Written by: Przmyslaw K. Radomski, CFA
Very little happened in gold and miners yesterday. As the USDX is hesitating, so do PMs.
The biggest component of the USD Index tells what’s next.
The biggest part of the USD Index (with 57.6% weight) is, of course, the EUR/USD currency pair.
The current situation in the euro is similar to what we saw three times in the previous years, and in each case, really big declines in the euro followed. I marked those cases with orange rectangles.
Please note that the analogy can also be seen with the 2008 top, which was followed by the truly epic slide in the mining stocks (and yes, if GDXJ existed back then, it would have been likely to fall even more than the HUI Index that you can see on the above chart – marked with brown).
However, the really interesting thing about the euro is that we already saw an attempt to move above the declining red support/resistance line.
It’s not the first time.
The 2020 breakout was invalidated in 2022, but when it was being invalidated, the currency paused a bit at that line and declined more profoundly only thereafter.
Consequently, seeing a pause right now is normal - and it suggests that the decline will continue, just like it did in 2022. In fact, based on this analogy, it's likely to accelerate.
And you know what happened in gold, silver, and mining stock prices back then? They declined, and miners were down most significantly.
Based on the above, the USD Index is likely to soar, while the precious metals sector is likely to move lower.
On a very short-term basis, we saw a decline in the USDX, but – as I explained yesterday – it’s a completely normal phenomenon at this time.
On Friday, I wrote the following:
Two things that I’d like to add today is that the USD Index is forming a flag pattern, which might imply another very brief move to the downside, but that’s not the really important thing about it. The key thing is that the rally that is likely to follow the flag is likely to be similar to the one that preceded it.
The USD Index didn’t move below the lower border of the flag pattern, so it remains intact, and so do the bullish implications.
The fact that the USDX moved below its 38.2% Fibonacci retracement is not a game-changer either because we didn’t even see a daily close below that level. It’s quite possible that the USDX will reverse before the end of today’s U.S. session and end the day back above this retracement.
So, there’s nothing remarkable about today’s and yesterday’s pre-market moves lower in the value of the U.S. currency. Conversely, gold’s and silver’s weak reaction to this move lower is remarkable.
Normally, when the USDX is down, the prices of gold and silver “should” rally. After all, this is the currency both precious metals are priced in. And yet, when the precious metals market really wants to move in the opposite direction, it ignores even this “obvious” indication.
The thing is that the price of gold has been doing pretty much nothing in the last few weeks.
This might seem like something neutral – but it isn’t.
The key thing about that sideways movement is that it’s happening right after the gold price moved below its rising support line.
This means that it’s not just a random back-and-forth movement.
It’s a verification of the breakdown!
This means that it’s one big preparation for another move – lower.
There’s a trading rule that says that the longer the base, the bigger the move. When you think about it, it makes perfect sense. Trading is essentially a fight between bulls and bears, and after a longer fight, the overpowered side is weak, as it gave all the effort before the end of the “match”. In the case of trading, after a breakdown and its verification, bulls are overpowered but still have some strength left. The verification ends when the strength of bears picks up, and they push the price lower.
In the gold price’s case, you can see the lack of bulls’ strength in the way gold doesn’t want to react to moves lower in the USDX. You can see also something similar in case of gold stocks vs. gold, and gold stocks vs. the general stock market, but I wrote about that yesterday, so I don’t want to get into details once again here.
There’s a bearish writing on the wall. Or should I say, multiple walls.
So, since gold has been preparing for so long, the odds are that the move lower will be significant, not just in gold itself, but also in silver and mining stocks (in particular junior miners).
PS. To clarify some confusion and misleading information that you might find “out there” (probably spread by those that are not analyzing the precious metals market but that rather cheerleading it) regarding my profitability and the kind of positions that I’m opening in my Gold Trading Alerts (both: long and short), here’s a complete (!) list of trades that I featured since 2022.
“A trade” means that it was completed, I am not featuring the currently open positions (we have two: in GDXJ and FCX), but details of those positions are available to Gold Trading Alert subscribers.
Whenever discussing profits, I mean the nominal profits based on the basic, unleveraged instrument, like GDXJ and FCX); selection of instruments is not something I’m accountable for, and each investor determines it on their own, thus I’m not responsible for using options, leveraged instruments like futures / leveraged ETFs etc., and the way it might affect the rate of return.
Yes, all eight out of eight were profitable. And while I can’t promise any kind of performance of the current positions (nor any other), in my opinion, their potential is enormous.
Here’s the complete (!) list in inverse chronological order (please click the links for the actual analyses in which I described when the profits were taken; feel free to verify hours at which it was posted and where markets were trading at those times):
1. On May 25, 2023 we took profits from the short position in the FCX (practically right at the bottom; opened on Apr. 5, 2023).
2. On Mar. 17, 2023 we took profits from the short position in the FCX (almost right at the bottom; opened on Mar. 8, 2023).
3. On Mar. 1, 2023 we took profits from the LONG position in the GDXJ (very close to the local bottom; after the “easy part” of the rally).
4. On Feb. 24, 2023 we took profits from the short position in the GDXJ (almost right at the bottom; and that’s where I wrote about the long position from point 3).
5. On Jul. 28, 2022 we took profits from the LONG position in the GDXJ (entered on Jul. 11, 2022; we were buying around and very close to the bottom).
6. On Jul. 8, 2022 we took profits from the short position in the GDXJ (very close to the bottom).
7. On May 26, 2022 we took profits from the LONG position in the GDXJ (very close to the top; just several days before the top).
8. On May 12, 2022 we took profits from the short position in the GDXJ (that was exactly the monthly low and reversal; and that’s where I wrote about the long position from point 7).