GOLD DROP WARNED OF EURO PULLBACK -- AND DOLLAR REBOUND WHICH IS HELPING STOCKS BOUNCE
EURO AND GOLD HAVE BEEN RISING TOGETHER... One of the key intermarket relationships we've talked about over the past year is the "inverse" relationship between gold prices and the U.S. dollar. The falling dollar over the past two years has been the main driving force behind the gold market rally. Another way to look at the same pattern is to compare the Euro and gold. The Euro has been the strongest currency against the dollar over the past two years. It follows then that the Euro and gold prices have been rallying together (as the dollar has dropped). Charts 1 and 2 show the close correlation between gold and the Euro during their recent rise. Since the start of February, however, gold prices have been falling while the Euro has held up. Given their close correlation, we believe the gold selloff has been predicting a pullback in the Euro (and a bounce in the dollar). Today's activity suggests that's exactly what's happening.
Chart 1
Chart 2
GOLD PULLBACK LEADS EURO LOWER -- AND DOLLAR HIGHER... Since the start of February, gold and the Euro have been diverging -- gold has been dropping while the Euro has kept rising. That's unusual. When intermarket alignments get "out of line" temporarily, they usually snap back into line. Either gold had to start rallying -- or the Euro had to start falling. There seems little doubt now which way things are going. In overnight trading, the Euro tumbled over 1% against the dollar. The falling Euro (and the surging dollar) pushed gold prices $11 lower to $335. That puts gold at the lowest level in three months. That also puts gold closer to major support in the $330-325 zone. We've stated in previous messages that the selloff in gold was probably hinting at an oversold bounce in the stock market. Today's jump in the dollar appears to be the catalyst in the stock market rally. That means that intermarket trends may be reversing -- over the short-run. Gold (and other commodities) are weakening, the dollar is bouncing, stocks are bouncing, bond prices are falling (while yields are rising). That shouldn't be too much of a surprise either.
Chart 3
Chart 4
BOND YIELDS BOUNCING OFF OCTOBER LOW... We've shown the next chart several times over the past couple of weeks to demonstrate that the 10-year T-note yield was testing its October low. We've also suggested that was a logical spot for some bond profit-taking to occur. That seems to be the case. The yield on the 10-year (and 30-year bonds) are bouncing sharply off those previous lows. Bond prices, which fall when yields rise, are suffering their worst loss in two months. That's good for stocks -- at least over the short run. Charts 5 and 6 shows the close correlation between T-note yields and stock prices. The upturn in bond yields off the October low is helping stocks to do the same. A drop in oil prices today is also helping the stock market bounce.
Chart 5
Chart 6
