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The U.S. currency is one of the most influential factors behind the price of gold, silver and other precious metals. When dollar rises the latter usually fall in value and when it declines, precious metals usually go up.

While the shape of correlation seldom changes, the strength of it is quite often subject to fluctuations. That’s why it should be constantly monitored and this is precisely the reason behind our proprietary tool – Correlation Matrix, that’s intended to gauge both current and historical correlations between precious metals and other assets such as stocks and currencies. Knowing current relations, one can act with greater awareness of what’s going on in the market and consequently make better investment and speculative decisions.

Correlation measures the average relation between two assets in a given period – this means that there can be times when market action is different from what the value of correlation would suggest. Such times can be insightful – for instance when dollar rallies and gold refuses to decline, it can be viewed as a sign of the yellow metal’s strength. And such a situation took place recently in the precious metals sector – we’ll comment on it further in this essay.

For now, let’s move on to the technical part to see what we can expect in the U.S. Dollar market and how it could translate into precious metals. We’ll use the USD Index as a proxy for the U.S. currency and start with its long-term chart (charts courtesy by http://stockcharts.com.)

We see that the USD Index moved to the declining resistance line once again. Since this line was reached, the upside direction of the Index will likely change and a move to the downside is probable.

Now, let’s have a look at the short-term chart.

In the chart, we see a further confirmation of probable moves to the downside. Our target area has been reached (and even slightly surpassed – at the moment of writing this essay the USD Index is at the 81 level) and the index has corrected to the first Fibonacci retracement level. This means that 38.2% of the preceding decline (actually, almost 50%) has been corrected, and the Index will likely move lower once again given the bearish fundamental situation of the USD Index.

The most important implication from this chart is not what will happen to the dollar but rather the relationship with gold and silver. The precious metals rallied today and last week even without a decline in the USD Index. In fact, the index moved a bit higher last week, but the metals soared strongly. All-in-all, this is a very positive sign for the precious metals sector.

The Correlation Matrix is a tool which we have developed to analyze the impact of the currency markets and the general stock market upon the precious metals sector. We have a very interesting picture this week in the very short-term columns. The correlation between the precious metals and the USD Index changed and is now moderate to moderately weak. What used to be strongly negative is now simply somewhat negative. The reason for this is that gold recently managed to rally without declines in the USD Index and in spite of an actual small rally in the USD Index. This is a positive factor for the precious metals sector, so any implications here are bullish this week.

A slightly negative correlation in the last ten days (the very short term) is seen between the precious metals and the general stock market. This is also a positive sign as stocks declined heavily and the precious metals refused to follow. This is indeed a bullish combination for the weeks ahead.

Summing up, the case for the USD Index is now slightly more bearish than not, and the implications for the precious metals are bullish at this time. It seems that if the dollar rallies or trades sideways, precious metals will consolidate or rally slightly and if the USD declines, metals will soar.

If you ever browsed the Research section, you must have noticed the Question and Answer Panel. If you didn't check it out yet, it's a place where we provide replies to questions from our subscribers and readers that are universal in a way. We have just updated this section by adding tens of replies that we hand-picked from 2011 and 2012 Premium Updates. The latest (less than 2 months old) replies are reserved to our subscribers, but there are multiple replies that we just made available to you. For your convenience, here's the list of updated questions and replies:

• Could gold ever move $100-$200 in a day?
• What do you think about the Andrew's Pitchforks and the Ichimoku Cloud?
• Can an unbalanced U.S. budget have meaningful impact on precious metals?
• Do you suggest GLD and SLV for opening speculative long positions?
• How can we profit from intraday trading?
• What's your opinion on point and figure charts?
• Is a long-term correction in gold possible?
• How to deal with huge volatility in gold and silver prices?
• Can gold miners deliberately sit on their reserves?
• Why do you look at gold priced in Japanese yen?
• What are your thoughts on DGP/AGQ funds?
• It would be good to see your results, stop-losses and the risk you take.
• How can I hedge my gold holdings in India?
• Is the economic picture deflationary?
• What's your take on gold mining company valuation?
• What do you think of AGQ ETF as a fund tracking silver?
• How do you develop and use your precious metals cycle analysis?
• Is it true that low interest rates don't result in higher stock prices?
• Is it correct to treat junior gold and silver stocks as long-term capital?
• Are you using GDX as a proxy for miners, or either the HUI or XAU indexes?
• How about using DUST ETF for precious metals trading?
• Gold confiscation - any thoughts?
• Is AAPL:GLD a good ratio to use to buy gold?
• Can you give me some clues as to how to interpret your indicators?
• How long do you think the bull market in precious metals will last?
• What if I see a double extreme indicator on two consecutive days?
• How did you come up with a price target of $5000 for gold?
• Should I gather copper pennies and nickels?
• Does it make sense to stay in the gold market if it is manipulated?
• What to do when I lost 90% of my speculative capital with a huge bet on precious metals?
• How can I hedge my junior silver miners portfolio?
• How has the purchasing power of gold increased since 1900?
• What if the Fed devalued the dollar by 40%?
• Why is your analysis of gold heavily influenced by the US dollar?
• Is gold correlated with the US debt ceiling?
• Can you suggest a book for learning how to read gold and silver charts?
• What will be the role of China in the precious metals market?

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Thank you for reading.

Przemyslaw Radomski, CFA