Wait a minute...that’s exactly the same scenario in Israel.

This week the Bank ofIsrael stepped up its efforts to curb the appreciation of the shekel surprisingthe markets by unexpectedly cutting its interest rate and announcing a programto purchase foreign currency. A weaker currency boosts exports, driven bycheaper prices. The smaller economies are reacting to all the quantitativeeasing by the world’s large economies.

Israel’s centralbank, headed by Stanley Fischer, one of the most accomplished central bankersin the world, cut the key interest rate by a quarter of a percentage point to 1.5%to a three-year low. 

Fischer toldBloomberg that the move came “in light of the continued appreciation of theshekel, taking into account the start of natural gas production from the Tamargas field, interest rate reductions by many central banks – notably theEuropean Central Bank, the quantitative easing in major economies worldwide andthe downward revision in global growth forecasts.”

Despite the global financial threats, the Israeli economy is still in the blackand healthier than the economies of many European countries. The shekel hasrisen by nearly 9% over the past six months, making it one of thebest-performing currencies in the world, after the Mexican peso. Israel’scentral bank also plans to buy around $2.1 billion in foreign currencies.

Israel's economy isheavily dependent on exports, and a strong shekel weakens the competitivenessof Israel's products abroad.

It was Japan thisyear that shot off the latest round in the currency war after announcingmonetary stimulus of historic proportions. Recent steps by the world’sthird-largest economy have become a central concern. The impact of thecountry’s aggressive new monetary policy has been making central bankers aroundthe world lose sleep. Is the Bank of Japan trying to influence exchange ratesto give its exporters an advantage? Other countries might react in kind, whichis exactly what happens in currency wars.

Actually, this is notsurprising to us. The global increase in the money supply and lowering ofinterest rates is not surprising because countries will have to keep doing thatin order to keep their exports competitive. It is a currency war and those whoinflate first, get the most benefits. They are short-lived because othercountries will follow and the ultimate result will eventually be huge inflationon a global scale, but, again, on a short-term basis, the monetary authoritiesare pressed not to stay behind others. The comments about the lack of currencywar are not surprising either. Speaking publicly about it would simply encourageother countries to join it sooner, and those that are already printing moremoney don’t want that to happen as it means that the above-mentioned advantagethat they gained would disappear.

Implications forgold? Bullish in the long run, nonexistent in the short run.

As we can see, thegreat fundamental outlook for precious metals is intact. Let's move on to thechart section of today’s essay to see how gold’s current technical situationlooks like and therefore how gold can trade in the following weeks. Before we proceed to the yellow metal itself,let us begin with the Euro Index long-term chart (charts courtesy by http://stockcharts.com.)

The index hasdeclined for the past two weeks and it seems now that we should consider thepossibility that the head-and-shoulders pattern will be completed here. Such acompletion would take the Euro Index much lower.

The size of theprojected decline after the breakdown and completion of the pattern is roughlythe same size as the height of the head in the pattern. If this decline isattached to where the breakdown occurred, the projected downside target levelwill be about equal to the 2012 low (in the 121 – 122 area). Such a move wouldlikely contribute to a USD Index rally. All of this could also be bearish for gold inthe medium term if it all does indeed materialize.

Let’s move on togold’s very long-term chart now.

In this chart, we seea situation quite similar to the declines to 2008, where a sharp pullback wasfollowed by a continuation of the severe decline. The most bearish factor hereis the shape of the decline, which is a reverse parabola. This formationresults in accelerated declines and makes it difficult to tell how low priceswill go. Although the declines will likely end shortly, the increasedvolatility could result in prices moving very low quickly while still being intune with the trading pattern. This reverse parabola has been in place sincelast October.

The very long-termcyclical turning point suggests that a local bottom will be seen soon– within the next month, probably about 2 weeks from now. Keeping both of thesefactors in mind, we should prepare for even bigger declines.

Let us have a look atthe Dow to gold ratio chart, as an important technical development took placethere.

Here, we saw an important breakout above the declininglong-term resistance line. This has bearish implications for gold. Pleasenote that the breakout above the previous – much less significant – resistanceline (the red declining line on the above chart) was followed by major declinesin gold.

The next resistance level for this ratio is at 12.5 and with itcurrently at 11, declines in gold will surely be needed in addition to higherstock prices in order for the ratio to move this much higher (it seems that amove higher in the general stock market will not be enough for the ratio tomove that high soon). The implications are, of course, bearish.

Summing up, the situation remains bullish for the USD Index. The recent declines inthe Euro Index along with the breakout in the USD Index will likely keep thecurrent bullish outlook in place for the coming weeks. The implications of thebullish situation here, especially for the medium term, are bearish for theprecious metals. Gold prices declined last weekand pulled back on Thursday butit still does not seem that this period of decline is completely over.

To make sure that you are notified once the new features areimplemented, and get immediate access to our free thoughts on the market,including information not available publicly, we urge you to sign up for ourfree gold newsletter. Sign uptoday and you'll also get free, 7-day access to the Premium Sections on ourwebsite, including valuable tools and charts dedicated to serious PreciousMetals Investors and Traders along with our 14 best gold investment practices.It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

SunshineProfits.com

* * * * *

Disclaimer

All essays, research andinformation found above represent analyses and opinions of Przemyslaw Radomski,CFA and Sunshine Profits' associates only. As such, it may prove wrong and be asubject to change without notice. Opinions and analyses were based on dataavailable to authors of respective essays at the time of writing. Although theinformation provided above is based on careful research and sources that arebelieved to be accurate, Przemyslaw Radomski, CFA and his associates do notguarantee the accuracy or thoroughness of the data or information reported. Theopinions published above are neither an offer nor a recommendation to purchaseor sell any securities. Mr. Radomski is not a Registered Securities Advisor. Byreading Przemyslaw Radomski's, CFA reports you fully agree that he will not beheld responsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.

-- Posted Tuesday, 21 May 2013 | Digg This Article