So far, my theory about gold and the Euro seems to be proving true. As the Euro topped at 1.30 and then begain to decline yesterday, gold reversed off its $1175 low.

Though the correlation is far from perfect, and it is not the case that gold and the dollar are perfectly in lockstep, on the whole a loose correlation seems to be there. I have not heard or read anyone talking about this fundamental shift from the dollar to the Euro. It’s just something that I’m observing.

Regardless, it seems the odds are increasing that gold might be due for a tumble sometime soon. Equities are not looking good and if they should swoon, gold will likely take a hit. Maybe not that big a hit. Best case, $1150. Worst case, $950. If it goes anywhere below $1040 for a length of time, the inverse Head and Shoulders will be invalidated.

Supposing that the inverse correlation with the Euro continues, then I can’t see much potential upside just from that relationship. The dollar is really losing its luster as all the economic data point to a big slowdown and a possible return to Quantitative Easing. So the Euro may go back to being the anti-dollar and not move a whole lot lower.

By that time, maybe the inverse relationship with the dollar will come back as the dominant influence. Between now and then, we might have a repeat of late 08 when de-leveraging caused everything to decline. Maybe this time too the dollar will spike, but probably not as much as the Yen. And maybe gold will function as more of a safe haven than it did then, because currencies are getting more worthless in general.

Anyway, it’s time to be cautious. Gold might have a bounce here and then things could get ugly. Or it could ease off slightly and then head up again. Or it could keep heading up. But end of July is probably not a strong time for gold and it could be vulnerable to a pullback.