Gold cannot be printed or
manufactured in contrast to the currency. That’s why over the long term it
has kept its value as the ultimate currency. There can be no “gold war.”
However, we often hear about a currency war. Sounds familiar, were did we
hear this before?
The phrase “currency war”
was coined by Brazilian Finance Minister Guido Mantega after the financial
crisis of 2008. The idea is that highly indebted nations weaken the value of
their currency by cutting interest rates down to zero and printing fiat
currency in order to gain trade advantages (cheaper products to export) and
to pay less debt service on their bonds. Countries compete against each other
to achieve a relatively low exchange rate for their own currency. The policy
can trigger retaliatory action by other countries that in turn can lead to a
general decline in international trade, harming all countries.
Concerns over a currency
war prompted the Group of Seven and Group of 20 economies recently to
formulize what constitutes appropriate behavior by central banks in
influencing currency-exchange rates.
Let’s look at some
numbers. Global currency reserves have swelled from $1.9 trillion in the year
2000 to a whopping $11.2 trillion by the third quarter of 2012. But most of
that gain took place in the past six years with global currency reserves
doubling to the current levels from $5.6 trillion at the beginning of 2007.
If that is not evidence of the global currency war then what is? We can see
two different aspects. The first is undeniable evidence of aggressive money
printing, but we already know that. The second, is an indication of
determined stockpiling of the currencies of other countries in order to
weaken your own currency.
For a widespread currency
war to occur a large proportion of significant economies must wish to devalue
their currencies at once. This has so far only happened during a global
economic downturn.
Under normal economic
conditions countries tend to overlook a small rise in the value of their own
currency. However, during a time of recession, nations can take umbrage at
other countries’ devaluations.
Let’s begin this week's
technical part with the analysis of the U.S. Dollar (charts courtesy by http://stockcharts.com).
Let’s start today’s
analysis of the U.S. Dollar with its long-term chart.
When we take a look at
the above chart we can see that the USD Index declined once again this week.
Despite that fact, the January breakout was not invalidated. As we see, the
index is still above the declining support line, and thus the medium-term
outlook remains bullish.
Let’s take a look at the
medium-term situation. Has it changed since last week?
In this perspective we
can see that the USD Index moved to its medium-term support line (marked with
the thin black line), which is currently close to 80.4. It is very possible
that this line will pause the decline, at least for a while, and it’s quite
possible that it will actually stop it.
The situation remains
bullish for the USD Index in the long and medium term, so let’s check to see
if the short-time outlook is the same.
During the last several
days, the USD Index declined and moved slightly below the short-term support
line. There is a medium-term support line visible on the previous chart that
is much more important so the above is actually not a big deal.
The most important factor
on the above chart supporting the bullish case is the cyclical turning point
which is very close – about a week away. It is possible that we will see its
impact on the dollar next week and this can lead to a bigger pullback or –
more likely – the end of the current decline. If we move back in time a bit,
we will see similar situation in August and September 2012 when the cyclical
turning point worked very well after a significant decline.
Additionally, please note
that the RSI Indicator is now at the 30 level, which is a classic buying
opportunity.
Let's find out what
impact has this decline had on the two most popular precious metals.
In this week’s very
long-term gold chart, comments made in last week’s Premium Updateremain up-to-date:
The outlook continues
to be bearish and the trend remains down. Gold could still decline heavily
based on the long-term cyclical turning point (…). In both 2008 and 2009,
local tops formed slightly after the cyclical turning point, so it is
possible that the reversal in the downtrend won’t be seen until after the
cyclical turning point once again, leaving a number of days in which further
declines could be seen.
We are still likely to
see declines after the cyclical turning point from this long-term
perspective. The turning point should work on a “near to” basis and declines
will likely be seen sooner rather than later (and the bottom is likely weeks
away, not months away).
Now let’s take a look at
the white metal.
In this week’s very
long-term silver chart, not much really happened as prices declined slightly,
less than half of 1 percent overall. The intra-day high for the week was
lower than last week once again and from this perspective, the declines
clearly go on.
No confirmed move has
been seen below the level of the 2008 highs, but silver’s price is only
slightly above it at this time. It seems that we’ll have another sharp
decline once the breakdown below this support level is seen and confirmed.
Summing up, the most important event in the
currency market was further decline of the dollar. Although the decline
visible on the USD Index chart has been quite heavy, we have not seen a rally
in gold and silver so far this week – they moved lower. Gold’s underperformance
has become even more significant this week and we think that this makes the
outlook even more bearish for the short term. Although recent declines in
silver have been small, the downtrend remains in place. The implications of
the above-mentioned underperformance are bearish for the precious metals
sector.
Thank you for reading. If
you're interested in reading the full version of today's analysis with our
suggestions regarding positioning yourself in the current market environment
(trading positions, long-term investments), please sign up
.
Sincerely,
Przemyslaw Radomski, CFA
