GOLD MAY BE DRAWING STRENGTH FROM THE YEN WHICH MAY BE REPLACING THE EURO AS THE DOMINANT FOREIGN CURRENCY

GOLD IS ATTRACTING NEW ATTENTION... Over the last week I've shown the Gold & Silver (XAU) Index starting to bounce from potential chart support at its spring 2004 low, and the price of bullion bouncing off its February 2005 low. Last Friday I suggested it might be a good time to increase one's exposure to the precious metals sector. One way to do that is through the StreetTracks Gold ETF (GLD) shown in Chart 1. The daily bars in Chart 1 show GLD (which tracks the price of bullion) bouncing off its February low last week. The upside volume was the heaviest since the February rally began. The price of GLD is moving up again today with the price of gold. It's in the process of testing moving average lines. It also needs to clear the down trendline drawn along the March/April highs to signal an end to its three-month downtrend. But the entire precious metals group is starting to look a lot stronger. That may seem strange in the face of a rising dollar and a falling Euro. Normally, that combination produces lower gold prices. An explanation for the recent gold upmove may be more closely tied to the Japanese yen than the Euro.

Chart 1

EURO HAS PLUNGED, BUT YEN HASN'T ... The Euro has come under a lot of selling of pressure lately, much of it tied to expectations for a no vote on the European constitution which became a reality last week. That negative vote caused a gap down at the start of last week on the Euro chart. Although the chart doesn't look strong, the Euro has reached an oversold level where some type of bounce is likely. Since much of the Euro's weakness is tied to internal European politics, it may be a mistake to read too much into its recent decline. And given the increasing pressure on China to revalue its currency, it's quite possible that dominance in the foreign currency market is shifting to Asia -- and mainly to the Japanese yen which is the most liquid currency in the Far East. Which brings us to Chart 3.

Chart 2

GOLD AND THE YEN BOUNCE OFF SUPPORT... Chart 3 shows the Japanese yen bouncing off chart support formed during April. That sets up the possibility of a "double bottom" in the making. The chart also shows that the yen has been in a downside correction since last December. If you compare Chart 3 to the Gold ETF in Chart 4, you'll see that both started their downside correction around the same time. With the XAU (not shown here) and gold bullion bouncing off chart support levels, it's encouraging to see that the Japanese yen is trying to do the same. Both markets have a ways to go to confirm that this is indeed a bottom. But the rally in the yen does add some intermarket support to the new buying in the gold pit.

Chart 3

Chart 4