Staring at Gold: Is It Time to Go Short?

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We have been following gold prices for weeks now. This trade is one that has shown a lot of potential to pay off. During the last several weeks gold has trended downwards while consolidating. Even with the recent one day upswing, the overall arc of gold is still losing value. In fact recently gold closed outside the trend lines and stayed there. What does that mean for us? It means the appearance of a Trend Finder arrow would trigger a trade.

What are the gold markets showing right now?

You never want to trade blindly, which is why we continue to look at the fundamental factors that are affecting the gold markets. Right now there are some interesting correlations taking place; it is not just the strength of the US Dollar influencing price right now. The debt issues and growth concerns in the Euro-Zone are also having a major impact on gold prices. In particular, the recent news about more banks defaulting in already troubled Spain is only adding fuel to the fire.

In the past week, a full sixteen major European banks had their credit ratings cut. This has driven lending prices up and dealt a harsh blow to the Euro-Zone. As anyone who has been following the markets realizes that they were hardly on the most solid footing to start with. The increasing pressure to cut Greece lose and find a more effective way of dealing with the debt issues puts added risk on the EUR. That strengthens the USD, which in turn pushes down gold, but only to a point.

We do want to pay attention to what the one-day surge on gold prices might indicate. We still see the overall trend as heading downward, based on our technical analysis. That is the first piece of important information to take away from these reports. The next is that the surge happened when negative news came out about US regional factory production as well as the quelling of any hopes of another economic stimulus package.

This does not mean that the correlation will not change back. Part of the reason gold might not be gaining as many expected is because investors in Europe want more USD. Not having enough diversified currency made Europe’s crisis that much worse when the EUR last dropped sharply in value. Hedging against that could help explain a more solid USD and why gold is not making the movement many people expected.

Right now there is a noticeable correlation between the EUR and gold. I have noted that in the past, gold does its best when its correlation to the EUR is weak. Because of this, traders can expect gold to strengthen as its connection to the EUR weakens. Right now there is still a noticeable correlation between the two. However, it is worth noting that connection is not nearly as strong as it was back in January. The current correlation between the two on the weekly time frame is about 75% and climbing.

While there might be chances of Fed intervention down the line if more progress is not made with the economy, at the moment, that seems far away. For now, until stronger reports change the current fundamental trends, we have to assume gold is weaker than the USD as a safety investment.

Reviewing the EUR/CAD

The other trade we have been sticking with is the EUR/CAD, with attention to shorting the EUR for the CAD. We have already discussed in a roundabout way how this is tied to a USD power play. Seeing how the USD and EUR are reflecting off each other and gold has helped show some of the early potential for this particular currency trade.

Recently the EUR/CAD has bounced back from 16-month lows based mostly on some perceived weakness of the CAD. However it is worth noting that recent reports from Europe are hardly rosy and reassuring. British Prime Minister David Cameron has already come out publicly commenting that additional work and cooperation is mandatory; not only to stop the Euro-Zone crisis but to also prevent it from spreading.

These are not the kinds of signals you want coming from a strong or stable currency. In addition, talks about cutting Greece off have heated up leading to a lot of questions about how loans would be paid back or if this is the only real direction towards recovery.

We still believe the overall fundamental signs for the Euro now are not particularly good and a little good news for the CAD could easily bring the pair back down again. Stick with this trade and watch to see where the trend is going to move.

So what’s the final word on these trades?

What do we do with this information? On gold we are waiting on a Trend Finder arrow as we have already gotten a clear close outside the trend lines which occurred last week. That is exactly the way we are going to play that trade. With the EUR/CAD we are still in a holding pattern and watching those resistance lines.

Gold

EUR/CAD

Good investing,

Jason Fielder

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