Why Gold’s True Strength Lies in Euros, Not Dollars

Gold continues to consolidate around its recent record highs above $2,500 an ounce, but its bullish momentum is at risk as the U.S. dollar appears oversold. However, one market analyst suggests that investors should pay attention to another gold/currency cross to determine the precious metal’s true trend.

In her latest note, Nicky Shiels, Head of Research and Metals Strategy at MKS PAMP, said she is paying more attention to gold against the euro as it trades near record highs. She noted that XAUEUR is a good proxy for “gold-only” demand, as it removes the broader U.S. dollar volatility.

While the U.S. gold futures market is closed Monday for the Labor Day long weekend, spot gold against global currencies continues to trade. Gold is trading in neutral territory against the euro, at €2,259.60 an ounce, roughly unchanged on the day.

Shiels warned that gold is trading at a critical resistance level against the euro, which could set the stage for a broader trend.

“XAUEUR has been sitting comfortably in a broad ~€150 range since the large breakout in March and April this year,” Shiels said in her note. “XAUEUR is extremely toppy in the high €2200s; there have been six failed attempts in the €2270-2280 range since the April peak and all-time high in euro terms at €2287/oz.”

Although gold has been unable to break above its March/April highs, Shiels noted that the precious metal appears to be building a solid base around €2,200 an ounce. She said that even as prices consolidate, gold has maintained an upward bias against the euro. She added that in this environment, investors should look to buy the dips.

“Time is somewhat ripe for a rerating (up or down)—it’s been six months since the March breakout—but we don’t think the top is in yet. There is still ‘oomph’ in the XAUEUR as a proxy for real demand trading strongly, and this isn’t an environment to counter longer-term trends just yet. Sure, there’ll be tactical reversals, but calling the gold top at $2500/€2300 is premature,” she said in the note.

 

The gold market has been building broad bullish sentiment in the last month as markets prepare for the Federal Reserve to start its highly anticipated easing cycle. Market expectations for a 25-basis-point move and a growing outside chance of a 50-basis-point cut have pushed gold prices above $2,500 an ounce.

Growing expectations for aggressive easing caused a sharp selloff in the U.S. dollar; however, many analysts have said that a 50-basis-point move is unlikely, which could provide some support for the dollar in the near term.

At the same time, gold remains supported in euro terms. Markets expect the European Central Bank to cut interest rates again in September as inflation pressures continue to cool.

This article originally appeared on Kitco News.