Does Gold Want to Move Lower?

The yellow metal has climbed, but only with lacklustre energy. If the USD Index is not rising, then gold should really be shooting up and breaking new monthly highs, but it isn’t. Readers have been asking what’s happening and some have been concerned with gold’s apparent strength. So, let’s break it down.

History tends to rhyme and what happened before, will – to some degree – happen again. Gold is not immune to this concept, and the current implications are bearish.

Let’s jump right into the charts for details.

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Gold topped right at its triangle-vertex-based reversal, just like it did in mid-March and in early January (please note the points that are marked on the above chart for confirmation – they are described in red). That happened on Thursday (Apr. 8), and since that time gold has continued to move lower.

Gold invalidated the breakout above its mid-March highs, proving that what we saw was nothing more than just an ABC (zigzag) correction within a bigger downswing. The moves that follow such corrections are likely to be similar to the moves that precede it. In this case, the move that preceded the correction was the 2021 decline of over $150. This means that another $150+ decline could have just begun.

It might appear bullish that gold rallied yesterday (Apr. 13), but it only appears this way until one compares this rally with what happened in the USD Index during the same time. Paying attention to today’s (Apr. 14) pre-market price moves further emphasizes the fake nature of yesterday’s rally in gold.

The point is not that gold rallied, but that it hasn’t rallied enough.

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During yesterday’s session, the USD Index moved to new monthly lows and this decline continued in today’s pre-market trading. Consequently, if gold was at least reacting to the USD’s movement “normally”, it should move to new monthly highs. If gold “wanted” to rally, it would have likely exploded to the upside. But what happened instead? Gold moved higher only somewhat yesterday – not to new monthly highs – and in today’s pre-market trading it’s actually slightly lower.

This tells us that gold “wants” to move lower now.

The USD Index moved lower, and it can move even lower on a very short-term basis, perhaps to the 50% Fibonacci retracement based on the entire 2021 rally, and the previous lows. And what would be the likely effect on gold? Based on what we saw yesterday, and what we see so far today, it seems that gold will likely ignore this decline in the USD Index, while waiting for the latter to finally show strength – so that it (gold) could decline.

After all, gold has already topped right at its triangle-vertex-based reversal point . Consequently, it’s no wonder that it now continues to trade sideways, waiting for a trigger to move much lower.

Moreover, please note that the recent zigzag makes the situation similar (approximately symmetrical) to what we saw about a year ago – between April and early June. Once gold breaks to new yearly lows, one could view this as a breakdown below the neckline of a major head and shoulders pattern where the April 2020 – June 2020 and the recent consolidations are the shoulders of the pattern. Based on such a pattern, gold would be likely to slide profoundly, probably well below $1,500. And the relative performance of gold vs. the USD Index tells us that such a short-term breakdown (to new yearly lows) is a likely outcome in the following weeks.

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Gold stocks also failed to rally to new monthly highs, and they seem to be forming a relatively broad topping pattern, just as they did in mid-March and at the beginning of the year.

The sell signal from the Stochastic indicator as well as the fact that miners failed to invalidate the breakdown below their broad head-and-shoulders pattern points to a bearish outlook for the following weeks (and perhaps months).

All in all, the outlook for the precious metals market remains bearish and the recent rally didn’t change anything.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold Miners: Corrections are Normal

Just as the USD Index recently (last week) suffered a countertrend decline within a medium-term uptrend, so has the GDX ETF experienced a corrective upswing within a medium-term downtrend.

Nothing moves in a straight line, so recent developments in both the gold miners and the USD Index are nothing to worry about. Everyone is still on track. Gold and the miners are headed for a medium-term downtrend and the USD Index is still gathering steam and will be leaving the station.

With the gold miners attempting to dig themselves out of their 2021 hole, the labor of love could end as quickly as it began. With a temporary retreat of the USD Index last week and dormant U.S. Treasury yields doing much of the heavy lifting, the GDX ETF had plenty of help breaking down its wall of worry.

However, with April showers likely to derail further construction activity, off-site momentum may not be as kind. Case in point: the GDX ETF is still trading below the neckline of its bearish head & shoulders pattern, and while the senior miners’ bounce above their March high may seem like a ground-breaking event, the synthetic strength is likely to hammer the miners over the medium term. Why so? Well, like a current running on extremely low voltage, Friday’s (Apr. 9) intraday bounce occurred on relatively low volume – with the positive momentum evaporating into the close.

Please see below:

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As further evidence, the March/April corrective upswing took the form of a zigzag pattern, which is indicative of a countertrend move within a medium-term downtrend. In addition, if you analyze the chart above, notice how fits and starts were part of the senior miners’ price action back in January? In both cases, the GDX ETF moved above the declining blue resistance line and the 50-day moving average. Yet … the GDX ETF is lower now than it was then.

Furthermore, back in January, the GDX ETF initially ignored gold’s daily (Jan. 6) weakness. Thus, Friday’s (Apr. 9) outperformance by the GDX ETF is far from an all-clear. In fact, it could be the final creak before the foundation crumbles.

Some might say that mining stocks are showing strength compared to gold as the GDX to gold ratio broke above its declining resistance line.

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However, I don’t think it’s fair to say so. I think that seeing a breakout in the GDX to gold ratio is not enough for one to say that the miners to gold ratio is breaking higher.

After all, the GDX ETF is just one proxy for mining stocks, and if miners were really showing strength here, one should also see it in the case of other proxies for the mining stocks when compared to gold.

For instance, the HUI Index to gold ratio, the XAU Index to gold ratio, and the GDXJ ( junior mining stocks ) to gold ratio.

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There is no breakout in the HUI to gold ratio whatsoever. In fact, the ratio is quite far from its declining resistance line. Even if we chose other late-2020 tops to draw this line, there would still be no breakout.

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There is no breakout in the XAU to gold ratio either. The previous attempts for the XAU to gold ratio to rally above their 2020 high marked great shorting opportunities, which is very far from being a bullish implication.

But the most bearish implication comes from gold’s ratio with another ETF – the GDXJ.

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The breakout in the GDXJ to gold ratio is only tiny and unconfirmed. These moves always (since Oct. 2020) provided sell signals – the small breakout below the declining resistance line were always invalidated and they were then followed by visible short-term declines.

Five out of five previous attempts to break above the declining resistance line failed and were followed by short-term declines. Is this time really different?

It seems to me that the five out of five efficiency in the GDXJ to gold ratio is more important than a single breakout in the GDX to gold ratio, especially considering that the latter was preceded by a similar breakout in mid-March. That breakout failed and was followed by declines.

Taking all four proxies into account, it seems that the implications are rather neutral to bearish. Especially when taking into account another major ratio – the one between HUI and S&P 500 is after a major, confirmed breakdown.

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When the ratio presented on the above chart above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index. If you analyze the right side of the chart, you can see that the ratio has broken below its rising support line. For context, the last time a breakdown of this magnitude occurred, the ratio plunged from late-2017 to late-2018. Thus, the development is profoundly bearish.

Playing out as I expected, a sharp move lower was followed by a corrective upswing back to the now confirmed breakdown level (which is now resistance). Mirroring the behavior that we witnessed in early 2018, after breaking below its rising support line, the HUI Index/S&P 500 ratio rallied back to the initial breakdown level (which then became resistance) before suffering a sharp decline. And with two-thirds of the analogue already complete, the current move lower still has plenty of room to run. Likewise, the early-2018 top in the HUI Index/S&P 500 ratio is precisely when the USD Index began its massive upswing. Thus, with history likely to rhyme, the greenback could spoil the miners’ party once again.

In addition, the HUI to S&P 500 ratio broke below the neck level (red, dashed line) of a broad head-and-shoulders pattern and it verified this breakdown by moving temporarily back to it. The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline, the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market ):

  1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
  2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
  3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: if the stock market plunges, all bets are off. Why so? Well, because when the S&P 500 plunged in March 2020, the GDX ETF moved from $29.67 to below $17 in less than two weeks. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

Also supporting the potential move, the GDX ETF’s head and shoulders pattern – marked by the shaded green boxes in the first chart above – signals further weakness ahead.

I wrote previously:

The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.

Turning to the junior gold miners , the GDXJ ETF will likely be the worst performer during the upcoming swoon. Why so? Well, due to its strong correlation with the S&P 500, a swift correction of U.S. equities will likely sink the juniors in the process. Besides, junior miners have been underperforming recently even without general stock market’s help.

Furthermore, erratic signals from the MACD indicator epitomizes the GDXJ ETF’s heightened volatility. Remember though that the MACD indicator is far from a light switch. While false buy signals often precede material drawdowns, the reversals don’t occur overnight. As a result, it’s perfectly normal for the GDXJ ETF to trade sideways or slightly higher for a few days before moving lower.

Please see below:

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And unlike its senior counterpart, the GDXJ ETF cemented its relative underperformance by moving lower on Friday.

So, how low could the GDXJ ETF go?

Well, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range. Conversely, if stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

Some people (especially the permabulls that have been bullish on gold for all of 2021, suffering significant losses – directly and in missed opportunities) will say that the final bottom is already in. And this might very well be the case, but it seems highly unlikely. On a side note, please keep in mind that I’m neither a permabull nor a permabear for the precious metals sector, nor have I ever been. Let me emphasize that I’m currently bearish (for the time being), but about a month ago, we went long mining stocks on March 4 and exited this profitable trade on March 11.

As another reliable indicator (in addition to the myriads of signals coming not only from mining stocks, but from gold, silver, USD Index, stocks, their ratios, and many fundamental observations) the Gold Miners Bullish Percent Index ($BPGDM) isn’t at levels that elicit a major reversal. The Index is now back at 40. However, far from a medium-term bottom, the latest reading is still more than 30 points above the 2016 and 2020 lows.

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, with sentiment still relatively elevated, it will take more negativity for the index to find the true bottom.

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The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of 2020. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place.

But has it already run its course?

Well, in 2016 and early 2020, the HUI Index continued to move lower until it declined below the 61.8% Fibonacci retracement level. The emphasis goes on “below” as this retracement might not trigger the final bottom. Case in point: back in 2020, the HUI Index undershot the 61.8% Fibonacci retracement level and gave back nearly all of its prior rally. And using the 2016 and 2020 analogues as anchors, this time around, the HUI Index is likely to decline below 231. In addition, if the current decline is more similar to the 2020 one, the HUI Index could move to 150 or so, especially if it coincides with a significant drawdown of U.S. equities.

In conclusion, akin to Humpty Dumpty, “all the King’s horses and all the King’s men” are unlikely to put the GDX ETF back together again. With the HUI Index to gold ratio, the XAU Index to gold ratio and the GDXJ ETF to gold ratio all splintering beneath the surface, the GDX ETF’s recent strength simply masks all of the cracks in the precious metals’ foundation. Furthermore, with the USD Index and U.S. Treasury yields threatening to swing the wrecking ball, the metals’ house of cards could soon face demolition. Thus, even though the long-term outlook for gold, silver , and mining stocks is very bullish, the short- and perhaps medium-term outlooks remain profoundly bearish, and investors that ignore the warning signs will likely find themselves submerged in the rubble.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Mining Stocks: A House Built on Shaky Ground

It’s tempting to say that miners are showing strength compared to gold based on the GDX’s performance, but other mining proxies say otherwise.

Just because a house is standing doesn’t mean its foundations are solid, and that’s exactly the case with the miners.

There’s one extra thing that I would like to point out about mining stocks’ technical picture today (Apr. 8), and that’s their performance relative to gold.

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Some investors might say that mining stocks are showing strength compared to gold as the GDX to gold ratio broke above its declining resistance line.

However, I don’t think it’s fair to say so. I think that seeing a breakout in the GDX to gold ratio is not enough for one to say that the miners to gold ratio is breaking higher.

After all, the GDX ETF is just one proxy for mining stocks, and if miners were really showing strength here, one should also see it in the case of other proxies for the mining stocks when compared to gold.

For instance, the HUI Index to gold ratio, the XAU Index to gold ratio, and the GDXJ ( junior mining stocks ) to gold ratio.

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There is no breakout in the HUI to gold ratio whatsoever. In fact, the ratio is quite far from its declining resistance line. Even if we chose other late-2020 tops to draw this line, there would still be no breakout.

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There is no breakout in the XAU to gold ratio either. The previous attempts for the XAU to gold ratio to rally above their 2020 high marked great shorting opportunities, which is very far from being a bullish implication.

But the most bearish implication comes from gold’s ratio with another ETF – the GDXJ.

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The GDXJ to gold ratio actually provides a sell signal, as the tiny breakout above the declining resistance line was already invalidated.

Five out of five previous attempts to break above the declining resistance line failed and were followed by short-term declines. Is this time really different?

It seems to me that the five out of five efficiency in the GDXJ to gold ratio is more important than a single breakout in the GDX to gold ratio, especially considering that it was preceded by a similar breakout in mid-March. That breakout failed and was followed by declines.

Taking all four proxies into account, it seems that the implications are rather neutral to bearish. Especially when taking into account another major ratio – the one between HUI and S&P 500 is after a major, confirmed breakdown.

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All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Ladies and Gentlemen, Mr. Dollar is Back

With a potential bearish pattern already broken, the USDX is resuming its journey northward. And why is it geared to do well? Is it because the U.S. economy is ripping head? Definitely not – that’s not happening. It’s rather because other regions (think Europe and Japan) are doing even worse.

The dollar’s imminent rise doesn’t mean that gold can’t still experience some very short-term upswing, but for the medium-term, the precious metals continue to face bearish headwinds.

With the greenback laying back and enjoying a well-deserved Easter vacation, gold, silver and the gold miners avoided a dollar-drama for at least another day. However, with the USD Index working to regain its supremacy, along with investors’ respect, the ‘death of the dollar’ narrative has quietly dissipated from the investing zeitgeist.

Case in point: the USD Index has broken above its monthly declining resistance line and has already made four new highs since the New Year. More importantly though, because the precious metals have a strong negative correlation with the U.S. dollar, the upward momentum has coincided with an 8.78% drawdown of gold, a 6.18% drawdown of silver and a 6.41% drawdown of the GDX ETF.

Please see below:

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And showing no signs of slowing down, with a well-rested USD Index itching to get back to work, we could see ‘business as usual’ in the coming days. On Apr. 2, I warned that a short-term correction could usher the USD Index back to its March high.

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That’s exactly what happened yesterday (Apr. 5).

However, with the corrective culmination approaching the finish line, the USD Index remains poised to resume its uptrend.

Adding to the optimism, the tide has already gone out on a sea full of USD Index shorts. And because Warren Buffett once said that “only when the tide goes out do you discover who’s been swimming naked,” highly leveraged speculators could be the next to follow.

Please see below:

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To explain, notice how oversold periods in 2014 and 2018 – where net-speculative short interest as a percentage of total open interest (based on the CoT data) was extremely high – preceded sharp rallies in the USD Index? Thus, with 2021 the most extreme on record, the forthcoming rally should be significant.

How significant? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Wayback Playback

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, so without paying attention to tiny moves (like the one that we saw last summer), let’s focus on the more meaningful ones (like the one that we see right now – the net positions just became visibly positive – over 16%, after being very negative for quite some time.

In short, that’s how the following profound rallies started:

  • The big 2008 rally (over 16 index points)
  • The big 2009 – 2010 rally (over 14 index points)
  • The 2011 – 2012 rally (over 11 index points)
  • The 2013 rally (“only” over 5 index points)
  • The big 2014 – 2015 rally (over 20 index points)
  • The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114.

Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

Moreover, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. Please see below:

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To explain, I wrote on Friday (Apr. 2):

What we saw yesterday definitely qualifies as a small correction. In fact, even if it was doubled it would still be small. And – more importantly – it would be in perfect tune with what happened in 2018 during the big rally.

After rallying visibly above the:

  • 93 level
  • 200-day moving average
  • 61.8% Fibonacci retracement level based on the final part of the decline

the USD Index moved back below the 93 level. This happened in May 2018 and it happened last week.

Since both rallies are so similar, it’s nothing odd that we see a pullback in a similar situation.

Back in 2018, the pullback was small and quick. It ended without the USD Index reaching its 200-day moving average. The pullback ended when the USDX moved approximately to its previous high and slightly below the 61.8% Fibonacci retracement.

Applying this to the current situation (previous high at about 92.5, the 61.8% Fibonacci retracement at about 92.7, and the 200-day moving average at 92.66), it seems that the USD Index would be likely to find its bottom in the 92.3 – 92.7 area.

Because of this, the outlook remains profoundly bearish for the gold , silver , and mining stocks over the medium term (even though the next few days are relatively unclear, especially due to gold’s triangle-vertex based reversal that’s due this week ). If you analyze the table below, you can see that the precious metals tend to move inversely to the U.S. dollar.

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The 2017-2018 Analogue

But as the most important development affecting the precious metals, the USD Index’s 2017-2018 analogue is already unfolding before our eyes. With this version likely to be titled ‘The Resurgence: Part 2,’ while history often rhymes, it’s rare for it to rhyme with this level of specificity . For context, in 2018, the USD Index’s breakout above its 50-day moving average is exactly what added gasoline to the USDX’s 2018 fire. And after the 2018 breakout, the USDX surged back to its previous high. Today, that level is 94.5.

Even more ominous for the precious metals, when the USD Index turned a short-term decline into consolidation in mid-2018, can you guess what happened next? Well, the USD Index moved significantly higher, while gold moved significantly lower.

Please see below:

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USDX Broke a Potential Bearish Pattern

Likewise, a potentially bearish pattern that I had been monitoring – where the USD Index’s price action from July to October 2020 mirrored the price action from December 2020 to February/March 2021– has officially been broken . With the USD Index’s medium-term breakout trumping the former, the potentially bearish pattern has been invalidated and the USD Index remains on a journey to redemption.

But to what end?

Well, if we look back at 2020, the USD Index attempted to recapture its previous highs. But lacking the upward momentum, the failure was followed by a sharp move lower. Today, however, the USD Index has broken above its previous highs and the greenback verified the breakout by consolidating, moving back toward the previous lows and rising once again. Now, the USD Index is visibly above its previous highs .

Taken together, and given the magnitude of the 2017-2018 upswing , ~94.5 is likely the USD Index’s first stop. And in the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

No, not because the U.S. is doing so great in economic terms. It’s because it’s doing (and likely to do) better than the Eurozone and Japan, and it’s this relative performance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates and the latter move on a relative basis.

In conclusion, while the USD Index’s decline on Apr. 5 created a goldilocks environment for the precious metals, the latter should have enjoyed a much larger upswing. However, with the U.S. 10-Year Treasury yield jumping by another 2.37% and the precious metals still shaken from a string of false breakouts, their relatively weak performance was quite revealing. Think about it: if gold, silver and the gold miners can’t make up ground when their main adversary retreats, how are they likely to respond when the USD Index regains its mojo? As a result, with the USD Index’s attitude about to shift from accommodating to unkind, gold, silver and the gold miners will likely see lower levels before forming a lasting bottom.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold Just Can’t Seem to Breakout

Let’s start today’s analysis with a discussion of the key market that everyone is interested in – gold.

ChartDescription automatically generated

Gold’s Failed Breakout – A Sell Sign

In short, gold just invalidated its small breakout above the declining blue resistance line. The previous breakout was small and thus it required a confirmation. It never got one, and instead gold plunged, invalidating the move. This is yet another sell sign that we saw.

It also serves as further proof that ever since the beginning of the year, gold permabulls (many people continue to claim that gold can only go up, even now) were destroying value rather than creating it. On a side note, we have nothing against checking out the work of other analysts, but we encourage you to check if someone was both bullish and bearish on a given market. If they never changed their mind, it seems that you can save some time by not reading what they come up with, as you already know the outcome. Besides it’s not like they would prepare you in advance for any decline (in case of permabulls).

Getting back to the current market situation – since gold moved lower quite visibly yesterday (Mar. 30), and even (almost) reached its early-March high, it might be tempting to think that the decline is over. This seems unlikely in my opinion.

The less important reason for the above is visible right on the above chart. Earlier this month, gold topped very close to its triangle-vertex-based reversal. The previous two triangle-vertex-based reversals also triggered declines. So, if something similar triggered similar moves, then it might be worth checking how big did the previous declines end up being.

Both previous 2021 declines were followed by quite visible declines. The one that started in early Jan. took gold over $130 lower, and the one that started in mid-Feb. took gold over $170 lower. The current decline started at $1,754.20, so if the history is to rhyme (as it often does), gold would be likely to decline to at least $1,584 – $1,624. This target area corresponds quite well to the support provided by the early Mar. and early Apr. 2020 lows.

The more important reasons due to which it seems likely that the decline will continue are: the rally in the USD Index and the rally in the long-term interest rates.

The USD’s Rally

As far as the latter is concerned, it seems unlikely that we’ll see the Fed stepping into action with another Operation Twist until the general stock market slides. Otherwise, such a big intervention might seem uncalled for. Consequently, the long-term rates are likely to rally some more. And gold is likely to respond by declining further.

As far as the USD Index in concerned, it just moved to new yearly highs, and since the nearest strong resistance is relatively far (from the short-term point of view), it seems that the move higher will continue with only small corrections along the way.

ChartDescription automatically generated

The USD Index has not only confirmed the breakout above its Feb. highs, but it even managed to break above the rising red support line. This line, along with the rising black line based on the Feb. and mid-March lows, creates a rising wedge pattern that was already broken to the upside. The moves that tend to follow such breakouts often are as big as the size of the wedge. I used red, dashed lines for this target-determining technique. Based on it, the USD Index is likely to rally to about 96.65.

The above target is slightly above the mid-2020 highs, so it might seem more conservative to set the upside target at those highs, close to the 94.5-94.8 area. The mid-2020 highs are likely to trigger a breather, but it doesn’t have to be the case that the USD Index pauses below these highs. Conversely, it could be the case that the USD Index first breaks above the mid-2020 highs and consolidates after the breakout. In fact, that’s what it did with regard to the breakout above the Feb. 2021 highs.

Consequently, I’m broadening the target area for the USD Index, so that it now encompasses also the more bullish scenario in which the USDX takes out the mid-2020 highs before consolidating.

Either way, we’re currently in the “easy part” of the USD’s rally. Even if it’s going to consolidate at or below the mid-2020 highs, it’s still very likely to first get there, and this implies a move higher by at least another full index point. This means that the gold price is likely to decline some more before finding short-term support. The scenario fits very well with the situation that I outlined based on the gold chart earlier today.

ChartDescription automatically generated

Silver Losses

Silver just broke to new 2021 lows. Everyone buying silver (futures) in Jan. / Feb. is now at a loss and in an increasingly inconvenient situation.

Why would this be important? Because it means that everyone who jumped into the silver market with both feet based on just very brief research (“research”?) which in many cases was following instructions provided at various forums is in a losing position right now.

Sometimes the losses are small – for the very few, who were early, but in some cases, the losses are already quite visible – especially for those, who bought close to $30.

Why is this important? Because it emphasizes the need to verify the quality of the information that one chooses to act on, and because it’s a tipping point after which the previous buyers are likely to start becoming sellers, thus adding to decline’s sharpness.

The “new silver buyers” losses are not huge yet, but after another move lower, they will likely become such and the sales from those buyers would likely make these declines even bigger.

When everyone and their brother was particularly bullish on silver a few months ago, I wrote that they might be quite right, but the timing was terrible. So far, the losses for those, who bought silver earlier this year are not that big, but, in my opinion, they are likely to become much bigger in the following weeks.

Of course, I expect silver price to soar in the following years (well over $100), but not without plunging first in the short and/or medium term.

The Miners’ Relative Strength

Let’s take a look at the mining stocks. In yesterday’s analysis , I explained the likely reason behind the temporary strength in the mining stocks, and I emphasized that it’s not likely to last. This explanation remains up-to-date:

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ChartDescription automatically generated

Ultimately, it’s never possible to reply to the “why did a given market move” other than that “because buyers won over sellers”. It’s not particularly informative, though. The reason that seems most likely to me is that it was… a purely technical development that “needed” to happen for a formation to be complete.

This hypothesis would explain also one odd thing that happened yesterday. Namely, while the GDX closed the day slightly higher, the GDXJ ended the day lower. This would make sense if the general stock market declined ( junior mining stocks – GDXJ tend to follow its lead more than seniors – GDX) – but the point is that the general stock market ended yesterday’s session basically flat (declining by mere 0.09% decline).

“Ok, so what kind of formation are miners completing?”

Quite likely the head and shoulders formations. The reason for yesterday’s underperformance of the GDXJ would be the fact that in case of this ETF’s head-and-shoulders formation , the neckline is descending much more visibly. These formations are more visible on the 4-hour charts – so, let’s zoom in.

Currently – based on yesterday’s (Mar. 30) closing prices – both formations are completed, and while it could still be the case that both ETFs move back to their previous necklines to verify the breakdowns, the implications are already bearish for the short term.

The price targets based on those formations are $29.6 and $40.7 for the GDX and GDXJ, respectively. However, let’s keep in mind that the H&S-based targets should be viewed as “minimum” targets, not necessarily the final ones.

All in all, the technical picture currently favors lower precious metals (and mining stock) prices over the next several weeks. In my view, this is either the middle or the final part of the very final decline in the precious metals market, before it takes off based on multiple positive factors of long-term nature.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

A Climbing USDX Means Gold Investors Should Care

Positions in the USDX are shifting from shorts to longs, so gold investors should look closely. Why? Because it’s an inverse relationship.

We’ve discussed the negative correlation between the dollar and the precious metals many times before, but it can never be discussed enough, particularly as the situation develops and the outlook for the USD Index becomes more positive.

Once the USD Index lands some knockout punches, the precious metals will be hurting, as they tend to do when the dollar rises. Gold, silver and the miners will eventually rise, but for the medium-term, they are still in bearish territory.

Counted out, counted down and rarely counted on, investors threw in the USD Index’s towel long before the fight even began. However, after shaking the cobwebs and landing a few haymakers, the greenback’s Rocky-like comeback is proof that ‘it ain’t over till it’s over.’

Let’s look at the factors influencing rise of the USD Index as well as some of the historical patterns:

1. Repositioning from Short to Long

Now, with thousands of screaming fans chanting “USD, USD,” the eye of the tiger could be eying another move higher. As evidence, if you analyze the chart below, you can see that non-commercial (speculative) traders have quietly repositioned from net-short to net-long.

ChartDescription automatically generated

To explain, notice how oversold periods in 2014 and 2018 – where net-speculative short interest as a percentage of total open interest was extremely high – preceded sharp rallies in the USD Index? Thus, with 2021 the most extreme on record, the forthcoming rally should be significant.

How significant? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, so without paying attention to tiny moves (like the one that we saw last summer), let’s focus on the more meaningful ones (like the one that we see right now – the net positions just became visibly positive – over 16%, after being very negative for quite some time.

In short, that’s how the following profound rallies started:

  • The big 2008 rally (over 16 index points)
  • The big 2009 – 2010 rally (over 14 index points)
  • The 2011 – 2012 rally (over 11 index points)
  • The 2013 rally (“only” over 5 index points)
  • The big 2014 – 2015 rally (over 20 index points)
  • The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114.

Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

2. The 10-Year Treasury Yield

Adding to the momentum, in 2020, the USD Index sat out the U.S. 10-Year Treasury yield’s ferocious upswing. Defying historical precedent, a bottom and subsequent move higher in the U.S. 10-Year Treasury yield has coincided with a rise in the USD Index 80% of the time since 2003 . But now in sync, 2021 has been a much different story. If you analyze the chart below, you can see that the USD Index has been moving in lockstep with the U.S. 10-Year Treasury yield since the New Year.

Chart, line chartDescription automatically generated

3. Reclaiming 200-Day Moving Average

In addition, not only has the USD Index broke above its previous highs, but the basket just reclaimed its 200-day moving average (which is often indicative of a long-term uptrend). As a result, the greenback continues to float like a butterfly and sting like a bee .

ChartDescription automatically generated

For historical context, after recapturing its 200-day MA in 2018, the USD Index only suffered mild pullbacks before surging above 95. As such, with the mid-2020 highs the USD Index’s next opponent, 94.5 is unlikely to put up much of a fight.

Keep in mind though: in the very-short term, the USD Index could move lower and retest its prior 2021 highs. However, the damage should be minimal, and it wouldn’t invalidate the USD Index’s medium-term breakout. Because of this, the outlook remains profoundly bearish for the gold, silver , and mining stocks over the medium term. If you analyze the table below, you can see that the precious metals tend to move inversely to the U.S. dollar.

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4. The History Really Rhymes: The 2017-2018 Upswing

But saving the best for last, the 2017-2018 analogue could be the USD Index’s knockout punch. With this version likely to be titled “The Resurgence: Part 2,” while history often rhymes, it’s rare for it to rhyme with this level of specificity .

Please see below:

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Even more revealing, while it took less than 118 days for the USD Index to move from peak to trough in 2020-2021, the uprising could occur at a much faster pace. In 2018, the USD Index’s breakout above its 50-day moving average is exactly what added gasoline to the USDX’s 2018 fire. And after the 2018 breakout, the USDX surged back to its previous high. Today, that level is 94.5 .

Furthermore, in 2017-2018, it also took 82 days for the USDX to form a final bottom (the number of days between the initial bottom and the final bottom) and the duration amounts to 21.19% of the overall timeframe. If we applied a similar timeframe to today’s move, then the USD Index should have bottomed on Feb. 12. It actually bottomed (finally) on Feb. 25, which was just 8 trading days away from the former date. Taking into account the sizes of the moves that preceded the previous declines (they took approximately one year to complete), this is extremely close and an excellent confirmation that the self-similar pattern remains intact.

Also noteworthy, as the USDX approached its final bottom in 2017-2018, gold traded sideways. Today, however, gold has been in a downward spiral and it doesn’t seem that the decline is over. From a medium-term perspective, the yellow metal’s behavior is actually more bearish than it was in 2017-2018.

And while the self-similar pattern is already playing out as predicted, please read below for further explanation as to why the USD Index’s current and historical price action remains a spitting image:

It’s not true that there were no pullbacks during the 2018 rally. There were, but they were simply too small to be visible from the long-term point of view.

The first notable pullback took place in early May 2018, and it contributed to a corrective upswing in the precious metals market. To be precise, the USD Index declined after rallying for 56 trading days, but gold rallied earlier – 51 trading days after the USD Index’s final bottom. The USDX’s immediate-top formed 16 trading days after its final bottom, and gold’s bottom formed 10 trading days after the USD’s final bottom.

Comparing this to the size of the previous decline in terms of the trading days, it was:

  • 51 – 56 trading days / 283 trading days = 18.02% – 19.79%
  • 10 – 16 trading days / 283 trading days = 3.53% – 5.65%

Also indicating a messy divorce, when the USD Index turned a short-term decline into consolidation in mid-2018, can you guess what happened next? Well, the USD Index moved significantly higher, while gold moved significantly lower.

Please see below:

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Moreover, when comparing the pairs’ behavior in mid-2018 to today, it’s ominously similar.

Please see below:

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For additional context, I also wrote on Mar. 10:

Let’s examine the current situation: the preceding decline lasted for 200 trading days and there were 41 – 42 trading days between the final USDX bottom and the short-term reversals in gold and USDX. Comparing this to the final USDX bottom, we get 7 – 8 trading days.

Applying the previous percentages to the length of the most recent medium-term decline in the USD Index provides us with the following:

  • 18.02% – 19.79% x 200 trading days = ~36 – ~40 trading days
  • 3.53% – 5.65% x 200 trading days = ~7 – ~11 trading days

The above estimation of about 36 – 40 trading days almost perfectly fits the current 41 – 42-day delay, and the estimation of about 7 – 11 trading days almost perfectly fits the current delay of 7 – 8 trading days.

In other words, the analogy to the 2018 performance does not only remain intact – it actually perfectly confirms the validity of the current corrective upswing. Once again, it’s very likely just a pullback, not a big trend reversal.

Likewise, a potentially bearish pattern that I have been monitoring – where the USD Index’s price action from July to October 2020 mirrored the price action from December 2020 to February/March 2021– has officially been broken . With the USD Index’s medium-term breakout trumping the former, the potentially bearish pattern has been invalidated and the USD Index is likely to continue its ascension.

But to what end?

Well, if we look back at 2020, the USD Index attempted to recapture its previous highs. But lacking the upward momentum, the failure was followed by a sharp move lower. Today, however, the USD Index has broken above its previous highs and the greenback verified the breakout by consolidating, moving back toward the previous lows and rising once again. Now, the USD Index is visibly above its previous highs .

Taken together, and given the magnitude of the 2017-2018 upswing , ~94.5 is likely the USD Index’s first stop. And in the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

In conclusion, the USD Index went from being on the ropes to winning the crowd. And with the momentum building and the adrenaline rising, it’s only a matter of time before the USD Index lands another haymaker. Moreover, given the precious metals’ negative correlation with the U.S. dollar – combined with the fact that technicals, fundamentals and sentiment are now riding with the greenback – an uprising could leave the gold, silver, and mining stocks battered and bruised. However, after a tough period of soul searching, the precious metals will regain the heavyweight championship once again. Or, if one wants to put it in more technical terms, gold, silver, and miners are likely to start a massive rally, but only after declining visibly first.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Mining ETFs: Headed for Their Next Slide?

The mining ETFs (the GDX and GDXJ) have hit resistance and look tired. After their corrective rally, a slide looks promising.

The miners are done correcting and if they were at a water amusement park, would they head for the lazy river? How about the wave pool? Nah… they’d be headed straight for the slides.

If you’ve been waiting for a high-quality sign that the next big move in the precious metals sector is underway – you just got it.

There are days on the markets when nothing happens, there are days when what happens is visible only to some ( like Monday’s session ), and there are days when the market’s signals are crystal-clear – as if the charts were practically screaming at the person examining them. Yesterday, was one of the latter kind of days.

Without further ado, let’s take a look at the key development that we just saw in the precious metals’ world – the big decline in the GDX ETF – proxy for mining stocks.

ChartDescription automatically generated with medium confidence

After the tiny breakdown that I described yesterday (Mar. 24), the GDX ETF declined significantly, and it even opened the session with a price gap. If you look at the left side of the chart, you’ll see that this is the way in which the big January decline started. In the next 2 months, the value of the GDX ETF declined by over $8.

But is the corrective upswing really over? Did the move higher end at a price level that was likely to stop it? Yes, definitely so.

ChartDescription automatically generated

On March 10 (when we were already long), I wrote the following :

“Even though gold moved lower in early March, gold miners stopped declining after reaching my target area based several techniques – most importantly the 50% Fibonacci retracement based on the entire 2020 rally, and the previous lows and highs. Just as miners’ relative weakness had previously heralded declines for the entire precious metals sector, their strength meant that a rally was about to start. And that’s just what we saw yesterday (Mar. 9).”

Ultimately, it seems that the above corrections will result in the GDX ETF moving to about $34 or so.

The resistance levels in the $34 – $35 area are provided by:

  • The late-February 2020 high
  • The rising neck level of the previously completed head and shoulders pattern
  • The analogy to how big miners’ correction was in April (assuming that the mirror similarity continues)
  • The declining blue resistance line
  • The 50-day moving average

Consequently, it makes sense for the GDX ETF to slide form here, as the corrective rally that was likely to take place is most likely already over.

The clearly visible sell signal from the stochastic indicator (lower part of the chart) confirms the above as well.

Having said that, let’s take a look at even bigger decline in the GDXJ ETF – proxy for junior mining stocks.

ChartDescription automatically generated

While senior gold miners declined 2.54% yesterday, junior miners declined by 4.04%.

The remarkable thing about both declines is that they took place almost without gold’s help. GLD ended yesterday’s session just 0.73% lower. The general stock market – another market that could temporarily impact the prices of mining stocks – declined by 0.76% yesterday.

In comparison, the declines that we saw in both proxies for mining stocks were huge. This is very important , because the recent declines in the precious metals sector and the recent rallies in the precious metals sector were preceded by – respectively – the relative weakness of miners compared to gold and the relative strength of miners compared to gold.

What we saw yesterday is a crystal-clear sign that the waiting for the next big move lower is over.

This month’s “buy” signal from the MACD indicator seems to have once again marked a great shorting opportunity. On March 12 , I wrote the following:

The above chart is a big red warning flag for beginner investors . The flag reads: “verify the efficiency of a given tool on a given market, before applying it”.

The bottom part of the above chart features the MACD indicator . Normally, when the indicator line (black) crosses its signal line (red), we have a signal. If it’s moves above the signal line, it’s a buy sign, and if it moves below it, it’s a sell sign.

But.

If one actually looks at what happened after the previous “buy signals” in the recent months, they will see that in 5 out of 6 cases, these “buy signals” practically marked the exact tops, thus being very effective sell signals! In the remaining case, it was a good indication that the easy part of the corrective upswing was over.

I’m not only describing the above due to its educational value, but because we actually saw a “buy signal” from the MACD, which was quite likely really a sell signal.

I recently added that the MACD indicator is far from a light switch. While false buy signals often precede material drawdowns, the reversals don’t occur overnight. As a result, it’s perfectly normal for the GDXJ ETF to trade sideways or slightly higher for a few days before moving lower. This is what we saw last week.

And yesterday, we saw the 4%+ daily slide, which means that everyone who shorted the market based on the MACD’s “buy” signal is already profitable.

Once again – please remember to check whether a given technique or indicator actually worked for your favorite market before applying it and entering a trade.

Another market that appears to confirm the bearish narrative is silver.

Chart, histogramDescription automatically generated

Silver moved lower in a more visible manner, which might be surprising to some investors (especially those that went long based on the “ silver short squeeze ” movement almost two months ago), but it’s not surprising to me. If the history repeats itself to a considerable degree, then it’s not odd to see the same kind of performance that we saw in the similar stage of a given price move.

In this case, I already discussed the self-similarity present in the silver market, and I marked the similar patterns with red rectangles. The current situation seems similar to early March 2020, when silver was just starting a major decline while being between its 50- and 200-day moving average. Let’s keep in mind that gold actually moved to a new high in early March, and silver was very far from doing so. Back then, silver underperformed, so it’s no wonder that it’s underperforming right now. While the silver shortage was the topic of the day for many days about two months ago, it seems that more bearish headlines will soon be more popular.

Please note that a move below ~$24 in silver will imply that everyone who bought in late January or February, when silver was particularly popular is already in the red. As silver then moves even lower, those investors will most likely feel significant emotional pressure to sell – and some will, most likely making the decline bigger and sharper.

ChartDescription automatically generated

Gold seems to have topped in the lower part of my target area and the levels reached by its price as well as the levels reached by the stochastic indicator seem to indicate that the top is indeed in.

Gold reversed after failing to break above the declining short-term resistance line, relatively close to its triangle-vertex-based reversal , which is a bearish combination. The stochastic (lower part of the chart) didn’t move to the 80 level, but it was very close to it and it was the proximity of this level that was enough for the tops to form in quite a few previous cases – including the November 2020 top. Based on yesterday’s closing price, we didn’t see a sell signal in this indicator yet, but once we see just a little more weakness, we’ll get this confirmation. Based on what we saw in mining stocks yesterday, it seems that we’ll see it shortly.

Graphical user interface, chartDescription automatically generated

Right now, traders are likely taking the wait-and-see approach with regard to the USD Index. The latter just moved to its previous yearly highs. It’s already after verification of the breakout above the February highs, so it seems that it’s ready to break higher any day – or hour – now. When that happens, I expect the rally to take the USDX to at least 94, perhaps to 94.5 or 95. The September 2020 high is 94.8, so this level is the most likely upside target for the short term. I don’t think that the rally in the USD Index would end once it reaches the proximity of 95, but that’s when we might see another breather (perhaps after a breakout above this level and perhaps before the breakout, it’s too early to tell at this time).

All in all, it seems that the next move lower in the precious metals market is already underway and that we’re going to see new 2021 lows in gold and mining stocks in the next several weeks or days.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold Miners: Why Apparent Strength is Just a Facade

Despite everyone saying the bottom is in, and that gold and miners are set for takeoff, the signs still point south. The real question: how low can they go?

Let’s take a look at some price targets for where the GDX and GDXJ mining ETFs might land up.

With the miners attempting to reclaim Pride Rock, it won’t be long until the GDX ETF is singing Hakuna Matata.

Rising U.S. Treasury yields? No problem.

A reinvigorated USD Index? Who cares.

But while strength is often viewed through the eyes of the beholder, the GDX ETF is far from being The Lion King. Sure, its bravery in the face of familiar foes is reason for optimism. However, we’ve seen this movie before. While the recent rally may resemble Mufasa, beneath the surface, the GDX ETF’s tepid price action looks a lot like Simba.

If you analyze the chart below, you can see that the GDX ETF moved to the upper level of my initial target range. However, with the Mar. 19 close eliciting a sell signal from the stochastic oscillator (the black and red lines at the bottom section of the chart), a historical reenactment (repeat of the early-2021 performance) could deliver another sharp move lower.

ChartDescription automatically generated

In addition, the shape of the early-January swoon is eerily similar to today’s price action. Case in point: back in January, the GDX ETF enjoyed a material daily rally, consolidated , then sunk like a stone. Because of that, the recent move higher and a few days of back-and-forth trading ( consolidation ) is nothing to write home about.

To explain, I wrote on Mar. 18:

Mining stocks followed gold higher, and they moved to the upper part of my previous target area, but not yet to its upper border. As you may recall, I mentioned the possibility of GDX moving to the $34 – $35 area and my original target for this rally was slightly below $34.

The GDX ETF now encountered the strongest combination of resistance areas, while the Stochastic indicator moved above the 80-level. Technically, the situation is now much more bearish in the GDX ETF chart than it was at the beginning of the year. Back in January, the GDX ETF was only at the declining blue resistance line.

Now, in addition to being very close to the above-mentioned line it’s also at:

  • The neck level of the previously broken broad head and shoulders pattern
  • The 50-day moving average
  • The previous (late-February) highs.

Consequently, it’s highly likely that we’ve either just seen a top or one is close at hand.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, while the S&P 500 is a key variable in the equation, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market ):

  1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
  2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
  3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: the interim downside target is based on the assumption of a steady S&P 500 . If the stock market plunges, all bets are off. For context, when the S&P 500 plunged in March 2020, the GDX ETF fell below $17, and it took less than two weeks for it to move as low from $29.67. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

If gold forms an interim bottom close to $1,600, this could also trigger a corrective upswing in the mining stocks, but it’s too early to say for sure whether that’s going to be the case or not.

Also supporting the potential move, the GDX ETF’s head and shoulders pattern – marked by the shaded green boxes above – signals further weakness ahead.

I wrote previously:

Ever since the mid-September breakdown below the 50-day moving average , the GDX ETF was unable to trigger a substantial and lasting move above this MA. The times when the GDX was able to move above it were also the times when the biggest short-term declines started.

(…)

The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.

Turning to the junior gold miners , the GDXJ ETF will likely be the worst performer during the upcoming swoon. Why so? Well, due to its strong correlation with the S&P 500, a swift correction of U.S. equities will likely sink the juniors in the process.

What’s more, erratic signals from the MACD indicator epitomizes the GDXJ ETF’s heightened volatility.

Please see below:

ChartDescription automatically generated

To explain, I wrote on Mar. 12:

The above chart is a big red warning flag for beginner investors . The flag reads: “verify the efficiency of a given tool on a given market, before applying it”.

The bottom part of the above chart features the MACD indicator . Normally, when the indicator line (black) crosses its signal line (red), we have a signal. If it’s moves above the signal line, it’s a buy sign, and if it moves below it, it’s a sell sign.

But.

If one actually looks at what happened after the previous “buy signals” in the recent months, they will see that in 5 out of 6 cases, these “buy signals” practically marked the exact tops, thus being very effective sell signals! In the remaining case, it was a good indication that the easy part of the corrective upswing was over.

I’m not only describing the above due to its educational value, but because we actually saw a “buy signal” from the MACD, which was quite likely really a sell signal.

More importantly though, the MACD indicator is far from a light switch. While false buy signals often precede material drawdowns, the reversals don’t occur overnight. As a result, it’s perfectly normal for the GDXJ ETF to trade sideways or slightly higher for a few days before moving lower. This is what we saw last week

But how low could the GDXJ ETF go?

Well, just like the GDX ETF, the S&P 500 is an important variable . However, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range and if the stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

Some people (especially the permabulls that have been bullish on gold for all of 2021, suffering significant losses – directly and in missed opportunities) will say that the final bottom is already in. And this might very well be the case, but it seems highly unlikely to me. On a side note, please keep in mind that I’m neither a permabull nor a permabear for the precious metals sector, nor have I ever been. Let me emphasize that I’m currently bearish (for the time being), but earlier this month, we went long mining stocks on March 4 and exited this trade on March 11.

Another reason (in addition to the myriads of signals coming not only from mining stocks, but from gold, silver, USD Index, stocks, their ratios, and many fundamental observations) is the situation in the Gold Miners Bullish Percent Index ($BPGDM), which is not yet at the levels that triggered a major reversal in the past. The Index is now back above 27. However, far from a medium-term bottom, the latest reading is still more than 17 points above the 2016 and 2020 lows.

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, with sentiment still relatively elevated, it will take more negativity for the index to find the true bottom.

Graphical user interface, chartDescription automatically generated

The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of 2020. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place.

But has it already run its course?

Well, in 2016 and early 2020, the HUI Index continued to move lower until it declined below the 61.8% Fibonacci retracement level. The emphasis goes on “below” as this retracement might not trigger the final bottom. Case in point: back in 2020, the HUI Index undershot the 61.8% Fibonacci retracement level and gave back nearly all of its prior rally. And using the 2016 and 2020 analogues as anchors, this time around, the HUI Index is likely to decline below 231. In addition, if the current decline is more similar to the 2020 one, the HUI Index could move to 150 or so, especially if it coincides with a significant drawdown of U.S. equities.

Moreover, let’s keep in mind that an unwinding of NASDAQ speculation could deliver a fierce blow to the gold miners. Back in 2000, when the dot-com bubble burst, the NASDAQ lost nearly 80% of its value, while gold miners lost more than 50% of their value.

Please see below:

ChartDescription automatically generated

Right now, the two long-term channels above (the solid blue and red dashed lines) show that the NASDAQ is trading well above both historical trends.

Back in 1998, the NASDAQ’s last hurrah occurred after the index declined to its 200-day moving average (which was also slightly above the upper border of the rising trend channel marked with red dashed lines).

And what happened in the first half of 2020? Well, we saw an identical formation.

The similarity between these two periods is also evident if one looks at the MACD indicator . There has been no other, even remotely similar, situation where this indicator would soar so high.

Furthermore, and because the devil is in the details, the gold miners’ 1999 top actually preceded the 2000 NASDAQ bubble bursting. It’s clear that miners (the XAU Index serves as a proxy) are on the left side of the dashed vertical line, while the tech stock top is on its right side. However, it’s important to note that it was stocks’ slide that exacerbated miners’ decline. Right now, the mining stocks are already declining, and the tech stocks continue to rally. Two decades ago, tech stocks topped about 6 months after miners. This might spoil the party of the tech stock bulls, but miners topped about 6 months ago…

Also supporting the 2000 analogue, today’s volume trends are eerily similar. If you analyze the red arrows on the chart above, you can see that the abnormal spike in the MACD indicator coincided with an abnormal spike in volume. Thus, mounting pressure implies a cataclysmic reversal could be forthcoming.

Interestingly, two decades ago, miners bottomed more or less when the NASDAQ declined to its previous lows, created by the very first slide. We have yet to see the “first slide” this time. But, if the history continues to repeat itself and tech stocks decline sharply and then correct some of the decline, when they finally move lower once again, we might see THE bottom in the mining stocks. Of course, betting on the above scenario based on the XAU-NASDAQ link alone would not be reasonable, but if other factors also confirm this indication, this could really take place.

Either way, the above does a great job at illustrating the kind of link between the general stock market and the precious metals market that I expect to see also this time. PMs and miners declined during the first part of the stocks’ (here: tech stocks) decline, but then they bottomed and rallied despite the continuation of stocks’ freefall.

Even more ominous, the MACD indicator is now eliciting a clear sell signal . And displaying a reading that preceded the dot-com bust in 2000, the NASDAQ Composite – and indirectly, the PMs – continue to sail toward the perfect storm.

As further evidence, the HUI Index/S&P 500 ratio has broken below critical support.

Please see below:

ChartDescription automatically generated

When the line above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index. If you analyze the right side of the chart, you can see that the ratio has broken below its rising support line. For context, the last time a breakdown of this magnitude occurred, the ratio plunged from late-2017 to late-2018. Thus, the development is profoundly bearish.

For further context, the ratio is mirroring the behavior that we witnessed in early 2018. After breaking below its rising support line, the ratio rallied back to the initial breakdown level (which then became resistance) before suffering a sharp decline. And with two-thirds of the analogue already complete today – with the ratio rallying back to its initial breakdown level (now resistance) last week – a sharp reversal could occur sooner rather than later.

In addition, because last week’s bounce was merely a technical development, the HUI Index’s recent strength is nothing to write home about. What’s more, the early-2018 top in the HUI Index/S&P 500 ratio is precisely when the USD Index began its massive upswing. Thus, with history likely to rhyme again, the outlook for the PMs remains profoundly bearish.

Moreover, please note that the HUI to S&P 500 ratio broke below the neck level (red, dashed line) of a broad head-and-shoulders pattern and it verified this breakdown by moving temporarily back to it. The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline at all (it just closed the week at 3913.10), the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

In conclusion, with the miners’ recent confidence likely to fade, it’s only a matter of time before they show their true colors. With the USD Index raring to go and U.S. Treasury yields seemingly exploding on a daily basis, the PMs recent move higher is akin to swimming against a strengthening current: while they’re making progress, each stroke requires more and more energy. In addition, if a drawdown of U.S. equities enters the equation, the metaphor will be akin to swimming against a tsunami. The bottom line? Long positions in the PMs offers more risk than reward over the next several weeks or so. However, once the medium-term climax is complete, it will be smooth sailing once again.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Have the Ides of March Come for Silver?

“The Ides of March are come,” said Caesar. “Aye Caesar; but not gone,” replied the soothsayer. The Ides of March quotation is often bandied about in financial articles midway through the month. Caesar was assassinated on March 15 th in 44BC (or BCE), at a meeting of the Roman Senate. Written about by Plutarch and further popularized by Shakespeare (who dramatized the event), the day has been used as a harbinger of ill fortune. So, if we’re to look at silver, should we be concerned about anything at this time?

Chart, histogramDescription automatically generated

Silver is moving similarly to what we saw in the second half of 2019 and early 2020, before the huge slide. I marked the very broad tops that followed a quick rally in the red-shaded rectangles, and I also created solid-line red rectangles based on the last two – normal – tops and the initial decline that followed them.

Based on the sudden increase in silver’s popularity, it spiked 1.5 months ago, but this move to new highs was quickly invalidated. The nature of this move was more or less random – it didn’t stem from a change in fundamentals or from a specific technical pattern , but rather from a sudden growth of interest in silver based on forum posts. Because of that, and because this upswing was quickly invalidated, this quick upswing didn’t really break the self-similarity pattern .

Right now, we see a corrective upswing between – approximately – the 50- and 200-day moving averages (marked with blue and red). This upswing corresponds to the corrective upswing in gold and mining stocks (which allowed us to profitably go long in case of the latter). We saw – approximately – the same thing about 12 months ago, right before the huge slide.

And speaking of time, please note that the final corrective upswing of early 2020 took place in very late February and early March, while the two – normal – tops that created the red-line rectangle formed more or less at the turn of the year and in late February. This year, it’s all taking place at almost exactly the same time of the year.

If this self-similar pattern is indeed materializing, then the implications are very bearish, and we can expect a major downturn any day or week now.

Let’s be realistic – so far, the analogy might seem too unclear to be viewed as a reliable base for making a silver forecast .

But what if… What if there was a very similar pattern in the past that also preceded a massive decline? This would greatly increase the reliability of the above self-similarity.

There was indeed such a pattern!

Chart, histogramDescription automatically generated

That’s what silver did in 2008 before it declined.

The August 2007 – March 2008 rally (please note the interim top in November 2007 that was followed by a zigzag decline, more or less in the middle of the rally) is similar to the March 2020 – August 2021 rally (please note the interim top in June 2020 that was followed by a zigzag pattern, more or less in the middle of the rally).

Afterwards, we saw a double top in both cases that was followed by a sizable slide. Then silver formed a specific U-shaped broad top, where the final top was below the initial one (exception: in this case the forum-based rally took silver slightly above the previous high, but due to the specific / random nature of the move, it “doesn’t count” as something that invalidates the analogy).

After the top, silver declined, and the final corrective upswing took place approximately between the 50- and 200-day moving averages.

Please note that in both previous (2008 and 2020) cases silver then truly plunged, and it kept on declining until it moved below the 2.618 Fibonacci extension based on the initial downswing. The above charts illustrate that by showing the first decline at the 38.2% retracement (1 / 0.382 = approximately 2.618). Applying the same to the current situation (the initial decline took silver from below $30 to below $24) provides us with the minimum decline target at about $13.50. Will silver really decline as low? In my view, it’s imperative to watch other markets for indications as they might have more reliable targets (for instance gold), but I wouldn’t say that this target (or lower price levels) is out of the question. Of course, that’s just on a temporary basis – silver will likely soar in the following months and years (after this decline).

Before summarizing, please note silver’s tendency to decline sharply in March – that’s what happened in 2008 and 2020. Even if the entire self-similar pattern doesn’t continue, based on this seasonality, silver is likely to decline soon, anyway.

Summing up, if the similarity to what happened in 2020 and 2008 is upheld, then it seems that we’re about to see a big decline in the price of the white metal . Naturally, that’s not the only reason to expect silver’s weakness in the following weeks and months (not necessarily days) – you will find other reasons in my previous analyses .

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

History Rhymes: Does USDX’s Uprising Mean Gold’s Climax?

Plenty of warning signs on the near-term horizon: The USDX is after a long-tern breakout, traders are reducing net-short positions, and the slightest shift in U.S. dollar sentiment can lead the rest of the herd to follow. If a USDX resurgence is combined with an equity shock, then the precious metals are in for trouble.

Last Friday (Mar. 12), we focused quite a bit on the moves in the gold miners and how their related ETFs (GDX and GDXJ) are faring and which will suffer most during the next phase of the decline. We also touched on this subject last Wednesday as well. It was important to shed light on the miners because they’ve been leading the charge in the corrective upswing. I also wanted to explain the Eurozone’s impact on the precious metals and how crucial it is to examine the bigger picture and how the pieces are all connected. Today, let’s shift our attention over to the currency perspective, namely the USDX.

The price shape and time analogies are truly remarkable right now. It’s quite often the case that history rhymes, but it’s rare for it to rhyme so closely and clearly to what we now see in the case of the USD Index. And the implications for precious metals investors are profound.

On Mar. 8 , I warned that with the USD Index confronting its mid-2020 lows (resistance), a short-term dip could occur in the coming days. But after declining by 0.34% last week, the negativity could be short lived.

Case in point: the 2017-2018 analogue is already in full swing, and while short-term dips were part of the historical journey, the USDX could be about to exit its consolidation phase.

Please see below:

Chart, line chartDescription automatically generated

You can also see the similarity between two periods and the technical patterns that they included in the chart below:

ChartDescription automatically generated

Even while looking at the price moves for just a second, the size and shape of the 2017-2018 analogue clearly mirrors the 2020-current price action . Although this time, it took less than 118 days for the USD Index to move from peak to trough.

In 2017-2018, it also took 82 days for the USDX to form a final bottom (the number of days between the initial bottom and the final bottom) and the duration amounts to 21.19% of the overall timeframe. If we applied a similar timeframe to today’s move, then the USD Index should have bottomed on Feb. 12. It actually bottomed (finally) on Feb. 25, which was just 8 trading days away from the former date. Taking into account the sizes of the moves that preceded the previous declines (they took approximately one year to complete), this is extremely close and an excellent confirmation that the self-similar pattern remains intact.

In addition, as the USDX approached its final bottom in 2017-2018, gold traded sideways. Today, however, gold has been in a downward spiral. From a medium-term perspective, the yellow metal’s behavior is actually more bearish than it was in 2017-2018.

Finally, the USD Index’s breakout above its 50-day moving average (which it still holds today) is exactly what added gasoline to the USDX’s 2018 fire. Case in point: after the 2018 breakout, the USDX surged back to its previous high. Today, that level is roughly 94.5.

Moreover, gold’s trepidation alongside the USD Index strength on Mar. 12 adds even more validity to the 2017-2018 analogy.

I wrote on Mar. 10:

It’s not true that there were no pullbacks during the 2018 rally. There were, but they were simply too small to be visible from the long-term point of view.

The first notable pullback took place in early May 2018, and it contributed to a corrective upswing in the precious metals market. To be precise, the USD Index declined after rallying for 56 trading days, but gold rallied earlier – 51 trading days after the USD Index’s final bottom. The USDX’s immediate-top formed 16 trading days after its final bottom, and gold’s bottom formed 10 trading days after the USD’s final bottom.

Comparing this to the size of the previous decline in terms of the trading days, it was:

  • 51 – 56 trading days / 283 trading days = 18.02% – 19.79%
  • 10 – 16 trading days / 283 trading days = 3.53% – 5.65%

More importantly though, when the USD Index turned a short-term decline into consolidation in mid-2018, gold’s hesitant reaction highlighted the yellow metal’s anxiety. And what followed? Well, gold’s next move was significantly lower, while the USD Index’s next move was significantly higher. This means that it was likely a good idea that we took profits from our long positions recently when the GDX moved to $32.96 (opening at $30.80 – $31).

Please see below:

ChartDescription automatically generated

In addition, if we analyze the pairs’ very recent price action, it’s a splitting image.

On Friday (Mar. 12), the USD Index rallied by 0.28%, while gold was (roughly) directionless despite the intraday volatility. And just like in 2017-2018, the yellow metal’s behavior signals a forthcoming climax . As a result, gold and the USD Index are behaving exactly as they did before going their separate ways in 2017-2018. And this means a bearish gold price prediction for the following weeks (not necessarily hours, though).

Please see below:

Chart, histogramDescription automatically generated

To explain, I wrote on Mar. 10:

Let’s examine the current situation: the preceding decline lasted for 200 trading days and there were 41 – 42 trading days between the final USDX bottom and the short-term reversals in gold and USDX. Comparing this to the final USDX bottom, we get 7 – 8 trading days.

Applying the previous percentages to the length of the most recent medium-term decline in the USD Index provides us with the following:

  • 18.02% – 19.79% x 200 trading days = ~36 – ~40 trading days
  • 3.53% – 5.65% x 200 trading days = ~7 – ~11 trading days

The above estimation of about 36 – 40 trading days almost perfectly fits the current 41 – 42-day delay, and the estimation of about 7 – 11 trading days almost perfectly fits the current delay of 7 – 8 trading days.

In other words, the analogy to the 2018 performance does not only remain intact – it actually perfectly confirms the validity of the current corrective upswing. Once again, it’s very likely just a pullback, not a big trend reversal.

The bottom line?

Given the size of the 2018 upswing, 94.5 on the USD Index is likely the first, of many, potential upside targets.

Adding to the list of upside catalysts, the USD Index still has plenty of other bullets in its chamber. For instance, we’re also in the early innings of a shift in U.S. dollar sentiment. With short interest hitting an all-time high in late-2020, it was a complete fire sale. Today, however, short interest may have peaked.

Please see the below chart based on the CoT report :

ChartDescription automatically generated

Please consider how big rallies followed the moments when the net speculative position as % of total open interest started to rally back up after being oversold for months. The situation here is still more extreme than it was in early 2018 and 2014, suggesting that the upcoming rally might be bigger than the ones that we saw then.

As further evidence, speculative futures traders ( non-commercial ) actually reduced their net-short positions by 1,216 contracts last week (the net of the two values in the red box below). As a result, the slightest shift in sentiment could lead the rest of the herd to follow.

TableDescription automatically generated

Finally, let’s not forget that the USD Index is after a long-term, more-than-confirmed breakout. This means that the long-term trend for the U.S. dollar is up.

ChartDescription automatically generated

In conclusion, the USD Index is likely shifting from consolidation to ascension. With the size, scope and duration of the recent price action mirroring 2017-2018, it’s only a matter of time before the USD Index’s medium-term breakout gives way to a material breakthrough. What’s more, the USD Index is finally reacting to the rise in U.S. Treasury yields . Initially ignoring the late-2020 surge, a bottom, and subsequent rally in the U.S. 10-Year Treasury yield has lifted the USD Index 80% of the time since 2003. And with the relationship seemingly restored in 2021, the combination is profoundly bearish for the PMs, especially given today’s triangle-vertex-based reversal in gold.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

How the EUR/USD Affects Miners; Which ETF Will Suffer More?

A large part of yesterday’s free version of the analysis focused on the Eurozone’s economic outlook and how it affects the precious metals. We’ll eventually get to Europe again later in today’s analysis, but let’s first examine gold related ETFs, namely the GDX and GDXJ. How low can they go? That will depend on the general moves in the stock market.

The GDX ETF didn’t move to the strongest combination of nearby resistance levels, but it did flash a few bearish signs, anyway.

The resistance that it reached was notable as it moved to its November 2020 low. Consequently, “it makes sense” for the mining stocks to have topped here.

In yesterday’s (Mar. 11) regular analysis , I wrote the following about the above chart:

Miners generally paused yesterday (Mar. 10), which is quite natural after a sharp daily rally. They closed the day slightly higher, but the RSI is not yet at 50 and the volume that accompanied yesterday’s small move up was nothing to call home about. It was just a pause, and the preceding short-term move is now likely to continue.

Yesterday’s volume was nothing to call home about, but the RSI moved to 49.94 – close enough to 50 to be viewed as a sell signal.

Moreover, please note that while spike-high volume would be a reversal indication, it’s not required for a top to form. The recent small tops formed without high volume.

Consequently, it could be the case that the top in the mining stocks is in, and that by selling GDX at $32.96 yesterday (March 11) we exited the long positions (and entered short ones) practically right at the top – a week after buying in the $30.80 – $31 area .

Before anyone asks, yes, miners were strong relative to gold yesterday, but it was practically the only thing that was positive about yesterday’s session and the USDX’s performance along with gold’s weakness seem more important.

Please keep in mind that every now and then miners very briefly (!) fake their strength (or weakness) relative to gold right before the reversal. The 2016 rally started with a fake breakdown and fake underperformance of gold. So, while the continuous underperformance of miners (compared to gold) is very often bearish, a single day of strength or weakness might be a trap.

How low can the GDX ETF go? Our final downside target area ($15 – $24.5) is quite broad, because a lot depends on what the general stock market will do. I’ll be looking at gold for the key signs along with a few other factors (including the Gold Miners Bullish Percent Index ) and determined the buying opportunity based on them – not necessarily based on the price of the GDX or GDXJ by itself.

Yes, this target is quite low, and thus might appear unrealistic, but let’s consider the following:

  • Miners are slightly above their early-2020 high – just like gold.
  • Gold is likely to decline to its 2020 lows or so
  • General stock market might have just topped.

Considering all three above factors it’s clear that a move to even the 2020 lows is not out of the question.

And this means that junior miners might decline more than senior miners. A move from the current levels to the 2020 would imply a decline by about 50% in case of the GDX, and by about 60% in case of the GDXJ.

Speaking of the GDXJ, let’s take a look at its chart.

The most interesting thing on the above chart is a big red warning flag for beginner investors . The flag reads: “verify the efficiency of a given tool on a given market, before applying it”.

The bottom part of the above chart features the MACD indicator . Normally, when the indicator line (black) crosses its signal line (red), we have a signal. If it’s moves above the signal line, it’s a buy sign, and if it moves below it, it’s a sell sign.

But.

If one actually looks at what happened after the previous “buy signals” in the recent months, they will see that in 5 out of 6 cases, these “buy signals” practically marked the exact tops, thus being very effective sell signals! In the remaining case, it was a good indication that the easy part of the corrective upswing was over.

I’m not only describing the above due to its educational value, but because we actually saw a “buy signal” from the MACD, which was quite likely really a sell signal. Today’s pre-market decline in gold (and the move lower in the GDXJ in the London trading) seems to confirm it.

So, how low can the GDXJ go? As it is the case with the GDX, a lot depends on the general stock market and our final target area is quite broad (between $18 and $26), and the key indications will come from other markets and the way they behave relative to each other.

There’s an interim (and strong) support provided by the $42.5 level, which might trigger a corrective upswing, but since we have just seen one, it’s far from being certain that we’ll see another corrective upswing so soon. This could be another opportunity to profit on a long position in the gold miners , but we can’t say that we’ll definitely go long at that time – at least not based on the information that we have available right now. Naturally, we’ll keep monitoring the situation and send out regular (and intraday) Alerts with details as more information becomes available.

Having said that, let’s take a look at the market from the more fundamental angle.

Fundamental Frailty (Part 2)

As you’ve likely noticed, I spend a lot of time analyzing the EUR/USD – that’s because the currency pair accounts for nearly 58% of the movement in the USD Index. And due to Europe’s economic underperformance and the relative outprinting by the European Central Bank (ECB) , a sharp rerating of the EUR/USD could be the engine that drives the USD Index back above 94.5

For some time, I’ve warned that the ECB’s bond-buying program was likely to accelerate. On Jan. 22 , I wrote:

The ECB decreased its bond purchases toward the end of December (2020), Then, once January hit (2021), it was back to business as usual. As a result, the ECB’s attempt to scale back its asset purchases was (and will be) short-lived. And as the economic conditions worsen, the money printer will be working overtime for the foreseeable future.

And with Eurozone fundamentals continuing to deteriorate, I added on Mar. 9:

The ECB’s splurge could begin as early as this week. With Eurozone bond yields already on the rise and the debt-ridden economy unlikely to tolerate a sustained ascension, the ECB’s weekly PEPP purchases (pandemic emergency purchase program) are likely to accelerate.

And what happened?

Well, on Mar. 11, the ECB stuck another fundamental dagger into the heart of the euro. Lamenting the rise in European bond yields, ECB President Christine Lagarde told reporters that “market interest rates have increased since the start of the year, which poses a risk …. Sizeable and persistent increases in these market interest rates, when left unchecked, could translate into a premature tightening of financing conditions.”

And why is she so worried?

Well, if you analyze the chart below, you can see that Goldman Sachs’ Financial Conditions Index (FCI) has moved moderately higher. For context, the FCI is derived by calculating the weighted-average impact of the ECB’s overnight lending rate, sovereign bond yields, corporate bond spreads, equity prices and cross-border trade conditions.

Please see below:

To explain, when the white line above is falling, it creates an environment where money is cheap, abundant and easy for corporations to obtain. Conversely, when the white line is rising, it creates the opposite environment. As you can see, excess liquidity has begun to evaporate.

So, what was the ECB’s response?

Source: ECB

As expected, the ECB’s weekly PEPP purchases will now “be conducted at a significantly higher pace.”

Far from news for those that have been paying attention, Europe is extremely allergic to higher bond yields. Just yesterday, I wrote that rising Eurozone interest rates remain extremely unlikely. And because a picture is worth a thousand words, notice the reaction from the German 10-Year Government Bond yield?

Source: Holger Zschaepitz

Moving in lockstep, the Italian 10-Year Government Bond yield also followed suit.

Source: Jeroen Blokland

In stark contrast, the U.S. 10-Year Treasury yield actually rallied on Mar. 11 . And demonstrating material outperformance, since bottoming on Aug. 6, the benchmark has raced past the German 10-Year Government Bond yield.

Please see below:

What’s more, European lawmakers seem to believe that an economic resurgence is forthcoming. Projecting 3.8% GDP growth in 2021 – headlined by 5.5% growth in France (Europe’s second-largest economy behind Germany) – European officials believe that fiscal support will unleash pent-up demand once the coronavirus pandemic subsides.

For context, I wrote on Feb. 11:

Wishing, wanting and hoping, European lawmakers anticipate that more than €300 billion in excess household savings will lead to an economic renaissance in 2021. However, when you break it down, the balance only amounts to 4% of annual household income. Thus, the short-term bounce (if any) won’t last very long.

And to that point, if you analyze the chart below, you can see that excess household savings in the Eurozone are now less than $84 billion.

To explain, the brown bars above represent excess household savings in the Eurozone. And from the second-quarter to the third quarter of 2020, European households have spent nearly 60% of their Q2 excess savings . Thus, at this pace, there won’t be any “excess savings” left.

Also signaling economic weakness, the slump in Eurozone retail sales (released on Mar. 4) shows that consumers are spending their money on necessities and not discretionary items that boost GDP.

Please see below:

Falling off a cliff, Eurozone retail sales declined by 5.1% in January. Even more revealing, France (– 9.9%) – which is projected to be a beacon of Eurozone growth in 2021 – underperformed the bloc average, with December’s momentum quickly fading in January.

Source: Eurostat

On the flip side, U.S. retail sales rose by 5.3% in January (5.1% excluding food).

Please see below:

And while fundamentals continue to chip away at the EUR/USD, activity in the futures and options markets are signaling a shift in sentiment. Remember, narratives overpower fundamentals in the short-term, thus, changing opinions is like trying to fill a glass from a dripping faucet. However, the pressure may be rising.

Case in point: the latest Commitments of Traders (COT) report shows that non-commercial futures traders (speculators) have increased the EUR/USD short positions by more than 6,500 contracts, while reducing their EUR/USD long positions by nearly 5,900 contracts (the blue box below).

Source: COT

Even more interesting, EUR/USD futures’ volume exploded on Mar. 10. If you analyze the right side of the chart below, you can see that an abnormal number of contracts exchanged hands.

Chart, bar chartDescription automatically generated

Source: CME Group

And while the volume data doesn’t tell us whether these are bullish or bearish bets on the EUR/USD, the CME Group’s options data signals that it’s the latter. If you analyze the graphic below, you can see that there is little open interest for bullish bets of 1.1950 or above.

Source: CME Group

In stark contrast, there is plenty of open interest for bearish bets of 1.1850 or belowwith 1.1750 the most popular (642 contracts still outstanding).

Source: CME Group

In conclusion, the EUR/USD continues to swim against the fundamental current. And while daydreams of a Eurozone economic boom propel European equity bourses to new highs, the misguided optimism has also lifted the euro. However, with the USD Index already verifying its medium-term breakout and a boost from the EUR/USD likely to push it beyond the 94.5 level, the PMs medium-term outlook remains profoundly bearish. And while their correlations with the S&P 500 remains supportive in the short-term (which I predicted would be the case this week), a severe correction of U.S. equities increases the likelihood of a significant slide over the next few months.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold, Miners: How Long Will Short-Term Rally Last?

The precious metals market finally moved yesterday (Mar. 9) after providing us with bullish indications for quite a few days. Let’s jump right into charts and examine the details, starting with the part of the precious metals market that showed particular strength – mining stocks.

ChartDescription automatically generated

Figure 1 – VanEck Vectors Gold Miners ETF (GDX)

Even though gold moved lower in early March, gold miners stopped declining after reaching my target area based several techniques – most importantly the 50% Fibonacci retracement based on the entire 2020 rally, and the previous lows and highs. Just as miners’ relative weakness had previously heralded declines for the entire precious metals sector, their strength meant that a rally was about to start. And that’s just what we saw yesterday (Mar. 9).

Ultimately, it seems that the above corrections will result in the GDX ETF moving to about $34 or so.

The resistance levels in the $34 – $35 area are provided by:

  • The late-February 2020 high
  • The rising neck level of the previously completed head and shoulders pattern
  • The analogy to how big miners’ correction was in April (assuming that the mirror similarity continues)
  • The declining blue resistance line
  • The 50-day moving average

Additionally, please note that the last few local tops were accompanied by RSI at about 50. The latter is currently below 45, suggesting that this rally has more potential, but that it’s not particularly extreme.

The confirmation that the top is indeed in might come from the volume. Please note that the last three times when we saw really important tops, the GDX rallied on particularly strong volume. If we see something like that within the next 5 trading days or so (quite likely on Monday or close to it), we’ll have an even bigger chance of catching the reversal.

Consequently, the GDX is likely to form a top in the above-described area.

After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.

This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, the day of reckoning for stocks is coming , and it might be very, very close.

As I explained previously, based on the similarities to the 1929 and 2008 declines, it could be the case that the precious metals sector declines for about three months after the general stock market tops. And it seems that we won’t have to wait long for the latter. In fact, the next big move lower in stocks might already be underway, as the mid-Feb. 2021 top could have been the final medium-term top.

Let’s consider what the GDX and GLD did on an intraday basis yesterday.

ChartDescription automatically generated with medium confidence

Figure 2 – VanEck Vectors Gold Miners ETF (GDX) and Gold ETF (GLD) Comparison

As I already wrote, mining stocks rallied to new monthly highs, and the above 4-hour chart (each candlestick represents 4 hours of trading) makes it crystal-clear that the late-February bottom was the moment after which miners stopped declining and started to trade sideways. Gold (here: the GLD ETF, which I’m using to have an apples-to-apples comparison – both ETFs trade on the same exchange) continued to decline in March. Well, to be precise, miners did form new yearly lows in March, and we went long almost right at one of those intraday lows , but the moves were not significant enough to really change anything.

So, since miners no longer wanted to decline, and there were only two other things left for them to do: either nothing or rally.

They had been doing nothing for several days, due to the lack of bullish leadership in gold. They just got this leadership yesterday, and they soared.

Now, let’s keep in mind what I wrote in yesterday’s intraday Alert – namely, that mining stocks tend to rally particularly well in the initial part of the upswing, and then they underperform during the final part of the rally . So, when gold is above $1,750 or so, miners might already be rallying to a limited degree. Consequently, miners might rally above $34.27, but that is far from being certain. They might actually rally slightly less – perhaps to exactly $34 or so.

I applied the Fibonacci retracement levels to the above chart, but I actually used them as Fibonacci extensions. My current upside target for gold is at about $1,770 (which corresponds to about $166 in the GLD ETF) and it’s at about $34 for mining stocks (GDX ETF). The Fibonacci extensions emphasize that if both targets were to be reached, then it means that gold so far rallied (intraday) about half of its entire rally, while mining stocks rallied (intraday) about 61.8% of their entire rally. This perfectly fits miners’ tendency to outperform in the initial part of a given move, which makes both price targets more reliable.

Having said that, let’s move to gold.

ChartDescription automatically generated

Figure 3 – COMEX Gold Futures

Gold rallied strongly after bottoming right in the middle of my target area and after moving almost right to its June 2020 bottom, and after almost doubling its initial January decline. Yesterday’s rally also meant invalidation of the brief breakdown below the 61.8% Fibonacci retracement level based on the entire 2020 rally. Thus, the very short-term trend is up.

Please keep in mind that the upswing might be relatively short-lived – perhaps lasting only one week or so. There’s a triangle-vertex-based reversal point on Monday, so it wouldn’t be surprising to see an interim top at that time, especially considering that:

  1. The triangle-vertex-based turning points have been working particularly well in the recent past – they marked the January and February tops.
  2. The corrective upswings during this medium-term decline (especially in mining stocks) often took about a week to complete – at least the easy part of the upswing took a week.

The USD Index has been rallying relentlessly – just like in 2018 – in the last couple of days, but a quick pullback would not be surprising. In fact, it seems that one is already underway.

ChartDescription automatically generated

Figure 4 – USD Index (DX.F)

On March 8, the USD Index had closed above its lowest daily closing price of August 2020 (92.13), but yesterday, it closed back below this resistance. This means that we just saw an invalidation of the breakout – which is a bearish sign for the short term.

How low could the USD Index move during this pullback? Not particularly low, as the similarity to 2018 implies a rather unbroken rally. The February 2021 high of 91.6 seems to be a quite likely target, but we might see the USDX move a bit lower as well – perhaps to one of the classic Fibonacci retracements based on the recent upswing – lowest of them (the 61.8% one) being at about 90.8.

This pullback might trigger a question about the validity of the analogy to the 2018 rally, which seems to have taken place without any interruptions.

ChartDescription automatically generated

Figure 5

The analogy seems to remain intact when looking at it from the long-term point of view. Let’s keep in mind the recent decline was a bit sharper and it took less time to complete.

The 2017 – 2018 decline took 387 day (between the top and the first low) and then there were 82 days between the initial and the final low (21.19% of the decline).

This time, there were 269 days between the top and the first low. Adding 21.19% to this time, points to Feb. 12 as the “proportionately identical” bottom time target. The final bottom formed on Feb. 25 – just 9 trading days away from the analogy-based target. The analogy remains clearly intact.

“So, doesn’t it imply that there shouldn’t be any pullbacks until the USD Index rallies above 94?

No. And this becomes obvious once we zoom in.

ChartDescription automatically generated

Figure 6

You see, it’s not true that there were no pullbacks during the 2018 rally. There were, but they were simply too small to be visible from the long-term point of view.

The first notable pullback took place in early May 2018, and it contributed to a corrective upswing in the precious metals market. To be precise, the USD Index declined after rallying for 56 trading days, but gold rallied earlier – 51 trading days after the USD Index’s final bottom. The USDX’s immediate-top formed 16 trading days after its final bottom, and gold’s bottom formed 10 trading days after the USD’s final bottom.

Comparing this to the size of the previous decline in terms of the trading days, it was:

  • 51 – 56 trading days / 283 trading days = 18.02% – 19.79%
  • 10 – 16 trading days / 283 trading days = 3.53% – 5.65%

Now, let’s examine the current situation.

ChartDescription automatically generated

Figure 7

The preceding decline lasted for 200 trading days and there were 41 – 42 trading days between the final USDX bottom and the short-term reversals in gold and USDX. Comparing this to the final USDX bottom, we get 7 – 8 trading days.

Applying the previous percentages to the length of the most recent medium-term decline in the USD Index provides us with the following:

  • 18.02% – 19.79% x 200 trading days = ~36 – ~40 trading days
  • 3.53% – 5.65% x 200 trading days = ~7 – ~11 trading days

The above estimation of about 36 – 40 trading days almost perfectly fits the current 41 – 42-day delay, and the estimation of about 7 – 11 trading days almost perfectly fits the current delay of 7 – 8 trading days.

In other words, the analogy to the 2018 performance does not only remain intact – it actually perfectly confirms the validity of the current corrective upswing. Once again, it’s very likely just a pullback, not a big trend reversal.

Also, please note that back in 2018, the USD Index corrected after moving back above its mid-2017 lows and now we see the analogy to that – the USDX corrects after moving back above its mid-2020 lows. Back in 2017, the USD Index corrected to approximately its previous short-term high (the January 2018 high). Now, the February high is providing strong support at about 91.6 – that’s where this brief correction might end – on an approximate basis.

The above perfectly fits the scenario in which the precious metals market rallies on a very short-term basis (likely to about $1,770 in gold and about $34 in GDX), and then resumes its medium-term decline.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

How to Join the Mining Party… Before it Ends

Forget gold and silver for a moment. Do you hear the music? Yes, it’s coming from the mining ETFs club. But how long will the party last?

And more importantly, why miners, you may ask? Because miners tend to outperform in the early days of a major rally.

After closing only $0.10 below my initial downside target of $31 on Mar. 1 , the GDX ETF could be ripe for an upward revision. Able to ignore much of last week’s chaos, the GDX ETF’s outperformance of gold and silver signals that the tide has likely turned.

Please see below:

Figure 1

To that point, I warned on Mar. 1 that help was on the way:

“The GDX ETF has garnered historical support at roughly $29.52. The level also coincides with the early-March high, the mid-April low and the 61.8% Fibonacci retracement level. As a result, a corrective upswing to ~$33/$34 could be the miners’ next move.”

Furthermore, on Mar. 4 I wrote “when gold moves to $1,692, we’ll automatically open long positions in the miners”the GDX ETF ended Friday’s (Mar. 5) session up by 3.2% from my initial entry of ~$30.80 – $31. Thus, from here, the GDX ETF has roughly 3.8% to 7.0% upside (as of Friday’s close) before the $33/$34 levels signals that the momentum has run its course.

For now, though, positioning for more upside offers a solid risk-reward proposition . Prior to the initial decline, miners were weak relative to gold . However, after outperforming on Mar. 5, their steady hand was a sign of short-term strength. If you analyze the chart below, you can see that the size and shape of the current price action actually mirrors what we witnessed back in April.

Please see below:

ChartDescription automatically generated

Figure 2 – VanEck Vectors Gold Miners ETF (GDX), GDX and Slow Stochastic Oscillator Chart Comparison – 2020

For context, I wrote on Mar. 5:

Miners stopped their decline practically right in my target area, which I based on the 50% Fibonacci retracement and the 2020 highs and lows. Moreover, the proximity of the $31 level corresponds to the 2019 high and the 2016 high. Since so many support levels coincide at the same price (approximately), the latter is likely to be a very strong support. Moreover, the RSI was just close to 30, which corresponded to short-term buying opportunities quite a few times in the past.

In addition, a short-term upswing could provide a potential pathway to $35 – as this level also corresponds with the GDX ETF’s late-February high, its monthly declining resistance line and its 50-day moving average. The abundance of resistance levels – combined with the fact that an upswing would further verify the GDX ETF’s breakdown below the neckline of its potential head and shoulders pattern – should keep the upward momentum in check.

Over the medium-term, the potential head and shoulders pattern – marked by the shaded green boxes above – also deserves plenty of attention.

For context, I wrote previously:

Ever since the mid-September breakdown below the 50-day moving average , the GDX ETF was unable to trigger a substantial and lasting move above this MA. The times when the GDX was able to move above it were also the times when the biggest short-term declines started.

(…)

The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder (figure 2 – both marked with green) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.

Due to the uncanny similarity between the two green rectangles, I decided to check what happens if this mirror-similarity continues. I used purple, dashed lines for that. There were two important short-term price swings in April 2020 – one shows the size of the correction and one is a near-vertical move higher.

Copying these price moves (purple lines) to the current situation, we get a scenario in which GDX (mining stocks) moves to about $31 and then comes back up to about $34. This would be in perfect tune with what I wrote previously. After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.

This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, stocks’ day of reckoning is coming . And it might be very, very close.

As I explained previously, based on the similarities to the 1929 and 2008 declines, it could be the case that the precious metals sector declines for about 3 months after the general stock market tops. And it seems that we won’t have to wait long for the latter. In fact, the next big move lower in stocks might already be underway, as the mid-Feb. 2021 top could have been the final medium-term top.

In conclusion, the gold miners should continue to glisten as oversold conditions buoy them back to the $33-$35 range. Due to the GDX ETF’s recent strength, combined with gold rallying off of the lows on Mar. 5, the PMs could enjoy a profitable one-week (or so) party. However, with the celebration likely to be short-lived, it’s important to keep things in perspective. While this week’s performance may elicit superficial confidence, medium-term clouds have already formed. As a result, positioning for an extended rally offers more risk than reward.

(We normally include the “Letters to the Editor” section in the full version of Gold & Silver Trading Alerts only, but today I decided to include it also. It might be quite informative too. Enjoy:)

Letters to the Editor

Q: Could you update your thoughts regarding physical [gold and silver] for those looking to acquire additional positions – specifically, what do you think premiums and availability are going to look like when/if spot goes a $100 or $200 down from here? By way of example, I bought some U.S. gold buffaloes at $1854 spot at $1954. Those same coins at $1710 spot are still around $1930, if there are any to be found.

A: It’s a tough call, because the premium values don’t follow the technical patterns. Still, based on the analogy to situations that seem similar to what we saw recently, it seems that we can indeed say something about the likely physical values close to the likely $1,450 bottom.

Figure 43 – Source: didthesystemcollapse.org

The above chart shows the eBay premium for 1 oz Gold American Eagle coins over the spot gold price.

In April 2020, the premium spiked at about 14%. It was likely even higher in March (we don’t have the direct data), but the volatility back then was bigger than it is right now, so it seems that the current premium and the April 2020 premium values are a better proxy for the future bottoming premiums than the March 2020 bottom premium would be. If the volatility increases, one could see the premium at about 15% or so.

With gold at about $1,450, the above-mentioned information means Gold American Eagle coins can cost about $1,670.

Still, since gold futures prices seem more predictable than the prices of bullion coins, I’d focus on the former even while timing the purchase of the latter.

Moreover, please note that I’m planning to focus on buying mining stocks close to the bottom and move to metals only later. The reason is that miners tend to outperform in the early days of a major rally (just like they did in the first quarter of 2016). The fact that the premium is likely to be high when gold bottoms in a volatile manner is yet another reason for the above. When switching from mining stocks to physical holdings several weeks or months later, one might be buying at a smaller premium over the spot, and also after having gained more on miners than on the metals. Of course, the above is just my opinion, and you can purchase whatever you want – after all, it’s your capital and your investment decisions.

Q: Hi P.R., thanks for the advice on this trend, it’s been an amazing trade.

As I’m trading on XAUUSD, are you also able to advise the targets for a gold long entry, or should I wait for the final bottom before opening any longs?

A: I’m very happy that you’re making profits thanks to my analyses. While I think that the very short-term (for the next 5 trading days or so) outlook for gold, silver and mining stocks is bullish, I think the targets are more predictable for mining stocks than they are for gold and – especially – silver. Still, this time, the short-term upside target for gold is also relatively clear – at about $1,770. That’s why I put the $1,758 in the “For-your-information target” for gold in the “Summary” section below.

Q: Are we looking for the short-term upside move to be 1-5 weeks before the final decline into the 1350-1500 zone? I’m a little unsure of the timing you’re laying out.

A: I’m looking for the short-term upswing to take place between 1 and 3 weeks – that’s the part of the “Overview of the Upcoming Part of the Decline” section about it:

  1. It seems to me that the initial bottom has either just formed or is about to form with gold falling to roughly $1,670 – $1,680, likely this week.
  2. I expect the rebound to take place during the next 1-3 weeks.
  3. After the rebound (perhaps to $33 – $34 in the GDX), I plan to get back in with the short position in the mining stocks.

In my opinion it’s most likely that this counter-trend rally will take about 1 – 1.5 weeks. Then, I think that the decline to about $1,450 in gold will start.

Q: You have informed us to make the move when the Gold price “REACHES” $1693.00. My question is; Does the word “Reach” mean when the price touches that point, if only for a moment, or does “Reach” mean when it closes the day at or below $1693.00?

Thank you for your response to this question.

A: “Reaching” a price means the same thing as “touching” the price or “moving to” the price. This means moving to this price level on an intraday basis – even for just one tick . If I mean closing prices, I will specifically describe them as such.

For instance, I currently have binding exit positions for the current long position in the mining stocks – and these are exactly the price levels that I have put in my brokerage account as a limit sell order.

Q: Please comment on the Hindenburg Omen for stocks:

Figure 44 – Source: Refinitiv

A: Thanks. The Hindenburg omen is not one of the most reliable indicators – even on the above chart, it’s clear that most of the signals were not followed by declines. Please note how many fake initial signals there were before stocks finally declined in 2019 or 2020. There are many other reasons to think that stocks are going to move much lower, though. In the very short-term they could still move higher, but this move could be fake and could turn out to be the right shoulder of the head-and-shoulders top formation.

Q: 1) for shorter-term trades such as the potential 10% pop in the GDX, is NUGT better?

2) the plan after we re-enter a short trade when the GDX gets to $33/$34 might mean a longer haul before we hit rock bottom . You have mentioned time-scales up to 20 weeks (ish). Due to a longer holding period , would the CFD route be a cheaper route when compared to NUGT? I’m asking in general terms because each provider imposes different fees and I don’t expect you to comment on the fees charged by IG, which is the service I use.

I also recognize that NUGT only offers 2 X leverage, whereas CFD’s offer up to five times leverage.

Finally, the manner in which you detail the rich tapestry of the economic forces that impact PMs is revealing and educational. I find this all fascinating.

I have my own views which can be summed up like this: How many inflationary false-dawns and panics has the bond market had? Ever since 2008, when the FED launched QE, there have been numerous bouts and hissy fits of inflationary expectations that have subsequently sunk like a dodgy soufflé. I think this time is no different and it’s entirely possible the 30-year bond could drop to ZERO. I am in the deflationary camp.

How might the 10 year at zero or possibly sub-zero and longer, out on the duration curve to (TLT ETF) dropping to 0.5%, affect the price of gold?

Your thoughts as ever, are much appreciated

A: 1) That depends on whether one seeks leverage or not, and how much thereof. Please note that some short-term trades could sometimes become medium-term trades if the market decides to consolidate or move in the other direction before continuing the predicted trend. In this case, non-leveraged instruments are at an advantage over the leveraged ones, because they don’t suffer from the back-and-forth trading as much as the leveraged ones do.

If one’s desired exposure to the GDX ETF wouldn’t exceed the cash that one dedicated to trading, then in order to have the same exposure one would simply have half of the capital employed in NUGT (which is 2x leveraged). This way, the exposure would be identical, but the NUGT would imply additional risk of losing more capital if the trade takes much longer than planned and/or if the price moves adversely first.

Please note that there is also an additional way to gain leverage (it’s not available for everyone, though) and that is through the use of margin on one’s brokerage account. I’d prefer to use margin for the GDX before aiming to gain leverage through NUGT.

In other words, I’d first use more cash for GDX before I’d go into NUGT. If I wanted to have even bigger exposure than the one achieved by employing more capital to GDX, I would then consider using margin, and then I would consider using NUGT if I still wanted to get more leverage.

There might be some traders who would seek to combine both for even bigger leverage (buying NUGT on margin), but this is definitely not something that I’d recommend to most people. In fact, it seems that in many cases, sticking to the GDX would be a good way to go.

2) I think I already replied to the first part of your question (NUGT vs. CFD) above. Also, for other people reading this reply – please note that CFDs (contracts for difference) are not available in many areas, including the USA and Canada.

I’m glad to read that you enjoy reading my explanations of the current situation in the markets (precisely, my opinions on it).

Real interest rates are one of the most important drivers for gold (along with the USD Index), so a drop in the 10-year rates to zero or sub-zero levels would likely be very beneficial for the gold prices.

Figure 45

Also, based on the pace at which the rates have rallied recently, they might be topping here, but… There was no decline in the previous 40 years that was as big as what we saw between 2018 and 2020. Consequently, the corrective upswing might be bigger as well. Also, the above chart is not necessarily the scale that is big enough to make very long-term conclusions.

Figure 46

Over the past centuries, whenever the rates fell very low, they then rallied back up with vengeance. After WW2, it theoretically would have been a “good idea” to keep stimulating the economy with low rates – and yet, they soared. Right now, the monetary authorities strive to be very dovish and keep pumping liquidity into the system, and yet the rates are rallying anyway.

So, while the analogy to the previous years – or the past few decades – suggests that the rally in the rates might be over or close to being over, the very long-term chart suggests otherwise.

To make the situation even more complicated, if the stock market has already topped in February, and we have already entered the Kondratiev winter cycle, it means that we can theoretically expect the rates to fall, then rise in a credit crunch, and then fall much lower.

All in all, the outlook for the interest rates is anything but simple and clear. Perhaps what we see right now already IS the credit crunch and the 10-year rates are on their way to above 2% – after all, they used to return above their 200-day moving average after the previous medium-term declines. It seems to me that the move above 2% in the 10-year rates could correspond with gold’s decline below $1,500.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

3… 2… 1… Let the Corrective Gold Rally Begin

Folks, it seems that gold has formed an interim bottom, and a short-term corrective upswing is now likely, before the medium-term downtrend resumes.

Any further declines from this point are not likely to be significant for the short-term. The same applies to silver and the miners.

In yesterday’s (Mar. 4) intraday Gold & Silver Trading Alert , I described briefly why I think that the very short-term bottom is already in (or is at hand), and in today’s analysis, I’ll illustrate my points with charts. Let’s start with gold.

ChartDescription automatically generated

Figure 1 – COMEX Gold Futures (GC.F)

Gold just reached its 61.8% Fibonacci retracement level (based on the entire 2020 rally), and it just bounced off the declining red support line based on the August and November 2020 bottoms.

Gold didn’t reach the previous 2020 lows just yet, but it moved very close to them and the two strong above-mentioned support levels could be enough to trigger a corrective upswing. After all, no market can move up or down in a straight line without periodic corrections.

I previously wrote that when gold moves $1,693 we’ll be closing any remaining short positions, and when gold moves to $1,692, we’ll automatically open long positions in the miners. Since gold moved below $1,690, that’s exactly what happened.

Yesterday (Mar. 4), gold futures were trading below $1,692 for about 10 minutes, so if you acted as I had outlined it in the Gold & Silver Trading Alerts, you made your purchases then. The GDX ETF was trading approximately between $30.80 and $31 (NUGT was approximately between $49.30 and $50) at that time – this seems to have been the exact daily bottom.

One of the bullish confirmations came from the silver market .

Chart, histogramDescription automatically generated

Figure 2 – COMEX Silver Futures

I previously wrote that silver is likely to catch up with the decline at its later stage, while miners are likely to lead the way.

While gold miners showed strength yesterday, silver plunged over 4% before correcting part of the move. Yesterday’s relative action showed that this was most likely the final part of a short-term decline in the precious metals sector, and that we should now expect a corrective rebound, before the medium-term decline resumes. If not, it seems that the short-term bottom is at hand and while silver might still decline somewhat in the very short term, any declines are not likely to be significant in case of the mining stocks. At least not until they correct the recent decline by rallying back up.

Speaking of mining stocks, let’s take a look at the GDX ETF chart.

ChartDescription automatically generated

Figure 3 – VanEck Vectors Gold Miners ETF (GDX)

Mining stocks showed strength yesterday. Even though gold moved visibly to new yearly lows, the GDX didn’t move to new intraday lows. The GDXJ did move to new intraday lows, but the decline was relatively small compared to what happened in gold and to what happened on the general stock market. The latter declined substantially yesterday and the GDXJ is more correlated with it than GDX – hence GDXJ’s underperformance was normal. Still, compared to both gold’s decline and stocks’ decline, the GDXJ and GDX declined very little.

The price level at which miners showed strength matters greatly too. Miners stopped their decline practically right in my target area, which I based on the 50% Fibonacci retracement and the 2020 highs and lows. Moreover, the proximity of the $31 level corresponds to the 2019 high and the 2016 high. Since so many support levels coincide at the same price (approximately), the latter is likely to be a very strong support.

Moreover, the RSI was just close to 30, which corresponded to short-term buying opportunities quite a few times in the past.

How high are miners likely to rally from here before turning south once again? The nearest strong resistance is provided by the neck level of the previously broken head and shoulders pattern, which is slightly above $34.

Also, let’s keep in mind the mirror similarity in case of the price action that preceded the H&S pattern and the one that followed it. To be precise, we know that the second half of the pattern was similar to its first half (including the shape of pattern’s shoulders), but it’s not yet very clear if the follow-up action after the pattern is going to be similar to the preceding price action. It seems quite likely, though. If this is indeed the case, then the price moves that I marked using green and purple lines are likely to be at least somewhat similar.

This means that just as the late-April 2020 rally was preceded by a counter-trend decline, the recent decline would likely be followed by a counter-trend rally. Based on the size of the April counter-trend move, it seems that we could indeed see a counter-trend rally to about $34 this time.

There’s also an additional clue that might help you time the next short-term top, and it’s the simple observation that it was relatively safe to exit one’s long positions five trading days after the bottom.

That rule marked the exact bottom in November 2020, but it was also quite useful in early February 2021. In early December 2020, it would take one out of the market only after the very first part of the upswing, but still, let’s keep in mind that it was the “easy” part of the rally. The same with the October 2020 rally. And now, since miners are after a confirmed breakdown below the broad head and shoulders pattern, it’s particularly important not to miss the moment to get back on the short side of the market, as the next move lower is likely to be substantial. Therefore, aiming to catch the “easy” part of the corrective rally seems appropriate.

So, if the bottom was formed yesterday, then we can expect to take profits from the current long position off the table close to the end of next week.

Finally, let’s take a look at the USD Index.

Graphical user interface, chartDescription automatically generated

Figure 4 – USD Index

While the medium-term breakout continues to be the most important technical development visible on the above chart (with important bullish implications for the following months), there is one factor that could make the USD Index decline on a temporary basis.

This factor is the similarity to the mid-2020 price pattern. I previously commented on the head and shoulders pattern that had formed (necklines are marked with dashed lines), but that I didn’t trust. Indeed, this formation was invalidated, but a bigger pattern, of which this formation was part, wasn’t invalidated.

The patterns start with a broad bottom and an initial rally. Then it turns out that the initial rally is the head of a head-and-shoulders pattern that is then completed and invalidated. This is followed by a sharp rally, and then a reversal with a sizable daily decline.

So far, the situations are similar.

Last year, this pattern was followed by a decline to new lows. Now, based on the breakout above the rising medium-term support line, such a bearish outcome doesn’t seem likely, but we might see the pattern continue for several more days, before they disconnect. After all, this time, the USD Index is likely to really rally – similarly to how it soared in 2018 – and not move to new lows.

What happens before the patterns disconnect? The USD Index could decline temporarily.

Back in November 2020, the second top was below the initial one, and we just saw the USD Index move to new yearly high. Did the self-similar pattern break yet? In a way yes, but it doesn’t mean that the bearish implications are completely gone.

In mid-2020, the USD Index topped after moving to the previous important intraday low – I marked it with a horizontal line on the above chart.

Right now, the analogous resistance is provided by the September 2020 bottom and at the moment of writing these words, the USD Index moved right to this level.

Consequently, it could be the case that we see a decline partially based on the above-mentioned resistance and partially based on the remaining self-similar pattern. The latter would be likely to lose its meaning over the next several days and would be decisively broken once the USD Index rallies later in March. The above would create a perfect opportunity for the precious metals sector to correct the recent decline – and for miners (GDX ETF) to rally to $34 or so.

Please note that if gold rallies here – and it’s likely to – then this will be the “perfect” time for the gold and stock market permabulls to “claim victory” and state that the decline is over and that they were right about the rally all along. Please be careful when reading such analyses in the following days, especially if they come from people that have always been bullish. If someone is always bullish, the odds are that they won’t tell you when the next top is going to be (after all, this would imply that they stop being bullish for a while).

Just because anyone can publish an article online, doesn’t mean that they should, or that others should follow their analyses. The internet is now replete people who claim to have expertise in the markets, and we all saw what happened to the profits of those who bought GameStop at $300. It’s the same thing that happened to the profits of those who were told since the beginning of this year that gold is going to rally – they turned into losses. What we see as well are internet echo chambers, where you are more likely to only read articles that express what you already agree with, instead of being exposed to differing viewpoints that shed light on other critical factors.

Gold is likely to rally from here, but it’s highly unlikely that this was the final bottom, and that gold can now soar to new highs. No. The rally in the USD Index has only begun and while it could pull back, it’s likely to soar once again, similarly to how it rallied in 2018. And gold is likely to respond with another substantial wave lower. This doesn’t mean we’re permabears either or that we want to see gold fail. On the contrary, gold has a bright future ahead, but not before it goes through a medium-term decline after this corrective rally is over.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

So, Where Is the Corrective Upswing?

Gold & silver reversed yesterday (Mar. 2) and the GDX rallied after bottoming right in my previous target area, but it’s still unclear if the bottom is in.

Let’s check what’s happening in the charts.

Chart, line chartDescription automatically generated

Figure 1 – COMEX Gold Futures (GC.F)

In short, gold reversed yesterday after touching the upper border or my target area. Can the temporary bottom be in? Yes. Is it likely to be in? Not necessarily. Most likely it’s not in yet, because gold still hasn’t moved to its strong support levels.

The size of the first part of the move sometimes tends to be identical or near-identical to the size of the final move. The size of the initial, August decline was almost just like the November decline. Now, copying the January 2021 decline to the current situation (blue, dashed lines), provides us with the target at about $1,675.

The above price area coincides with the previous 2020 lows, and it’s also slightly below the 61.8% Fibonacci retracement based on the entire 2020 upswing. Gold would be likely to at least reach this retracement before forming the temporary bottom.

Consequently, it would not be surprising to see gold suffering another ~$50 decline before finding a short-term bottom. More importantly though, if the initial move lower coincides with an S&P 500 correction, it would be likely to push mining stocks and silver lower in a more visible way.

On the bullish front, the shape of yesterday’s candlestick does indeed look like an intraday reversal. And we saw the same kind of intraday reversal in silver.

Chart, histogramDescription automatically generated

Figure 2 – COMEX Silver Futures

The fact that silver’s triangle-vertex-based reversal is approximately today / was approximately yesterday (it’s unclear) further validates the scenario, in which precious metals move higher in the short term.

I previously wrote that silver is likely to catch up with the decline at its later stage, while miners are likely to lead the way. That’s exactly what we’ve been seeing in the last few months. Silver is still likely to catch up with the declines when silver investors panic – just as they tend to do close to the end of given price moves (selling close to the bottom and buying close to the top). So far, miners remain the asset of choice for trading, but sometime during the next downswing, we might move to silver in order to magnify gains from both declines. As a reminder, please consider what happened on March 13 and March 16, 2020 and consider that the GDX ETF bottomed (in terms of the daily closing prices) on March 13. That was when silver was only in the middle of its decline.

Speaking of mining stocks, let’s take a look at the GDX ETF chart.

ChartDescription automatically generated

Figure 3 – VanEck Vectors Gold Miners ETF (GDX)

The GDX moved higher shortly after we successfully exited our short positions, relatively close to the bottom. But is this rally about to take miners much higher before they turn south once again? It’s unclear at this time.

It could be the case that we see an immediate move lower once again as gold declines to $1,675 or so, but it could also be the case that miners correct to $33 – $34 now, and then move to new lows later.

All in all, it seems that we are already seeing the corrective upswing, or one is about to start after another very short-term downswing. Once this corrective upswing is over, the downtrend is likely to resume.

Why would this be the case? There are myriads of reasons and I’m going over most of them each week in my flagship Gold & Silver Trading Alerts , but to name just a few, it’s gold’s invalidation of the breakout above its 2011 high, despite having an extremely positive fundamental picture, gold’s weak performance relative to the USD Index, miners’ relatively weak performance compared to gold, and the medium-term breakout in the USDX.

And speaking of the USD Index, let’s take a look at its chart.

ChartDescription automatically generated

Figure 4

While the medium-term breakout continues to be the most important technical development visible on the above chart (with important bullish implications for the following months), there is one factor that could make the USD Index decline on a temporary basis.

This factor is the similarity to the mid-2020 price pattern. I previously commented on the head and shoulders pattern that had formed (necklines are marked with dashed lines), but that I didn’t trust. Indeed, this formation was invalidated, but a bigger pattern, of which this formation was part, wasn’t invalidated.

The patterns start with a broad bottom and an initial rally. Then it turns out that the initial rally is the head of a head-and-shoulders pattern that is then completed and invalidated. This is followed by a sharp rally, and then a reversal with a sizable daily decline.

So far, the situations are similar.

Last year, this pattern was followed by a decline to new lows. Now, based on the breakout above the rising medium-term support line, such a bearish outcome doesn’t seem likely, but we might see the pattern continue for several more days, before they disconnect. After all, this time, the USD Index is likely to really rally – similarly to how it soared in 2018 – and not move to new lows.

What happens before the patterns disconnect? The USD Index could decline temporarily.

This means that the temporary bottom in the precious metals and miners could have already formed, but it’s far from being crystal-clear.

All in all, markets tend to reverse only after reaching important support or resistance levels, which means that PMs and miners might still move lower before their short-term corrective upswing, but it could also be the case that the latter is already underway. Depending on how many confirmations we get of the bullish outlook, it might or might not be a good idea to enter temporary long positions here. After all, the medium-term downtrend started in August 2020 and it remains intact – thus, quick long positions are against the trend and thus riskier.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

After Gold’s Slide, What Happens to Miners?

After gold came down hard last week, it might be in a for a short pause and corrective upswing. What will the yellow metal’s next chapter bring for the miners? How high can they go if gold rallies from here?

As gold recently moved very close to my approximate target of $1,700, the senior miners (GDX) ended Friday’s (Feb. 26) session $0.13 above my initial downside target of $31 . And while an eventual flush to the $23 to $24 range (or lower) remains on the table, a corrective upswing could be next in line.

To explain, if gold can bounce off of the $1,670 to $1,700 range, the GDX ETF will likely follow suit. Thus, while the miners are likely to move drastically lower over the medium-term, a decline of nearly 11% over the last two weeks has given way to short-term oversold conditions.

Please see below:

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Figure 1

Even more precise, if you analyze the chart below, you can see that the GDX ETF has garnered historical support at roughly $29.52. Moreover, the level also coincides with the early-March high, the mid-April low and the 61.8% Fibonacci retracement level. As a result, a corrective upswing to ~$33/$34 could be the miners’ next move.

Please see below:

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Figure 2 – VanEck Vectors Gold Miners ETF (GDX), GDX and Slow Stochastic Oscillator Chart Comparison – 2020

Remember though, if gold does bounce off of the $1,670 to $1,700 range, and the miners are able to ride the momentum higher, ~$33 to ~$34 is where the rally likely ends. From there, the bearish medium-term trend will likely continue, with the miners declining to my secondary target range of $23 to $24.

From a medium-term perspective, the potential head and shoulders pattern – highlighted by the shaded green boxes above – also deserves plenty of attention.

Ever since the mid-September breakdown below the 50-day moving average , the GDX ETF was unable to trigger a substantial and lasting move above this MA. The times when the GDX was able to move above it were also the times when the biggest short-term declines started.

Looking at the chart above, the most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder ( figure 26 – both marked with green) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.

Due to the uncanny similarity between the two green rectangles, I decided to check what happens if this mirror-similarity continues. I used purple, dashed lines for that. There were two important short-term price swings in April 2020 – one shows the size of the correction and one is a near-vertical move higher.

Copying these price moves (purple lines) to the current situation, we get a scenario in which GDX (mining stocks) moves to about $31 and then comes back up to about $34. This would be in perfect tune with what I wrote previously. After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.

This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, the day of reckoning for stocks is coming . And it might be very, very close.

As I explained previously, based on the similarities to the 1929 and 2008 declines, it could be the case that the precious metals sector declines for about 3 months after the general stock market tops. And it seems that we won’t have to wait long for the latter. Perhaps the next big move lower in stocks is already underway.

In conclusion, the sun may be about to shine on the precious metals, even if the upcoming rally is not yet destined to last. If the yellow metal can rally off of the $1,670 to $1,700 range, the miners have a pathway to ~$33/$34. Supporting a short-term bounce, abnormally high short interest in U.S. Treasuries could be a contrarian indicator , with a temporary calming of the priors weeks’ yield surge adding fuel to the PMs’ fire. If so, the favorable backdrop could support a temporary bounce before gold and the miners resume their medium-term downtrends.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Does Gold Have a Green Light to $1700?

It’s really hard to get a more bearish combination of factors for gold than what we just saw.

A good way to start the discussion would be to reply to a question that I received about the USD Index recently.

“Hi, I have been reading your articles about the USD bottoming and moving in a similar pattern to 2018. I am seeing a possible head and shoulder pattern on Jan 18th (left shoulder), Feb 5 th (the head), and Feb 17th (right shoulder). For all its problems, the euro seems to be going higher and higher. Just wondering what your thoughts are.”

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Figure 1

Indeed, the head-and-shoulders pattern formed as you described it (I added a dotted neckline to the formation on the above chart), but since it wasn’t as significant as the breakout above the declining medium-term resistance line, the implications of the latter overwhelmed the bearish implications of the H&S formation. The USD index invalidated the breakdown below the neck level of the formation, so what was previously a sell signal, has now turned into a buy signal. Consequently, we have yet another reason to expect higher values of the USD Index in the following weeks and months.

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Figure 2

Based on the obvious similarity to early 2018, the verification of the breakdown is likely the final step before a major rally in the USDX. This will likely translate into lower precious metals and mining stock prices, especially if the general stock market declines as well.

Let’s use another question that I received to segue to the following part of the analysis.

What happens to gold if the dollar crashes, instead of going up?

That’s just what happened early during the day, yesterday (Feb. 25). Well, it was just intraday action rather than a big medium-term crash, however, it shows what could happen. Simply put, gold declined anyway. Why did it do so? Because it wanted to do so based on technical/emotional factors. Maybe that was just a temporary reversion in direction? No – when the USD Index came back up, gold declined even more, and we see the continuation of this pattern today as well.

What if the USD Index declines much more? The last time when gold was trading at these levels in 2020, the USD Index was trading at about 100. The latter declined about 10 index points and gold is at the same level. So, gold has already proven its ability to ignore the USD’s declines. There will be a time, when gold soars in response to even mild declines in the USDX, but this is likely to happen only after gold declines significantly – and it “wants” to rally.

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Figure 3

In previous analyses , I commented on the above chart in the following way:

“The move higher in gold was notable, but nothing game changing. The last time gold moved above the declining short-term resistance line, was when it actually topped. The invalidation of the breakdown marked the start of another very short-term decline. The small decline in today’s overnight trading might be the very beginning of this invalidation that leads to another slide.”

That’s exactly what happened. The failed breakout led to another slide and gold is currently right after its breakdown to new 2021 lows. The road to ~$1,700 gold is now fully open. That’s when gold would be likely to take some sort of breather and gather strength (well, weakness, but “gathering weakness” just doesn’t sound right) for another wave down – likely to $1,500 or so.

Please note that gold didn’t close at new yearly lows yesterday. This observation is important in comparison with the fact that…

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Figure 4

Mining stocks did.

Miners closed at new 2021 lows yesterday, even though gold didn’t, which once again proves their weakness and once again confirms the bearish outlook.

I previously wrote that gold’s ~$1,700 target is likely to be aligned with the GDX’s ~$31 target and this remains up-to-date. After that, I expect some kind of corrective upswing – perhaps to $33 or so, and then another – big – move lower. Please note that the corrective upswing would be yet another (and final) verification of the head and shoulders pattern, and its very bearish implications would take place only after this verification. That’s why I expect the decline to be particularly significant.

Silver just went through a triangle-vertex-based reversal , and it seems to have indeed triggered a reversal.

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Figure 5

Silver moved a bit higher on Wednesday (Feb. 24) and in yesterday’s early trading, but it didn’t exceed the recent high. This means that my previous comments on the above chart remain up-to-date:

“The move lower is not yet super significant, but given the reversal point, it could just be the beginning. Remember the triangle-vertex-based reversal at the beginning of the year? Back then, practically nobody wanted to believe that silver and the precious metals market was topping at that time. It was the truth, though. Gold and mining stocks were never higher since that time and the same thing would have most likely happened to silver if it wasn’t the #silversqueeze popularity that gave it its most recent boost.

Now, there’s also another triangle-vertex-based-reversal in a few days , and since these reversals tend to work on a near-to basis, silver might top any day now, even if it hasn’t topped earlier today.

Based on what’s happening in the markets right now, it seems just as possible that silver and the rest of the precious metals market will form a temporary bottom within the next few days.

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Figure 6

Moreover, please note that it’s the last delivery day for silver futures, and instead of a supply-crunch-based rally, we see a decline. Naturally, this is bearish.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

For a look at all of today’s economic events, check out our economic calendar.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

How Bond Yields Are Affecting Gold

After Monday’s (Feb. 22) supposedly “groundbreaking” rally, the situation in gold developed in tune with what I wrote yesterday . The rally stopped, and miners’ decline indicated that it was a counter-trend move.

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Figure 1

Despite Monday’s (quite sharp for a daily move) upswing, the breakdown below the neck level of the broad head-and-shoulders remains intact. It wasn’t invalidated. In fact, based on Monday’s rally and yesterday’s (Feb. 23) decline, it was verified. One of the trading guidelines is to wait for the verification of the breakdown below the H&S pattern before entering a position.

What about gold stocks ratio with other stocks?

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Figure 2

It’s exactly the same thing. The breakdown below the rising long-term support line remains intact. The recent upswing was just a quick comeback to the broken line that didn’t take it above it. Conversely, the HUI to S&P 500 ratio declined once again.

Consequently, bearish implications of the breakdowns remain up-to-date . Having said that, let’s consider the more fundamental side of things.

Swimming Against the Current

After trading lower for six consecutive days, gold managed to muster a three-day winning streak. However, with the waves chopping and the ripple gaining steam, every swim higher requires more energy and yield’s decelerating results.

For weeks , I’ve been warning that a declining copper/U.S. 10-Year Treasury yield ratio signaled a further downside for gold. And with the ratio declining by 2.88% last week, gold suffered a 2.51% drawdown.

Please see below:

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Figure 3

Over the long-term, the ratio is a reliable predictor of the yellow metal’s future direction. And even though the weekly reading (3.04) hit its lowest level since May 2020, it still has plenty of room to move lower.

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Figure 4

For context, I wrote previously:

“To explain the chart above, the red line depicts the price of gold over the last ~21 years, while the green line depicts the copper/U.S. 10-Year Treasury yield ratio. As you can see, the two have a tight relationship: when the copper/U.S. 10-Year Treasury yield ratio is rising (meaning that copper prices are rising at a faster pace than the U.S. 10-Year Treasury yield), it usually results in higher gold prices. Conversely, when the copper/U.S. 10-Year Treasury yield ratio is falling (meaning that the U.S. 10-Year Treasury yield is rising at a faster pace than copper prices), it usually results in lower gold prices.”

As the star of the ratio’s show, the U.S. 10-Year Treasury yield has risen by more than 47% year-to-date (YTD) and the benchmark has surged by more than 163% since its August trough.

Please see below:

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Figure 5

On Jan. 15 , I warned that the U.S. Federal Reserve (FED) had painted itself into a corner. With inflation running hot and Chairman Jerome Powell ignoring the obvious, I wrote that Powell’s own polices (and their impact on real and financial assets) actually eliminate his ability to determine when interest rates rise.

As a result, the central bank had two options:

  1. If they let yields rise, the cost of borrowing rises, the cost of equity rises and the U.S. dollar is supported (all leading to shifts in the bond and stock markets and destroying the halcyon environment they worked so hard to create).
  2. To stop yields from rising, the U.S. Federal Reserve (FED) has to increase its asset purchases (and buy more bonds in the open market). However, the added liquidity should have the same net-effect because it increases inflation expectations (which I mentioned yesterday, is a precursor to higher interest rates).

Opening door #2, Powell’s deny-and-suppress strategy is now playing out in real time. On Feb. 23 – testifying before the U.S. Senate Banking Committee – the FED Chairman told lawmakers that inflation isn’t an issue.

“We’ve been living in a world for a quarter of a century where the pressures were disinflationary,” he said…. “The economy is a long way from our employment and inflation goals.”

And whether he’s unaware or simply ill-informed, commodity prices are surging. Since the New Year, oil and lumber prices have risen by more than 24%, while corn and copper prices are up by more than 14%.

Please see below:

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Figure 6

In addition, relative to finished goods, the entire basket of inputs is sounding the alarm.

Chart, histogramDescription automatically generated

Figure 7

To explain the chart above, the blue line is an index of the price businesses receive for their finished goods. Similarly, the green line is an index of the price businesses pay for raw materials. As you can see, the cost of doing business is rising at a torrent pace.

More importantly though, Powell’s assertion that inflation is an urban legend has been met with eye rolls from the bond market . To repeat what I wrote above: Powell’s own policies (and their impact on real and financial assets) actually eliminate his ability to determine when interest rates rise.

Case in point: the U.S. 10-year to 2-year government bond spread is now at its highest level since January 2017.

Please see below:

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Figure 8

To explain the significance, the figure is calculated by subtracting the U.S. 2-Year Treasury yield from the U.S. 10-Year Treasury yield. When the green line is rising, it means that the U.S. 10-Year Treasury yield is increasing at a faster pace than the U.S. 2-Year Treasury yield. Conversely, when the green line is falling, it means that the U.S. 2-Year Treasury yield is increasing at a faster pace than the U.S. 10-Year Treasury yield.

And why does all of this matter?

Because the above visual is evidence that Powell has lost control of the bond market.

At the front-end of the curve, Powell can control the 2-year yield by decreasing the FED’s overnight lending rate (which was cut to zero at the outset of the coronavirus crisis). However, far from being monolithic, the 5-, 10-, and 30-year yields have the ability to chart their own paths.

And their current message to the Chairman? “We aren’t buying what you’re selling.” As such, the yield curve is likely to continue its steepening stampede.

Circling back to gold, all of the above supports a continued decline of the copper/U.S. 10-Year Treasury yield ratio. With yields essentially released from captivity, even copper’s 8.02% weekly surge wasn’t enough to buck the trend.

As a result, gold’s recent strength is likely a mirage. The yellow metal continues to bounce in fits and starts, thus, it’s only a matter of time before the downtrend continues. Furthermore, with the USD Index still sitting on the sidelines, a resurgent greenback would add even more concrete to gold’s wall of worry.

And speaking of gold’s wall of worry, the sentiment surrounding it is far from being negative.

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Figure 9 – Source: Investing.com

The above chart shows the sentiment of Investing.com’s members. 64% of them are bullish on gold. As you can see above, there are also other popular markets listed: the S&P 500, Dow Jones, DAX, EUR/USD, GBP/USD, USD Index, and Crude oil. The sentiment for gold is the most bullish of all of them. Yes, the general stock market is climbing to new all-time highs every day now, and yet, people are even more bullish on gold than they are on stocks.

When gold slides, the sentiment is likely to get more bearish and particularly high “bearish” readings – say, over 80% would likely indicate a good buying opportunity. Naturally, this is not the only factor that one should be paying attention to.

The bottom line? As it stands today, being long the precious metals offers a poor risk-reward proposition. However, in time (perhaps over the next several months), the dynamic will reverse, and the precious metals market will shine once again.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 

Gold’s Downtrend: Is This Just the Beginning?

Gold and mining stocks just broke to new yearly lows – as I warned you in my previous analyses. And that’s only the beginning.

Let’s jump right into the charts, starting with gold.

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In early February, gold broke below the rising red support line and it then verified it by rallying back to it and then declining once again. It topped almost exactly right at its triangle-vertex-based reversal, which was yet another time when this technique proved to be very useful.

Gold has just closed not only at new yearly lows, but also below the late-November lows (in terms of the closing prices, there was no breakdown in intraday terms). This means that yesterday’s (Feb. 17) closing price was the lowest daily close since late June 2020. At the moment of writing these words, gold is also trading below the April 2020 intraday high.

Gold was likely to slide based on myriads of technical and cyclical factors, while the fundamental factors remain very positive – especially considering that we are about to enter the Kondratiev winter, or we are already there. As a reminder, Kondratiev cycles are one of the longest cycles and the stages of the cycle take names after seasons. “Winter” tends to start with a stock market top that is caused by excessive credit. In this stage gold is likely to perform exceptionally well… But not right at its start. Even the aftermath of the 1929 top (“Winter” started then as well), gold stocks declined for about 3 months before soaring. In the first part of the cycle, cash is likely to be king. And it seems that the performance of the USD Index is already telling investors to buckle up.

And speaking of stocks, what about mining stocks? As you might already well know, just as with gold, the miners moved below the November lows in terms of both the intraday prices and daily closing prices. What does that mean? If you’d like to explore mining stocks in detail and are curious to know more about their prices and possible exit levels, then our full version of the analyses contains exactly what you need to know.

Getting back to gold…

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If the fact that gold invalidated its breakout above its 2011 high, despite the ridiculously positive fundamental situation, doesn’t convince you that gold does not really “want” to move higher before declining profoundly first, then the above chart might.

As I wrote above, gold is currently more or less when it was trading at the April 2020 top. Where was the USD Index trading back then? It was moving back and forth around the 100 level.

100!

The USD Index closed a little below 91, and gold is at the same price level! That’s a massive 9 index-point decline in the USDX that gold shrugged off just like that.

There’s no way that gold could “ignore” this kind of movement and be “strong” at the same time. No. It’s been very weak in the previous months, which is a strong sign (not a fundamental one, but a critical one nonetheless) that gold is going to move much lower once the USD Index finally rallies back up.

Right now, waiting for gold to rally is like waiting for the light to turn green, arguing that eventually it has to turn green, while not realizing that the light is broken (gold just didn’t rally despite the huge decline in the USDX). Yes, someone will fix it and eventually it will turn green, but it doesn’t mean that it makes much sense to wait for that to happen, instead of looking around and crossing the street if it’s safe to do so.

Yes, gold is likely to rally to new highs in the coming years. And silver is likely to skyrocket. But in light of just two of the above-mentioned factors (gold’s extreme underperformance relative to the USD Index and the invalidation of a critical breakdown) doesn’t it make sense not to purchase gold right now (except for the insurance capital that is) in order to buy it after several weeks / few months when it’s likely to be trading at much lower levels?

We live in very specific times. Getting a “like” on a post or picture becomes a necessary daily activity and means of self-validation. Not “liking” something that others posted or that is massively “liked” may be frowned upon or even viewed as being disrespectful. Plus, it seems that no matter what you do, everyone gets offended very easily. When did honesty, independence and common-sense stop being virtues?

When it comes to gold investment analysis, it’s surprisingly similar. You either like gold and think that it’s going higher right away or you’re “one of them”. “Them” can be anyone who tries to manipulate gold or silver prices, “banksters”, or some kind of unknown enemy. “ Analysts’ ” goal is often no longer to be as objective as possible and to provide as good and as unbiased an analysis as possible, but to simply be cheering for gold and provide as many bullish signals as possible regardless of what one really thinks about them. The above may seem pleasant to readers, but it’s not really in their best interest. In order to make the most of any upswing, it’s best to enter the market as low as possible and to exit relatively close to the top. What happens before a price is as low as possible? It declines. Why would something like that (along with those describing it) be hated by gold investors? It makes no sense, but yet, it’s often the case.

The discussion – above and below – can be viewed as something positive or negative for any investor, but while reading it, please keep in mind that our goal is the same as yours – we want to help investors make the most of their precious metals investments. Call us old-fashioned, but regardless of how unpleasant it may seem, we’ll continue to adhere to honesty, independence and common-sense in all our analyses

Ok, but why on Earth would the USD Index rally back up? The Fed is printing so much dollars – why would they be worth more?!

Because the currencies are valued with relation to each other and whether or not the USD Index moves higher or lower doesn’t depend only on what the Fed is doing.

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What other monetary authorities do matters as well and right now the ECB is outprinting the Fed (that’s what the decline in the green line above means), which means that the euro is likely to fall more than the U.S. dollar. Therefore, the EUR/USD currency exchange rate would be likely to decline and since this exchange rate is the biggest (over 50%) component of the USD Index, it makes perfect sense – from the fundamental point of view – to expect the USD Index to move higher.

Can gold rally despite higher USD Index values? Absolutely. However, it would first have to start to behave “normally” relative to the USD Index, and before that happens it would have to stop being extremely weak relative to it. And the fact that gold is at the same price level despite a 9-index-point decline in the USDX is extreme weakness.

To make the technical discussion easier, I’m attaching the previous chart once again.

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On Monday (Feb. 15), I wrote the following about the above chart:

The size and shape of the 2017-2018 analogue continues to mirror the current price action . However, today, it’s taken 118 less days for the USD Index to move from peak to trough.

Also, it took 82 days for the USDX to bottom in 2017-2018 (the number of days between the initial bottom and the final bottom) and the number amounts to 21.19% of the overall duration. If we apply a similar timeframe to today’s move, it implies that a final bottom may have formed on Feb. 12. As a result, the USDX’s long-term upswing could begin as soon as this week.

Also noteworthy, as the USDX approached its final bottom in 2017-2018, gold traded sideways. Today, however, gold is already in a downtrend. From a medium-term perspective, the yellow metal’s behavior is actually more bearish than it was in 2017-2018.

Also supporting the historical analogue, the USD Index’s current breakout above its 50-day moving average is exactly what added gasoline to the USDX’s 2018 fire. Case in point? After the 2018 breakout, the USDX surged back to its previous high. Today, that level is roughly 94.5.

Based on this week’s rally it seems that the final bottom formed on Tuesday (Feb. 16) – just 2 trading days away from the analogy-based target, and in perfect tune with what I wrote back then. The breakout above both: the declining blue line, and the 50-day moving average was verified, and the short-term outlook here is clearly bullish.

But isn’t the current situation similar to what happened in mid-2020? The correction that was followed by another decline?

In a way, it is. In both cases, the USD Index moved higher after a big decline, but that’s about it as far as important similarities are concerned.

What is different is the entire context. Even a single look at the above chart provides an instant answer. The mid-2020 correction was like the mid-2017 correction, and what we see right now is the post-bottom breakout, just as we saw in the first half of 2018.

There are multiple details on the above chart that confirm it, including the sizes of the medium-term declines, the position of the price relative to the declining support/resistance lines, as well as relative to the 50-day moving average, and even the green arrows in the RSI indicator show how similar the preceding action was in case of this indicator. The vertical dashed line shows “where we are right now” in case of the analogy.

Also, the fact that the general stock market has not yet declined in any substantial way only makes the short-term outlook worse (particularly for silver and miners). When stocks do slide, they would be likely to impact the prices of miners and silver particularly strongly.

And please remember, we’re looking for the bottom in the precious metals sector not because we’re the enemy of gold or the precious metals investor . On the contrary, we’re that true friend that tells you if something’s not right, even if it may be unpleasant to hear. We want to buy more and at better prices close to the bottom, and we’ll continue to strive to assist you with that as well.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care


All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Here’s What’s Eating Away at Gold

Catching unsuspecting traders in yet another bull trap , gold’s early-week strength quickly faded. And with investors unwilling to vouch for the yellow metal for more than a few days, the rush-to-exit mentality highlights a short-term vexation that’s unlikely to subside.

Please see below:

Graphical user interface, line chartDescription automatically generated

Destined for devaluation after hitting its triangle-vertex-based reversal point (which I warned about previously ), the yellow metal is struggling to climb the ever-growing wall of worry.

Mirroring what we saw at the beginning of the New Year, gold’s triangle-vertex-based reversal point remains a reliable indicator of trend exhaustion.

And when you add the bearish cocktail of rising U.S. interest rates and a potential USD Index surge, $1,700 remains the initial downside target , with $1,500 to even ~$1,350 still possibilities under the right curcumstances.

Please see below:

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Gold Continuous Contract Overview and Slow Stochastic Oscillator Chart Comparison

To explain the rationale, I wrote previously:

Back in November, gold’s second decline (second half of the month) was a bit bigger than the initial (first half of the month) slide that was much sharper. The January performance is very similar so far, with the difference being that this month, the initial decline that we saw in the early part of the month was bigger.

This means that if the shape of the price moves continues to be similar, the next short-term move lower could be bigger than what we saw so far in January and bigger than the decline that we saw in the second half of November. This is yet another factor that points to the proximity of $1,700 as the next downside target.

In addition, as a steepening U.S. yield curve enters the equation, I wrote on Jan. 27 that the bottom, and subsequent move higher, in U.S. Treasury yields coincided with a USDX rally 80% of the time since 2003.

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Source: Daniel Lacalle

And while the USDX continues to fight historical precedent, on Feb. 12, the U.S. 30-Year Treasury yield closed at its highest level in nearly a year. As such, the move should add wind to the USDX’s sails in the coming weeks.

Please see below:

Graphical user interface, chart, application, ExcelDescription automatically generated

In conclusion, gold is under fire from all angles and dodging bullets has become a near impossible task. With the USD Index likely to bounce off its declining resistance line (now support), a bottom in the greenback could be imminent. Also ominous, a steepening U.S. yield curve signals that the yellow metals’ best days are likely in the rearview. However, as the situation evolves and gold eventually demonstrates continued strength versus the USD Index, its long-term uptrend will resume once again.

Before moving on, I want to reiterate my previous comments and explain why $1,700 remains my initial target:

One of the reasons is the 61.8% Fibonacci retracement based on the recent 2020 rally, and the other is the 1.618 extension of the initial decline. However, there are also more long-term-oriented indications that gold is about to move to $1,700 or lower.

(…) gold recently failed to move above its previous long-term (2011) high. Since history tends to repeat itself, it’s only natural to expect gold to behave as it did during its previous attempt to break above its major long-term high.

And the only similar case is from late 1978 when gold rallied above the previous 1974 high. Let’s take a look at the chart below for details (courtesy of chartsrus.com)

ChartDescription automatically generated
Gold rallying in 1978, past its 1974 high

As you can see above, in late 1978, gold declined severely right after it moved above the late-1974 high. This time, gold invalidated the breakout, which makes the subsequent decline more likely. And how far did gold decline back in 1978? It declined by about $50, which is about 20% of the starting price. If gold was to drop 20% from its 2020 high, it would slide from $2,089 to about $1,671 .

Chart, histogramDescription automatically generated
Relative Strength Index (RSI), GOLD, and Moving Average Convergence Divergence (MACD) Comparison

If you analyze the red arrow in the lower part of the above chart (the weekly MACD sell signal), today’s pattern is similar not only to what we saw in 2011, but also to what we witnessed in 2008. Thus, if similar events unfold – with the S&P 500 falling and the USD Index rising (both seem likely for the following months, even if these moves don’t start right away) – the yellow metal could plunge to below $1,350 or so. The green dashed line shows what would happen gold price, if it was not decline as much as it did in 2008.

However, as of right now, my initial target is $1,700, with $1,500 likely over the medium-term. But as mentioned, if the S&P 500 and the USD Index add ripples to the bearish current, $1,400 (or even ~$1,350) could occur amid the perfect storm. ~$1,500 still remains the most likely downside target for the final bottom, though.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the targets for gold and mining stocks that could be reached in the next few weeks. If you’d like to read those premium details, we have good news for you. As soon as you sign up for our free gold newsletter, you’ll get a free 7-day no-obligation trial access to our premium Gold & Silver Trading Alerts. It’s really free – sign up today.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & Care


All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.