Check out the chart below. Looks rather bullish doesn’t it?
Not only has price made higher lows since the beginning of the year, it also recently found support at a key trendline and its 200 day moving average.
But what is this a chart of?
Here are some clues:
- It is a market that I cover every week in our Technical Forecast service
- The chart above looks at a popular asset, just in a “different light”
Would You Believe It?
When thinking about the decline in price of the precious metals (NYSEARCA:AGQ) over the last few months, let’s look at it in a completely different way. What if the decline in the metals’ prices was entirely driven by the strengthening U.S. Dollar (NYSEARCA:UUP)?
Instead of saying gold has declined in value since its July top, instead let’s say, the purchasing power of the Dollar, driven by its 8% rise, has increased since July, requiring an adjustment in metals’ and all other Dollar based pricing mechanisms.
Alternatively let’s also say the purchasing power for the Euro Zone (the largest economy in the world) has declined by 10% since May.
Looking back at the chart above what would you say if I told you it was actually a chart of gold’s price?
It is (see below)! The caveat is that it is gold priced in Euros instead of priced in U.S. Dollars.
Priced in Euros, gold has not declined near as much as it has in the U.S. In fact, it is up 10% year to date.
Europeans have profited by being in gold this year, but Americans have not. The reason is not so much because gold has declined in value, but it is because of the major currency (NYSEARCA:EUO) fluctuations that have occurred. The decline in the Euro means Europeans who owned gold instead of Euros actually profited as the Euro (NYSEARCA:DRR) has lost 10% of its value since May. The Euro’s massive decline is shown in the bottom portion of the graph.
Case in point: On Friday, Oct 3, at one point gold was down 1.2%, but the Euro was down 1.3%. Europeans long gold benefited from being out of Euros and in gold as the chart below also shows has occurred year to date.
This chart is another reason to expect a low soon in the metals. In European terms, gold is actually looking bullish, finding support at its 200 day MA and trendline.
Taken one step further, this chart suggests gold will continue to perform better than the Euro over the coming weeks.
This implies when the inevitable bounce in the Euro finally does occur, gold’s rally could be rather swift as gold also outperforms a rallying Euro (declining Dollar).
Gold is no less important to the Europeans as it is to Americans, making this chart also an important piece to the gold price puzzle.
For this and the other reasons I have discussed over the last few weeks, gold and silver are likely gearing up for their largest rallies since Dec 2013 and June 2014. I would not be surprised to see gold 8% higher and silver up 15% off their lows, once they do arrive.
The other benefit this gold chart priced in Euros provides us is another trendline to keep an eye on. If this ratio drops below the 200 day MA and the trendline at 9.40, it would turn into a big warning for gold owners.
For now, stay short the Euro (NYSEARCA:EUFX) and long Gold (NYSEARCA:GDXJ)and wait for the sentiment driven bottom to finally surface. Once the bottom does arrive, gold (NYSEARCA:UGL) should see a very nice rally, likely making some of the more volatile leveraged ETFs attractive.
The ETF Profit Strategy Newsletter uses technical, sentiment, and fundamental analysis across global assets to keep you abreast of what is really going on out there. Gold has tanked in U.S. Dollar terms, but that is because of the Dollar’s strong rally. Once that rally is finished, we explain how far gold’s relief rally may go.
Follow us on Twitter @ETFguide