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Did a Gold Wave Drown the Dollar?

Posted by Joseph Trevisani on Aug 15, 2013 2:24:00 PM

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Market News International reported that the move in gold above $1350 around 12:45 pm, where it has not been since June 20th, caught traders "long and wrong' the usd starting a violent short squeeze in the euro which spread to other currencies.

The euro rocketed from 1.3273 to 1.3345 in one minute at 1:14 pm.  The dollar/yen dropped from 97.73 to 97.48 and the sterling ran from 1.5593 to 1.5651, within a minute of the euro surge.

There are two problems with this scenario. First, the correlation between gold and the dollar usually runs the other way. The dollar moves and then gold reacts (sometimes), because as a dollar priced commodity, a more or less valuable dollar requires an inverse adjustment in the dollar price of gold.

Second, gold's vault began almost 30 minutes earlier at 12:47 pm when it broke $1340. The immediate rush higher lasted eight minutes and stopped at $1363.09 at 12.55 pm. The price then dropped back to $1357.89 at 12:58 pm before shooting up to $1368.58 at 1:11 pm followed by $1358.65 at 1:26 pm and then, the high so far at $1370.13 at 1:13 pm.  Gold broke $1350 long before the currencies started to move.

It is possible, whatever the cause of the initial move, long dollar intra-day positions were caught short and surprised when the market began to move. But the buying frenzy brought the euro more than 40 points above the old intra-day high of 1.3311 to 1.3354.

On the tick chart the euro price moved from 1.3373 to 1.3345 in two consecutive prices.  That type of violent price change is usually more indicative of a large buy order hitting the market, paying all the existing offers up to a specific level and then stopping upon completion. This does not mean that the origin of the order, or at least the rationale for it, was not the sharp acceleration in gold.

The euro is currently (3:31 pm) at 1.3355 only 10 points above the top of the original surge.  Prices haven’t reversed as they normally do after a stop run, because no one really knows the cause of the move.  In a stop run many traders will know the reason because they will have executed the stops on their own order books and they will assume that their order book was typical of the market, usually an accurate assumption.

It is likely a few traders, those who executed the buy order, know both the reason and the origin of the surge, but they do not appear to be talking.

Joseph Trevisani

Chief Market Strategist


Charts: Bloomberg

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