout. The same indicator that was used in the above chart helped show me that a breakdown was due for gold stocks.

The next chart, which took me about 15 minutes to annotate, shows the Euro on the top panel, and what I call an intermarket MACD on the bottom panel. The last time I showed this type of chart was in this post.


As you can see, there has been a negative crossover on the MACD, which has triggered a Euro sell signal. A declining Euro will likely put pressure on gold prices, and also may drag Crude Oil prices down as well.

On the bright side, gold stocks are starting to near some potential areas of support. The following chart is a daily chart of GDX:


If you are a long term precious metals holder, like myself, then you could probably take some solace in the fact that GDX is nearing an unfilled gap, which may offer support. We'll have to wait and see what sort of candle emerge at this level.

Furthermore, silver prices are within 10% of a major area of support, which means the amount of pain left for the silver bulls to endure is certainly limited:


So the bottom line is that the US Dollar will likely rally for the next little while, and this means that the gold stocks correction is not quite over, but there is certainly some light now visible appearing at the end of the tunnel.

I will try to write a mini post on Tuesday again.

4 comments:

Anonymous said...

Do you often pat yourself on the back after a lucky call. Is that all you have in life you geek.

Danny Merkel said...

anonymous,

Unfortunately for you, comments left on my blog are not completely anonymous.

Your comment was originally submitted at 5:05pm today. The only person who visited my site during this time, was using a computer with IP Address 198.96.178.

This IP address is for the same Bank of Montreal office that I happen to be employed at.

I am sorry that you are bitter that you lost the company stock simulation contest.

http://www.sitemeter.com/?a=stats&s=s38chartfiend&v=90&r=9&vlr=8&pg=1&d=428

The Word said...

Danny,

What are you doing working for a bank? You should be a detective.

Bang on!

I thank you on your rigourous precious metal analysis. I depend on it for that area of my trades. If I come to a different conclusion, I research it again and again an 90% of the time I must join your side.

Thanks for the original research

The Word

z-stock said...

i can't believe how accurate your GDX chart was ..