JUMP IN OVERSOLD DOLLAR CAUSES BIG DROP IN GOLD -- RECENT DROP IN GOLD SHARES WERE EARLY WARNING -- AUSTRALIA AND CANADIAN ETFs ARE ALSO DROPPING ON COMMODITY SELLOFF
FOREIGN CURRENCIES ARE FALLING ... A sharp rebound in an oversold dollar is causing heavy selling on foreign currencies. Chart 1 shows the Euro gapping down to 132 today and nearing a test of its 20-day moving average. The Japanese yen has already broken that initial support line and is headed toward its lower Bollinger Band. The Canadian Dollar has been the weakest of the three major currencies, and has broken its 50-day average. Last Thursday, I wrote about all of those foreign currencies starting to slip from an overbought condition (December 02, 2004). I mentioned specifically the 14 day RSI in the Euro trading in overbought territory over 70. The Euro's RSI line is dropping under 70, usually the sign of a short-term top. At the same time, the Dollar Index is bouncing from long-term chart support at its 1995 low near 80. To quote from the last line of the December 2 opening paragraph: "Naturally, if the dollar bounces, gold and gold stocks will experience pullbacks". Gold stocks have been dropping for two weeks and correctly warned of weakness in bullion and a bounce in the greenback. Gold has been tracking the Euro especially closely. Today's big Euro drop is causing a double digit loss in gold.
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GOLD ETF TUMBLES $15... Chart 4 shows the new Gold ETF (GLD) tumbling the equivalant of $15 in today's trading, putting it within striking distance of its 50-day average. Today's drop also pushed gold well below $450 which I recently described as an "interim" psychological resistance barrier. Nasty as it is, today's bullion drop isn't a surprise. I've written several pieces lately showing that the drop in gold stocks that started nearly two weeks ago warned of a similar drop in bullion. That's because gold stocks usually lead the price of bullion. Two weeks ago I wrote an article headlined: DOLLAR NEARS SUPPORT AT 1995 LOW - GOLD STOCKS ARE STARTING TO SLIP WHICH WARNS OF PULLBACK IN BULLION. That article talks about the fact that the XAU Index and Newmont Mining were starting to pull back from resistance at their early 2004 highs, and also describes the weakening in the XAU:GLD ratio. It's a good example of how intermarket influences work. If you haven't already read it, you may find it educational reading. November 24, 2004.
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AUSTRALIA AND CANADIAN SELLING ... That earlier article also described how a dollar rebound -- coupled with commodity selling -- was starting to hurt the Canadian market which has thrived on a rising Canadian Dollar and natural resources. Not surprisingly, Canada is one of today's weakest global ETFs. The daily bars in Chart 6 show the Canada iShares (EWC) dropping to their 50-day average. The relative strength line has also been slipping (vs. the S&P 500) over the last two weeks. Given the close correlation between Canada and commodities, I take that as an additional warning of corrective action in commodity markets. The recent drop in the Canadian Dollar is another negative for the EWC. The monthly bars in Chart 7 show another reason for some concern about the Canadian market. Chart 7 shows the EWC running into selling at its mid-2000 peak near 17. Its 14-month RSI line is trading in overbought territory over 70 as well. A pullback in Canada, a correction in commodities, and a bounce in the dollar. It all fits together. Another natural resource country ETF that's falling today is Australia. Australia is closely tied to industrial commodities like copper which have also been falling lately. Yesterday's sharp drop in basic material stocks like copper and aluminum was another warning of impending weakness in commodity markets and global markets tied to those commodities. And a likely rebound in the dollar.
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