In today's previous alert we wrote that the comments coming from Europe regarding the QE could change a lot in the markets and perhaps trigger a reversal. This could have been the case, but instead of just providing the expected QE-announcement Mario Draghi also decided to decrease the interest rates.

The reaction was visible in the EUR/USD exchange rate and, in consequence, in the USD Index. Naturally, given the surprising nature of the announcement, the former declined, and the latter rallied.

The precious metals seem to have not reacted to this piece of information at all. Taking a closer look reveals that the move was indeed seen - PMs rallied, but only from the European perspective - in terms of the euro. That's a natural reaction - the currency declined in value, so the goods priced in it appear more expensive. This move hasn't changed much from the technical perspective for the non-USD gold price and also in case of gold priced in the euro. Consequently, we don't think there are any significant implications as far as the technical picture is concerned. One could argue that gold's small reaction in terms of euro today is a sign of weakness, not strength.

Now, there are implications for the long term and they are bullish. Europe will be printing more money which means that the precious metals sector will have yet another reason to move much higher in the coming years - however, not necessarily right away. Of course, the term "printing money" is an oversimplification, but still, in the long run, the above is a bullish factor.

The USD Index has rallied and gold hasn't declined - is this a sign of strength of gold, or exactly the opposite? If we were certain or at least there were a good possibility that the USD Index increased based on the strength of the U.S. currency, gold's lack of decline would be bullish. However, at this time, it almost certainly (generally, despite what the mainstream media would like you to believe, there are no certainties as to what caused a given move in the markets) was the euro that lost value. Consequently, with no change in the value of the dollar itself, the fact that gold hasn't declined from the USD perspective, has practically no implications. It's neither bearish nor bullish - that's just average, normal performance.

Now, we know that gold hasn't reacted to the dollar's strength, but that doesn't guarantee that it won't react to the dollar's weakness. At this time it might seem that the only direction in which the USD Index can move (given that there are talks in the U.S. about increasing interest rates and the ECB has already lowered rates) is up. That's exactly why… It could correct at this time. Remember that when everyone gets on the same side of the boat, it's better to be on the other side. The cyclical turning point is here and the USD is extremely overbought from the short term perspective.

Will metals move higher when the USD finally corrects? Quite likely - we will be able to estimate this with much greater precision after the initial part of the correction. At this time gold's upcoming upswing is less likely than it was yesterday, as gold is quite likely to confirm its recent breakdown (below the rising support/resistance line) today.

The confirmation of the breakdown will be an important event, but please note that we have other confirmations to look at: the breakdown in mining stocks and a weekly close below the support/resistance line.

The bottom line is that situation deteriorated today because gold could have invalidated the breakdown but it hadn't. If it wasn't for the extreme (!) situation in the USD Index, we would be suggesting shorting the precious metals market at this time. However, the situation in the USD Index IS extreme and the risk of being thrown out of the market with the "one last move higher" before the decline seems to be simply too big to open a speculative position at this time.

The medium-term trend has been down and we are not close to suggesting getting back in the precious metals market with one's long-term investment capital at this time. It seems that we will see gold, silver and mining stocks at much better prices (for making a purchase) in the coming weeks or months. On a side note, please note that the $1,050 target is more or less in the middle of our target area for gold and this has been the case for months now. While we don't necessarily like this kind of "support," please look at who agrees with us and has told the mass media about this kind of prediction.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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