McClellan Chart In Focus: Gold’s Dollar-Price Breakout Started With A Yuan-Priced Breakout – By Tom McClellan

Chart In Focus

Gold prices shot higher starting on June 14, once the dollar price of gold cleared the Feb. 20, 2019 high at 1343.70.  That brought out the momentum chasing buyers, or at least it brought out those who think in dollars. 

But a breakout to a higher high had already taken place if you look at the spot price of gold as measured in the Chinese yuan.  It moved above its equivalent high on June 3, almost 2 weeks before the dollar price’s breakout. 

Traders and investors in the USA are used to looking at everything in dollar price terms, because that is what matters for their trading success.  We buy and sell in dollar terms, and our success or failure is measured in those terms.  So it is natural to think in those terms.  But it may not be the best way to get answers about what prices are doing, and what they are going to be doing.

This week’s chart is about learning to see gold prices in a different way, and in a way that may arguably be more important for chart analysis.  The trendline breakouts on the yuan price plot seem to come ahead of the equivalent ones on the dollar price plot.  So if you want to know what is going to happen to gold as priced in dollars, you can sometimes get a really big hint from the yuan price of gold. 

One additional interesting point about this comparison is that the big dollar price decline in gold during the middle of 2018 was not really reflected in the yuan price.  The yuan price just chopped quietly in a very tight descending triangle structure, until the point when it decided it was ready to get started moving higher.

This relationship merits further contemplation in terms of what we see in the lower chart.

Gold versus the Chinese yuan

From late 2016 until just recently, the yuan to dollar exchange rate has been doing a pretty good job of matching the movements of the dollar, with a very strong pattern correlation.  That correlation just recently broke down, when the yuan dropped back down to seek support at around the 0.144 level (~6.90 yuan/dollar).  Exactly why the yuan fell out of correlation to the dollar price of gold is not clear, but that moment when the correlation was broken coincided with the start of the launch higher for gold prices which led to its breakout in both currencies. 

The trade negotiations between the USA and China are assuredly a part of the ongoing drama in the yuan, and those negotiations are a topic beyond my set of skills to forecast.  The important point to take away from this now, though, is that looking at prices only in dollar terms can lead a chartist to miss the developing story which is evident elsewhere.

Tom McClellan
Editor, The McClellan Market Report

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About the author

Sherman and Marian's son Tom McClellan has done extensive analytical spreadsheet development for the stock and commodities markets, including the synthesizing of the four-year Presidential Cycle Pattern. He has fine tuned the rules for interrelationships between financial markets to provide leading indications for important market and economic data. Tom is a graduate of the U.S. Military Academy at West Point where he studied aerospace engineering, and he served as an Army helicopter pilot for 11 years. He began his own study of market technical analysis while still in the Army, and discovered ways to expand the use of his parents' indicators to forecast future market turning points. Tom views the movements of prices in the financial market through the eyes of an engineer, which allows him to focus on what the data really say rather than interpreting events according to the same "conventional wisdom" used by other analysts. In 1993, he left the Army to join his father in pursuing a new career doing this type of analysis. Tom and Sherman spent the next 2 years refining their analysis techniques and laying groundwork. In April 1995 they launched their newsletter, The McClellan Market Report, an 8 page report covering the stock, bond, and gold markets, which is published twice a month. They utilize the unique indicators they have developed to present their view of the market's structure as well as their forecasts for future trend direction and the timing of turning points. A Daily Edition was added in February 1998 to give subscribers daily updates on their indicators and also provide market position indications for stocks, bonds and gold. Their subscribers range from individual investors to professional fund managers. Tom serves as editor of both publications, and runs the newsletter business from its location in Lakewood, WA.