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Gold Priced in Euros Looks Stronger

Chart In Focus
March 22, 2013

It should not be surprising that a chart of gold prices measured in dollars should look a lot like gold prices in some other currency.  After all, gold prices tend to jump around more than the currencies do.  But there can be subtle differences in the chart patterns when priced in different currencies, and there can be information in those subtle differences.

This week's chart compares the dollar price of spot gold to the price measured in euros, a topic I featured here back in 2010.  The key insight which every gold trader or investor should understand is that most of the time these two will move together, but when they disagree, it is usually the euro price that tells the truer story about where both are headed.

Most often, this disagreement will take the form of a divergent top or bottom structure.  Just recently, we saw the dollar price of gold make a flat bottom, but the euro price of gold made a higher low, which disagreed with the dollar price's flat bottom.  The disagreement can also take the form of different behavior relative to good old fashioned trend lines.

The dollar price of gold is still operating underneath a declining tops line.  So based on that one single criterion, gold is still in a downtrend.  But the equivalent line drawn across the same points on the euro price plot has already been broken.  The euro price plot has already announced that the downtrend is over, and now it is already making a higher high.

We saw a similar type of trend line disagreement back in May 2012, shown at the left end of the chart.  The euro price of gold broke its downtrend line ahead of the breaking of the equivalent line on the dollar price chart, and we saw in subsequent weeks that the euro price was correct then about where both plots were headed.

We don't get these sorts of divergences at every important turn.  So the lack of a divergence is not necessarily a sign that the existing trend is going to continue.  But when we do see these divergences, they are worth paying attention to, and the euro price is usually right about where gold is headed.

Wholly apart from the technical lesson about the behavior of gold prices, there are a lot of people in the world this week who just saw an increase in the marginal utility of gold bullion as a transportable way to store one's wealth.  When depositors in Cypriot banks were confronted with the possibility that their bank deposits might have a levy of 7-10% assessed on them, plus the reality that they cannot access those deposits while the banks are all shut down, then suddenly gold under the mattress starts to look a whole lot better.  Gold pays zero interest, but that's still better than -7%. 

And while governments can still take action to seize gold holdings, it is somewhat harder to do than to seize bank holdings.  Thus, for a lot of people, gold this week suddenly became a more useful and thus more valuable item. 


Tom McClellan
Editor, The McClellan Market Report

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