Gold Miners: Last of the Summer Wine

With Fed Chairman Jerome Powell sticking to his dovish guns and U.S. nonfarm payrolls elongating the central bank’s perceived taper timeline, gold, silver, and mining stocks were extremely happy campers. However, with event-driven rallies much more semblance than substance, I warned on Sep. 7 that the rollercoaster of emotions would likely end in tears.

I wrote:

With the 2013 analogue leading the gold miners down an ominous path, the HUI Index and the GDX ETF have rallied by roughly 8% off their recent lows. However, identical developments occurred in 2013, and neither bout of optimism invalided their bearish medium-term outlooks.

And after the GDX ETF and the GDXJ ETF (our profitable short position) plunged by 5.35% and 6.98% respectively last week, summertime sadness confronted the precious metals. Likewise, with more melancholy moves likely to materialize over the medium term, gold, silver, and mining stocks should hit lower lows during the autumn months.

To explain, the HUI Index also plunged by nearly 6% last week, and the reversal of the previous corrective upswing mirrors its behavior from 2013. In addition, with its stochastic oscillator and its RSI (Relative Strength Index) also a spitting image, an ominous re-enactment of 2013 implies significantly lower prices over the medium term.

Please see below:

ChartDescription automatically generated with medium confidence

What’s more, the vertical, dashed lines above demonstrate how the HUI Index is following its 2012-2013 playbook. For example, after a slight buy signal from the stochastic indicator in 2012, the short-term pause was followed by another sharp drawdown. For context, after the HUI Index recorded a short-term buy signal in late 2012 – when the index’s stochastic indicator was already below the 20 level (around 10) and the index was in the process of forming the right shoulder of a huge, medium-term head-and-shoulders pattern – the index moved slightly higher, consolidated, and then fell off a cliff.

Thus, the HUI Index is quite likely to decline to its 200-week moving average (or so) before pausing and recording a corrective upswing. That’s close to the 220 level. Thereafter, the index will likely continue its bearish journey and record a final medium-term low some time in December.

Furthermore, I warned previously that the miners’ drastic underperformance of gold was an extremely bearish sign. There were several weeks when gold rallied visibly and the HUI Index actually declined modestly. And now, gold stocks are trading close to their previous 2021 lows, while gold is almost right in the middle between its yearly high and its yearly low.

And why is this so important? Well, because the bearish implications of gold stocks’ extreme underperformance still remain intact.

Let’s keep in mind that the drastic underperformance of the HUI Index also preceded the bloodbath in 2008 as well as in 2012 and 2013. To explain, right before the huge slide in late September and early October 2008, gold was still moving to new intraday highs; the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market suffered materially. If stocks didn’t decline so profoundly back then, gold stocks’ underperformance relative to gold would have likely been present but more moderate.

Nonetheless, broad head & shoulders patterns have often been precursors to monumental collapses. For example, when the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02. Thus, three of the biggest declines in the gold mining stocks (I’m using the HUI Index as a proxy here) all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern. As a reminder, the HUI Index recently completed the same formation.

Yes, the HUI Index moved back below the previous lows and the neck level of the formation, which – at face value – means that the formation was invalidated, but we saw a similar “invalidation” in 2000 and in 2013. And then, the decline followed anyway. Consequently, I don’t think that taking the recent move higher at its face value is appropriate. It seems to me that the analogies to the very similar situation from the past are more important.

As a result, we’re confronted with two bearish scenarios:

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early-2020 low.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

In both cases, the forecast for silver, gold, and mining stocks is extremely bearish for the next several months.

For even more confirmation, let’s compare the behavior of the GDX ETF and the GDXJ ETF. Regarding the former, investors rejected the senior miners (GDX) attempt to recapture their 50-day moving average and the failure was perfectly in tune with what I wrote on Sep. 7:

Large spikes in daily volume are often bearish, not bullish. To explain, three of the last four volume outliers preceded an immediate top (or near) for the GDX ETF, while the one that preceded the late July rally was soon followed by the GDX ETF’s 2020 peak. Thus, when investors go ‘all in,’ material declines often follow. And with that, spike-high volume during the GDX ETF’s upswings often presents us with great shorting opportunities.

Please see below:

ChartDescription automatically generated

Even more bearish, not only did last week’s plunge usher the GDX ETF back below the neckline of its bearish head & shoulders pattern (the horizontal red line on the right side of the chart above), but the sell signal from the stochastic oscillator remains firmly intact. As a result, ominous clouds continue to form.

And with the GDXJ ETF stuck in a similar rut, I wrote on Sep. 7 that overzealous investors would likely end the week disappointed:

With the current move quite similar to the corrective upswing recorded in mid-May, the springtime bounce was also followed by a sharp drawdown. As a result, the GDXJ ETF could be near its precipice, as its 50-day moving average is right ahead. And with the key level now acting as resistance, investors’ rejection on Sep. 3 could indicate that the top is already here.

Moreover, while the junior miners followed the roadmap to perfection, the GDXJ ETF still remains ripe for lower lows over the medium term.

Please see below:

ChartDescription automatically generated

Finally, while I’ve been warning for months that the GDXJ/GDX ratio was destined for devaluation, after another sharp move lower last week, the downtrend remains intact. For example, when the ratio’s RSI jumped above 50 three times in 2021, it coincided with short-term peaks in gold. Second, the trend in the ratio this year has been clearly down, and there’s no sign of a reversal, especially when you consider that the ratio broke below its 2019 support (which served as resistance in mid-2020). When the same thing happened in 2020, the ratio then spiked even below 1.

More importantly, though, with the relative weakness likely to persist, the profits from our short position in the GDXJ ETF should accelerate during the autumn months.

ChartDescription automatically generated

The bottom line?

If the ratio is likely to continue its decline, then on a short-term basis we can expect it to decline to 1.27 or so. If the general stock market plunges, the ratio could move even lower, but let’s assume that stocks decline moderately (just as they did in the last couple of days) or that they do nothing or rally slightly. They’ve done all the above recently, so it’s natural to expect that this will be the case. Consequently, the trend in the GDXJ to GDX ratio would also be likely to continue, and thus expecting a move to about 1.26 – 1.27 seems rational.

If the GDX is about to decline to approximately $28 before correcting, then we might expect the GDXJ to decline to about $28 x 1.27 = $35.56 or $28 x 1.26 = $35.28. In other words, $28 in the GDX is likely to correspond to about $35 in the GDXJ.

Is there any technical support around $35 that would be likely to stop the decline? Yes. It’s provided by the late-Feb. 2020 low ($34.70) and the late-March high ($34.84). There’s also the late-April low at $35.63. Conservatively, I’m going to place the profit-take level just above the latter.

Consequently, it seems that expecting the GDXJ to decline to about $35 is justified from the technical point of view as well.

In conclusion, gold, silver, and mining stocks went from delighted to despondent, as the technical downpour continues to rain on their parade. And while a major buying opportunity may present itself in December, the next few months will likely elicit more tears than cheers. As a result, while we eagerly await the opportunity to go long the precious metals and participate in their secular uptrends, bearish breakdowns, stock market struggles, and the Fed’s taper timeline will likely dampen their moods over the medium term.

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.

 

Cyclical Nature of Labor Day: Let’s Make Some Money On It!

Chart analysis is a very interesting activity. You need to keep your mind open, your cognitive and emotional biases at bay, you have to stay humble, as you always have something new to discover, and you might need to change your mind in a flash. Moreover, the indications can arrive from all over the place. You can expect that the key signal will come from this price analysis technique, or that one, or maybe based on the price link between some assets. Or it could even be the case that it will not be the price or volume that will be critical in a given situation… but time.

The cyclical nature of many areas of life is present in the markets, and it is usually the case that the seasonal factors have only a mild effect on the prices and other factors are much more important, as they are specific to a given situation. Sometimes, however, we have a recurring event that’s so precise in its implications and so accurate that its importance could dwarf other techniques.

This could be the case with gold’s post-U.S.-Labor-Day performance.

A poet might say that at that time a golden dolphin jumps joyfully into the air, shining briefly in the evening sun, preparing for a deep and dangerous dive.

A data scientist might say that 10 out of 10 efficiency with regard to short-term implications and 8 out of 10 performance with regard to medium-term implications is something that seems opposite to the efficient market theory, even in its weak form.

And a trader might say “great! let’s make some money on it!”

I’ll let you be the judge as to which approach is best, while I will feature my observations regarding gold’s price performance around the U.S. Labor Day.

And yes, I did feature this chart yesterday, but I think I haven’t given enough emphasis on how important it is currently.

We’re now less than one week away from the U.S. Labor Day, which is particularly important for the gold price movement.

You see, in the previous 10 years, gold almost always declined profoundly right after the U.S. Labor Day — I marked that on the above chart with red, dashed lines. There were only two cases (in 2015 and in 2018) when gold didn’t slide profoundly after that day, but… it was when gold declined in the short term anyway. There was simply no major downswing later.

In other words, in all 10 out of the previous 10 years, gold moved lower in the short term after the U.S. Labor Day. Of course, it’s debatable what one describes as the short term. In this case, I mean a period between a few days and a few weeks. Then again, if you look at the chart, it’s clear what we can expect. Please have a look at how far gold usually fell (red lines) and how far it fell during the exceptionally bullish years when it declined just in the short run.

This is very important, as it tells us that even if gold doesn’t decline this week, it will be very likely to do so based on this surprisingly accurate cyclicality.

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.

 

Bittersweet Truth for Gold Stocks: What You Need to Know

Beware of the candyman!

With Fed Chairman Jerome Powell performing his usual dovish dance on Aug. 27, gold, silver, and mining stocks were like kids in a candy store. However, with the short-term sugar highs often leaving investors with nasty stomach aches, the sweet-and-sour nature of the precious metals’ performances may lead to pre-Halloween hangovers.

HUI Index: Harbinger of Things to Come

To explain, while the HUI Index invalidated the breakdown below its previous lows, the bullish reversal may seem quite sanguine. However, an identical development occurred in 2013 right before the index continued its sharp decline. Moreover, I warned previously that the HUI Index could record a corrective upswing of 4% to 8% (that’s what happened after the breakdown in 2013) and that it would not change the medium-term implications. And after the index rallied by more than 6% last week, the bounce is nothing to write home about.

Furthermore, after recording a similar breakdown below the neckline of its bearish H&S pattern in 2000, a short-term corrective upswing followed before the HUI Index resumed its swift decline. As a result, gold, silver, and mining stocks may not behave like Jolly Ranchers for much longer.

Please see below:

What’s more, the vertical, dashed lines above demonstrate how the HUI Index is mirroring its decline from 2012-2013. After a slight buy signal from the stochastic indicator in 2012, the short-term pause was followed by another sharp drawdown. For context, after the HUI Index recorded a short-term buy signal in late 2012 – when the index’s stochastic indicator was already below the 20 level (around 10) and the index was in the process of forming the right shoulder of a huge, medium-term head-and-shoulders pattern – the index moved slightly higher, consolidated, and then fell off a cliff. Thus, the HUI Index is quite likely to decline to its 200-week moving average (or so) before pausing and recording a corrective upswing. That’s close to the 220 level. Thereafter, the index will likely continue its bearish journey and record a final medium-term low some time in December.

Furthermore, I warned previously that the miners’ drastic underperformance of gold was an extremely bearish sign. There were several weeks when gold rallied visibly and the HUI Index actually declined modestly. Last week, we finally saw gold miners moving back up along with gold. But just like one swallow doesn’t make a summer, this move up doesn’t change the fact, that in general, performance of gold stocks has been truly terrible.

After all, gold stocks are trading close to their previous 2021 lows, while gold is almost right in the middle between its yearly high and its yearly low.

And why is this quote so important? Well, because the bearish implications of gold stocks’ extreme underperformance still remain intact.

Let’s keep in mind that the drastic underperformance of the HUI Index also preceded the bloodbath in 2008 as well as in 2012 and 2013. To explain, right before the huge slide in late September and early October 2008, gold was still moving to new intraday highs; the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market suffered materially. If stocks didn’t decline so profoundly back then, gold stocks’ underperformance relative to gold would have likely been present but more moderate.

Nonetheless, broad head & shoulders patterns have often been precursors to monumental collapses. For example, when the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02. Thus, three of the biggest declines in the gold mining stocks (I’m using the HUI Index as a proxy here) all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern. As a reminder, the HUI Index recently completed the same formation.

Yes, the HUI Index moved back below the previous lows and the neck level of the formation, which – at face value – means that the formation was invalidated, but we saw a similar “invalidation” in 2000 and in 2013. And then, the decline followed anyway. Consequently, I don’t think that taking the recent move higher at its face value is appropriate. It seems to me that the analogies to the very similar situation from the past are more important.

As a result, we’re confronted with two bearish scenarios:

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early-2020 low.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

In both cases, the forecast for silver, gold, and mining stocks is extremely bearish for the next several months.

GDX and GDXJ Comparison

For even more confirmation, let’s compare the behavior of the GDX ETF and the GDXJ ETF. Regarding the former, the senior miners (GDX) also rallied above the neckline of their bearish H&S pattern. And while Friday’s (Aug. 27) euphoria occurred on high volume, prior volume spikes in buying sentiment actually marked four peaks (or close to) within the last 12 months. Thus, while the bullish bids may push the GDX ETF slightly higher in the near term, history implies that investors’ excitement often does more harm than good.

Please see below:

In all 4 out of previous 4 cases, the spike-high volume during GDX’s upswing meant a great shorting opportunity.

Meanwhile, the junior miners (GDXJ) didn’t invalidate the breakdown below the neckline of their bearish H&S pattern; and Friday’s close still left the GDXJ ETF below its previous lows. Moreover, while the juniors’ future direction following volume spikes isn’t quite as clear as it is with the GDX ETF, more often than not, euphoric spikes are followed by medium-term declines.

Please see below:

As further evidence, if you analyze the GDXJ ETF’s four-hour chart below, you can see that historical volume spikes (marked by the red vertical dashed lines) nearly always coincide with short-term peaks. As a result, Friday’s rally was more of an event driven surge – courtesy of Powell – and it’s unlikely to disrupt the GDXJ ETF’s medium-term downtrend.

Finally, while the GDXJ/GDX ratio moved slightly higher last week, its downtrend also remains intact. For one, when the ratio’s RSI jumped above 50 three times in 2021, it coincided with short-term peaks in gold. Second, the trend in the ratio this year has been clearly down, and there’s no sign of a reversal, especially when you consider that the ratio broke below its 2019 support (which served as resistance in mid-2020). When the same thing happened in 2020, the ratio then spiked even below 1.

Please see below:

The Bottom Line?

If the ratio is likely to continue its decline, then on a short-term basis we can expect it to decline to 1.27 or so. If the general stock market plunges, the ratio could move even lower, but let’s assume that stocks decline moderately (just as they did in the last couple of days) or that they do nothing or rally slightly. They’ve done all the above recently, so it’s natural to expect that this will be the case. Consequently, the trend in the GDXJ to GDX ratio would also be likely to continue, and thus expecting a move to about 1.26 – 1.27 seems rational.

If the GDX is about to decline to approximately $28 before correcting, then we might expect the GDXJ to decline to about $28 x 1.27 = $35.56 or $28 x 1.26 = $35.28. In other words, $28 in the GDX is likely to correspond to about $35 in the GDXJ.

Is there any technical support around $35 that would be likely to stop the decline? Yes. It’s provided by the late-Feb. 2020 low ($34.70) and the late-March high ($34.84). There’s also the late-April low at $35.63. Conservatively, I’m going to place the profit-take level just above the latter.

Consequently, it seems that expecting the GDXJ to decline to about $35 is justified from the technical point of view as well.

In conclusion, investors showcased their sweet tooth for gold, silver, and mining stocks on Aug. 27. However, with the USD Index hovering near two key support levels and the yellow metal confronting its second triangle-vertex-based reversal point, the taste may turn bitter over the medium term. Moreover, with prior upswings underwritten by the Fed resulting in lower lows soon after, the precious metals’ bullish behavior is nothing new. As a result, their prior weakness will likely persist before reliable bottoms emerge later this year.

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.

 

S&P 500 On a Win Streak – More Guns Aim to Take it Down

The same is the case with the S&P 500, which hasn’t recorded a two-month decline in nearly 10 months. It’s the fourth-longest streak on record! What’s more, the general stock market suffered another bout of volatility recently — with everyone teamed up to take the index lower, the only remaining question is: when?

Fuel to the Fire

With Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), scheduled to speak at the annual Jackson Hole Economic Symposium on Aug. 27, the Delta variant has clearly paved a dovish pathway. However, could the magician actually reveal his secret? Well, as a not-so-subtle hint of what’s to come (whether today or over the next few months), Fed hawks were out in full force on Aug. 26. Speaking with CNBC, Dallas Fed President Robert Kaplan said that “what we’re seeing in these [lower-income] communities is inflation affects them disproportionately. I think at the Fed we have to take that very seriously.”

And what does this mean for his taper timeline?

Source: CNBC

Likewise, Kansas City Fed President Esther George also told CNBC on Aug. 26 that “I would be ready to talk about taper sooner rather than later.”

“When you look at the job gains we saw last month, the month before, you look at the level of inflation right now, I think it would suggest that the level of accommodation we’re providing right now is probably not needed in this scenario.”

Even more hawkish, she actually downplayed the economic impact of the Delta variant:

“Both the anecdotes I hear from our contacts in the region and the data so far do not show a material change in the outlook.”

Upping the ante, St. Louis Fed President James Bullard led the hawkish brigade on Aug. 26. Also, speaking with CNBC, Bullard said that “we do have a new framework we did say that we would allow inflation to run above target for some time, but not this much above target.”

“I think that there is worry that we’re doing more damage than helping with the asset purchases because there is an incipient housing bubble in the U.S. The median house price, at least the number I saw, was approaching $400,000,” he said. “We got into a lot of trouble in the mid-2000s by being too complacent about housing prices, so I think we want to be very careful on that this time around.”

And not only does Bullard want the taper to begin immediately, but he’s advocating for net-zero asset purchases by the end of Q1 2022.

Please see below:

Source: CNBC

S&P 500 – A Correction Coming?

Furthermore, as the taper drama unfolded on Aug. 26, equity investors responded with expected disdain and the negativity ushered the USD Index back above 93. More importantly, though, with the gold price exhibiting strong negative correlations with the U.S. dollar, a profound correction of the S&P 500 could capsize the PMs. To explain, while the general stock market suffered another bout of volatility, the S&P 500 hasn’t recorded a two-month decline in nearly 10 months. For context, it’s the fourth-longest streak on record.

Please see below:

Moreover, the Institute for Supply Management’s (ISM) manufacturing PMI is highly correlated with the S&P 500. And with the former falling from its recent high and poised to turn lower in the coming months, the S&P 500 may find itself running out of upside catalysts.

Please see below:

To explain, the dark blue line above tracks the year-over-year (YoY) percentage change in the ISM’s manufacturing PMI, while the light blue line above tracks the YoY percentage change in the S&P 500. If you analyze the right side of the chart, you can see that the former’s decline has already outpaced the latter’s. And with Bank of America predicting that the ISM’s manufacturing PMI (in YoY terms) will turn negative by October, the S&P 500 may follow in its footsteps.

Adding to Wall Street’s trepidation, Morgan Stanley also expects a profound correction. Chief equity strategist Michael Wilson told clients on Aug. 20 that unprecedented fiscal spending fueled “a hotter but shorter cycle” and that a reversion to the mean could hammer the S&P 500 in the coming months.

He wrote:

“With Congress expeditiously providing record amounts of fiscal stimulus last year, the table was set for a major consumer stand against the downturn. Fast forward 16 months and it’s fair to say the US consumer has not disappointed. But, after a year of remarkable resilience from the US consumer, it begs the question: ‘Is it sustainable?’ While there is little doubt about the US consumers’ willingness to spend, the other key variable to consider is their ability to spend.”

Please see below:

To explain, the dark blue line above tracks the University of Michigan’s Consumer Sentiment Index (CSI), while the light blue line above tracks the S&P 500’s consumer discretionary/consumer staples ratio. When the light blue line is rising, it means that consumer discretionary companies (cyclicals) are outperforming staples (risk on). Conversely, when the light blue line is falling, it means that consumer staples companies (defensives) are outperforming consumer discretionary (risk off). If you analyze the right side of the chart, you can see that the light blue line has already rolled over.

And with the dark blue line now at a 2021 low, the ratio has plenty of catching up to do. Moreover, with the cyclical basket home to some of the S&P 500’s most expensive stocks outside of the technology sector, an unwinding of the excess could have a profound impact on the USD Index, and therefore, the performance of the PMs.

As further evidence, with investors throwing caution to the wind, the S&P 500 is running low on capital.

Please see below:

Source: Bank of America

To explain, the dark blue line above tracks the S&P 500, while the gold line above tracks the net free credit balances held in investors’ cash and margin accounts (data from FINRA). In a nutshell: it’s the amount of purchasing power (cash and debt) that investors can use to buy more stocks. If you analyze the relationship, you can see that historical lows in investors’ net free credit balances often coincide with historical peaks in the S&P 500. More importantly, though, if you analyze the right side of the chart, you can see that investors’ net free credit balances are easily at an all-time low. As a result, with the bulls all in and little dry powder available to accelerate the momentum, the S&P 500’s pain could turn into the USD Index’s gain.

Volatile Times Ahead

Finally, with the Cboe Volatility Index (VIX) – which measures the expected volatility in the S&P 500 over the next 30 days – surging by more than 12% on Aug. 26, seasonal signals imply that uncertainty could reign supreme over the next few months.

Please see below:

To explain, the blue bars above track the average value for the VIX during each month of the year. If you analyze the arrow in the middle, you can see that VIX spikes often occur in August, September and October. And with this year’s edition coinciding with the Fed’s taper timeline and investors’ all-time high exposure to stocks, the U.S. dollar could be in high demand if (when) volatility erupts.

In conclusion, the PMs suffered another pullback on Aug. 26 and their medium-term downtrends remain intact. And while Powell’s presser may result in ‘PMs up, USD Index down’, the short-term sugars highs often have very short shelf lives. Moreover, with the Fed’s taper timeline poised to reach its climax in the coming months and the uproar likely to upend the S&P 500, the USD Index’s medium-term fundamentals remain robust. As a result, the PMs are unlikely to find a true bottom until these developments subside.

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-GameStop Connection? It’s an Emotions Game

Given today’s pre-market slide in gold, it seems that the triangle-vertex-based turning point worked once again. Declines are likely next.

In yesterday’s analysis, I explained why the situation remains very similar to what happened in 2013, and that remains up-to-date. On top of that, two interesting things happened yesterday: one quite obvious and one less obvious.

White Metal Outperformance

The more obvious one was that silver outperformed gold on a short-term basis.

While miners and gold were almost flat yesterday, silver’s daily upswing was notable. Nothing to write home about, but it was visibly bigger than what we saw in gold and miners. These moments – when silver outperforms on a very short-term basis – tend to take place right before the prices of the precious metals and mining stocks decline.

Remember the early-August breakout in silver that turned out to be a fakeout? Silver broke above new highs while gold didn’t, so it outperformed on a very short-term basis. And just as lower prices followed then, lower prices are likely to follow soon (not necessarily immediately, though).

Have You Heard About GameStop?

The less obvious indication of a turnaround in gold came from the… GameStop stock price.

Yesterday’s sizable price spike is something that we saw several times this year. I’m not taking into account the January rally, as it was a specific forum-activity-based upswing that seems to be of one-of-a-kind nature. Except for yesterday’s price spike, there were also four other similar spikes. Let’s check if there was any kind of regularity on the gold market at the same time.

It turns out that in all four cases when the GameStop stock price spiked, gold was topping. Does it make any sense, and can one, therefore, count on this being repeated?

Actually, it does make sense. The assets are not really directly related, but they are related in terms of people’s emotions. The GameStop trade was quite an emotional one, people were jumping on board based on fear of missing out regardless of anything else. And nothing really changed since that time. The current valuations of the stock seem to be based on the same emotional aspect along with people’s ability to finance the purchases, perhaps based on leveraged stimulus-based funds. Consequently, the price spikes in GameStop might be a barometer for a specific type of emotionally driven purchases. And if the market is emotional in one specific way, it could impact more (all?) assets in one way or another. In the case of gold, it seems that when emotions (as indicated by GameStop stock) spiked, gold was topping.

Actually, it could be the case that the reason why silver outperforms gold on a short-term basis is related to the above. Silver is a smaller market, and it’s much more popular among individual investors than among institutions. No wonder that emotions play a part here, as the former are generally more emotional than the latter.

Having said that, let’s take a look at gold.

The yellow metal moved lower today, close to its triangle-vertex-based reversal. Consequently, the top might be in based on just that indication, and there are plenty more coming from other markets.

The USD Index, for example.

The Dollar’s Behavior

Yesterday, I commented on the above chart in the following way:

The USD Index invalidated the breakout to new 2021 highs, but it didn’t invalidate the previous inverse head-and-shoulders pattern, so the downside seems very limited.

There’s a rising short-term support line based on the June and July lows that currently “says” that the USD Index is unlikely to fall below ~92.75. At the moment of writing these words, the USD Index is trading at about 93.07, so it’s very close to above-mentioned level.

And even if the USDX declines below it, there’s support at about 92.5 provided by the neck level of the previously confirmed inverse head-and-shoulders pattern. This means that the USDX is unlikely to decline below this level, and this in turn means that the downside seems to be limited to about 0.6 index point. That’s not a lot.

Remember when the USD Index previously invalidated the breakout above the inverse H&S pattern? I wrote then that it could decline to the nearest support level provided – then – by the 38.2% Fibonacci retracement. Now the nearest support is provided by the rising support line at about 92.75.

This doesn’t mean that gold will necessarily rally from here or that the rally will be substantial. On the lower part of the above chart, you can see that gold moved to its declining resistance line, which means that it could decline right away.

The USD Index didn’t move to the above-mentioned rising support line, but it was very close to it. The USD Index has been relatively flat so far today, but gold is already down, so it seems that even if the USD Index bottoms slightly lower, it might not take gold to new short-term highs.

All in all, it seems that the precious metals sector is ready for another sizable 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.

 

USDX Resurgence: Don’t Let It Catch You Flat-Footed!

While the overwhelming majority of investors entered 2021 with a bearish outlook for the U.S. dollar, our optimism has proved quite prescient. The USDX bottomed at the beginning of the year. With the USD Index hitting a new 2021 high last week – combined with the EUR/USD, the GDX ETF, the GDXJ ETF, and the price of silver (in terms of the closing prices) hitting new 2021 lows – the ‘pain trade’ has caught many market participants flat-footed. Even silver stocks (the SIL ETF) closed at new yearly lows.

Moreover, after the USD Index surged above the neckline of its inverse (bullish) head & shoulders pattern and confirmed the breakout above its cup and handle pattern, the combination of new daily and weekly highs is quite a bullish cocktail. Given all that, even if a short-term pullback materializes, the USDX remains poised to challenge ~97.5 – 98 over the medium term — perhaps even over the short term (next several weeks).

Please see below:

Furthermore, as the USD Index seeks higher ground, the euro has fallen off a cliff. For context, the EUR/USD accounts for nearly 58% of the movement of the USD Index, and that’s why the currency pair’s performance is so important. If you analyze the chart below, you can see that the Euro Index has confirmed the breakdown below its bearish head & shoulders pattern, and the ominous event was further validated after the back-test of the breakdown failed and the Euro Index hit a new 2021 low.

Please see below:

Eye In the Sky Doesn’t Lie

What is signaling trouble for dollar bears as well, the USD Index often sizzles in the summer sun and major USDX rallies often start during the middle of the year. Summertime spikes have been mainstays on the USD Index’s historical record and in 2004, 2005, 2008, 2011, 2014 and 2018 a retest of the lows (or close to them) occurred before the USD Index began its upward flights (which is exactly what’s happened this time around).

What’s more, profound rallies (marked by the red vertical dashed lines below) followed in 2008, 2011 and 2014. With the current situation mirroring the latter, a small consolidation on the long-term chart is exactly what occurred before the USD Index surged in 2014. Likewise, the USD Index recently bottomed near its 50-week moving average; an identical development occurred in 2014. More importantly, though, with bottoms in the precious metals market often occurring when gold trades in unison with the USD Index (after ceasing to respond to the USD’s rallies with declines), we’re still far away from that milestone in terms of both price and duration.

Just as the USD Index took a breather before its massive rally in 2014, it seems that we saw the same recently. This means that predicting higher gold prices here is likely not a good idea.

Ok, but didn’t we just see strength in gold – the one that you just wrote about? The USD Index soared last week by a full index point, and yet gold didn’t decline…

That’s a good question, but the context is very important when analyzing specific price moves and their relative strengths. As I wrote earlier, we saw new yearly lows in practically every other important asset used for determining next moves in the precious metals sector: the EUR/USD, silver, and mining stocks (including practically all noteworthy ETFs and indices). So, did gold really show strength by not declining despite the USD’s strength, or was gold’s performance just a small, local deviation from the ongoing trend? Since practically everything else points to lower PM prices in the next weeks, the latter is more probable.

Besides, there are both: technical and fundamental reasons for gold to behave in this way right now.

The technical reason comes from the looming triangle-vertex-based turning point in gold, which is due today.

The rising black support line starts at the 2020 low, which is not visible on the chart.

Since these points work on a near-to basis, we might see a turnaround today or within the next few days.

Seen Anything on the News Recently?

Fundamentally, did anything important from the geopolitical point of view happen recently? Like, for example, the U.S. withdrawing from Afghanistan? Exactly…

Geopolitical events tend to impact gold much more than they impact other parts of the precious metals sector, which serves as a perfect explanation of why gold didn’t decline along with the rest of the PMs. As a reminder, geopolitical events usually have a visible but temporary impact on the gold price. They change its short-term price moves, but they don’t change the forecast for gold in general.

Consequently, it was not really the strength in gold vs. the USD Index that took place last week. It was a mix of the above and gold’s weakness relative to what happened in a geopolitical arena sprinkled with technicals. All in all, it’s not bullish for the PMs.

On top of that, the eye in the sky doesn’t lie. And with the USDX’s long-term breakout clearly visible, the smart money is already backing the greenback.

Please see below:

Finally, while short covering helped propel the USD Index higher last week, speculators’ positioning still has room to run. For example, while the latest Commitments of Traders (COT) report shows that net-positioning (long 19,211 contracts) by non-commercial (speculative) futures traders is near its 2021 highs, enthusiasm for the U.S. dollar is still well below the highs witnessed in previous years.

Source: COT

The bottom line?

Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop, ~98 is likely the next stop, and the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is fundamentally outperforming the Eurozone, the EUR/USD accounts for nearly 58% of the movement of the USD Index, and the relative performance is what really matters.

In conclusion, the U.S. dollar’s resurgence has weighed heavily on gold, silver and mining stocks. And with the technicals, fundamentals and shifting sentiment supporting a higher USD Index over the medium term, the metals’ strong negative correlation with the U.S. dollar should give investors a cause for pause. To that point, while we’re bullish on gold, silver and mining stocks’ long-term prospects, sharp declines will likely materialize over the medium term before they continue their secular uptrends.

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 Stocks Break to New Yearly Lows!

The HUI Index (gold stocks) broke to new 2021 lows while the USD Index broke to new 2021 highs. Just as I’ve been warning you.

Mining stocks’ extreme weakness relative to gold continued yesterday, and while it may seem like the weakness has to have a limit, this limit is likely still quite far from the markets right now.

Let’s take a look at the long-term HUI Index chart for details.

Remember when I told you that the tiny buy signal from the stochastic indicator was unlikely to trigger anything more than a brief pause? That was based on the analogy to what happened in late 2012 when miners paused, and then the decline simply continued. Well, gold stocks did exactly that and gold stocks declined once again. Right now, they are right after the breakdown to new yearly lows, and this has profound implications in light of the analogy to the 2012 – 2013 decline.

You see, when the HUI Index declined below the previous lows back in 2013, it meant that the biggest part of the slide was underway. The profit potential was still there, as it was still the first half of the biggest decline, but it meant that waiting for another big rebound in order to add to one’s short positions was not a good idea.

To clarify, there were two short-term consolidations soon after the breakdown in 2013. One of them took the HUI about 4% higher (in February 2013) and then we saw a decline. Afterwards, about 7%-8% correction (in March 2013) followed and then the biggest part of the decline took place.

Consequently, we might see a consolidation in gold stocks quite soon, but I wouldn’t expect it to be anything to write home about. At the current price levels, 4% – 8% means a decline of about 9 – 19 index. In the case of the GDXJ (if it moved in tune with the HUI), it would imply a move up by $1.5 – $3.

Of course, this is a hypothetical discussion of what might happen when gold stocks correct, but it doesn’t imply that they are likely to correct now. Actually, the opposite seems likely because of the HUI’s breakdown and the USD’s breakout. Again, forecasting gold stocks at higher levels in the near term might be a dangerous thing to do.

So, to clarify, the above-mentioned corrective upswing is likely to take place after another short-term move lower. If the GDXJ bottoms at about $35, then seeing it correct to about $36.5 – $38 will be quite normal.

As far as the short-term price moves in the mining stocks are concerned, my previous comments remain up-to-date. Yesterday, I wrote the following about the GDX ETF:

What happened? Senior gold miners finally broke decisively below the neck level of their head-and-shoulders formation, while juniors’ freefall continued.

Yesterday, senior miners closed below the neck level of the pattern for the second day, which means that the breakdown is almost confirmed.

The GDX has encountered strong support provided by the previous 2021 lows, but it doesn’t mean that we have to see a rebound here. Why? Because other proxies for mining stocks are already after the breakdown. This is the case with the GDXJ ETF, the HUI Index, and also the XAU Index. Even silver stocks – the SIL ETF –closed below the previous 2021 lows for the second day in a row.

So, did mining stocks encounter strong support here? Not really, only one of the proxies did – the GDX ETF. The remaining ones are already after a breakdown to new 2021 lows, and if we get a weekly close below them as well, the breakdown will be confirmed.

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.

 

Ignorance Always Backfires. Pay Attention to Gold Miners!

To be clear: it’s something very important right now. Juniors, as well as senior mining stocks, are very weak compared to gold, which means that they are not reacting to gold’s gains but multiplying gold’s declines instead. This doesn’t just mean that the profits on our short positions in juniors are increasing almost constantly – it also means that the entire precious metals sector is about to fall much further. This kind of underperformance preceded the 2013 slide, and we haven’t seen it – to this extent – in years. This is huge.

Junior gold miners – the GDXJ ETF – just moved to new 2021 lows after completing a flag pattern. This is bearish not only on its own but especially when compared to what gold did.

And gold….

Gold moved just $2 lower yesterday. This near-nothing was enough to trigger a breakdown to new lows in the related sector – junior mining stocks. Gold junior miners’ current performance is truly one of the weakest that I’ve ever seen.

And just imagine what horrors await the prices of the mining stocks if a mere $2 decline in gold was enough to trigger a breakdown to new lows. And gold seems to be about to slide once again!

Now, based on the triangle-vertex-based reversal that’s due on Monday, it could be the case that gold waits a bit before sliding. However, given the similarity to how it declined in the first quarter of the year, it seems that the top in gold is either in or at hand.

I explained the similarity to Q1 before, but here’s a quick recap.

After declining sharply (January and June) and forming a double bottom with the second bottom slightly lower, it then corrected half of the decline forming more than one top close to the 50% retracement and then declined sharply once again.

Back in February 2021, gold corrected about 76.4% of the decline (which is a less popular but still a Fibonacci retracement level – marked with blue). Right now, this retracement is just below the $1,800 mark. So, if history rhymes once again, gold will be likely to move close to $1,800 and then decline once again.

I’ve recently been asked to compare the performance of the 10-year yields and gold on one chart and to comment on them.

There are a couple of interesting things that the 10-year-yield chart and gold can tell us.

One of them is that when the ROC (rate of change) indicator based on the yields rallies above 50, it tends to correspond to medium-term bottoms in gold. This happened 3 times in the past 40+ years, and it worked in each case. This is likely to be important in a couple of months, but it’s not that relevant today.

Another interesting feature is that, overall, gold has not been performing well relative to the long-term yields. Between 2001 and 2011, gold was performing very well relative to yields – soaring when the yields were declining. However, that has not been the case since late 2012. Sure, gold managed to briefly move above its 2011 highs before invalidating the breakout and declining, but please compare how huge a decline in yields it took to trigger this move.

The decline in rates that made gold more than double its price from the 2008 bottom was relatively small (from ~2% to about ~1.5%). And the decline in yields from 1.5% in mid-2019 to about 0.5% in mid-2020 made gold increase its value by “only” 1/3. Again – a decade ago it took half a percentage point to make gold double, and now it took a full percentage point to make gold increase its value by only 1/3. Sure, 1/3 of gold’s price is a lot on a nominal level, but when compared to doubling its value, it’s much smaller. And when compared with the size of the moves in rates, it turns out that gold was now about 6 times less inclined to rally when the rates declined.

This seems bearish for gold at first glance, and it is such in reality.

The final observation is the most concrete and the most actionable. As I described in my previous gold trading analyses, what we are seeing now in gold is very similar to what we saw in 2012-2013, and the above-mentioned super-weak performance of gold stocks confirms it.

What’s very interesting is that after gold’s final top and yield’s final bottom (mid-2012), the yields rallied, and then they corrected to more or less their 50-week moving average. And when that was taking place, gold moved close to their previous lows (that was before the biggest part of the plunge).

Why would the above be very interesting? Because gold is also after a corrective upswing and the yields are after a corrective downswing that took them to more or less their 50-week moving average. If history rhymes, it seems that we’re about to see another big move higher in the rates and another big move lower in the price of gold.

The Economic Symposium in Jackson Hole and the news coming from it could trigger the above-mentioned moves. The September FOMC is another candidate. Then again, since markets are forward-looking, any piece of news that could hint at the upcoming tapering could trigger the moves. That’s what the weak performance of gold juniors vs. gold tells us – the market is ready to slide, and when the trigger comes is not that important. In fact, the precious metals market is likely to decline even without a specific news-based trigger.

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: The General Left Alone

The Gold Miners

While gold shrugged off the Aug. 8 ‘flash crash’ and bounced back above its June lows, the yellow metal’s renewed sense of swagger hasn’t been mimicked by its precious metals peers. For example, while gold ended the week up by 0.86%, the GDXJ ETF (our short position) ended the week down by 1.72%.

Please see below:

Furthermore, while gold jumped by roughly $15 last week, the HUI Index declined by five index points. And with the bearish underperformance often a precursor to profound medium-term drawdowns, the precious metals are behaving like its 2012-2013. Last week is yet another confirmation of the analogy.

Case in point: after the HUI Index recorded a short-term buy signal in late 2012 – when the index’s stochastic indicator was already below the 20 level (around 10) and the index was in the process of forming the right shoulder of a huge, medium-term head-and-shoulders pattern – the index moved slightly higher, consolidated, and then fell off a cliff.

Please see below:

To explain, can you see the HUI’s rally at the end of 2012 that followed a small buy signal from the stochastic indicator? I marked it with a purple, dashed line. No? That’s because it’s been practically nonexistent. The HUI Index moved higher by so little that it’s impossible to see it from the long-term point of view. On top of that, with the shape of gold’s recent price action, its RSI, and its MACD indicators all mirroring the bearish signals that we witnessed back in December 2012, the current setup signals that we’re likely headed for a similar swoon.

For context, I warned previously that the miners’ drastic underperformance of gold was an extremely bearish sign. I wrote the following about the week beginning on May 24:

(…) gold rallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxy for the gold stocks… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains. That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks.

And why is this quote so important? Well, because the bearish phenomenon still remains intact. As mentioned, with gold rising by roughly $15 and the HUI Index declining by about five index points, the bearish underperformance is accelerating. Precisely, something similar happened during the week beginning on July 6. The gold price rallied by $27.40, and the HUI Index declined by 1.39. As a result, with the HUI Index’s ominous signals still present, if history rhymes (as it tends to), medium-term support will likely materialize in the 100-to-150 range. For context, high-end 2020 support implies a move back to 150, while low-end 2015 support implies a move back to 100. And yes, it could really happen, even though such predictions seem unthinkable.

In addition, the drastic underperformance of the HUI Index also preceded the bloodbath in 2008. To explain, right before the huge slide in late September and early October, gold was still moving to new intraday highs; the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market suffered materially. If stocks didn’t decline back then so profoundly, gold stocks’ underperformance relative to gold would have likely been present but more moderate.

Nonetheless, bearish head & shoulders patterns have often been precursors to monumental collapses. For example, when the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped.

And in early 2020, the left shoulder topped at 303.02. Thus, three of the biggest declines in the gold mining stocks (I’m using the HUI Index as a proxy here) all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern.

Furthermore, when the HUI Index peaked on Sep. 21, 2012, that was just the initial high in gold. At that time, the S&P 500 was moving back and forth with lower highs. And what was the eventual climax? Well, gold made a new high before peaking on Oct. 5. In conjunction, the S&P 500 almost (!) moved to new highs, and despite bullish tailwinds from both parties, the HUI Index didn’t reach new heights. The bottom line? The similarity to how the final counter-trend rally ended in 2012 (and to a smaller extent in 2008) remains uncanny.

As a result, we’re confronted with two bearish scenarios:

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early-2020 low.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

In both cases, the forecast for silver, gold, and mining stocks is extremely bearish for the next several months.

As further evidence, let’s compare the behavior of the GDX ETF and the GDXJ ETF. Regarding the former, the senior miners (GDX) are in the midst of forming an ominous bear flag and the volume that accompanied Friday’s (Aug. 13) corrective upswing was relatively weak and it declined while the flag pattern was formed – just as it should if the formation was valid.

Conversely, the GDX ETF did invalidate the breakdown below the neckline of its bearish H&S pattern (which is a bullish sign). However, the GDXJ ETF did not. And with the junior miners’ initial plunge (the pole) implying a continuation of the downtrend (following a consolidation that forms the flag), there are more indicators weighing down the gold miners than lifting them up.

Please see below:

Wave the Flag! The Bear Flag!

Speaking of the GDXJ ETF, not only are the junior miners lagging behind their senior counterparts, but the four-hour chart provides a clear visual of the initial breakdown and the formation of the current bear flag.

Please see below:

The flag is perfect, and it took place on relatively declining volume, suggesting that another move will also be to the downside. After all, the moves that follow flags tend to be similar to the ones that preceded them.

The price levels at which the flag was formed are also very important, and it’s clearer on the daily chart.

Junior miners broke below the previous 2021 lows, and they held this breakdown, even though gold rallied quite visibly last week. This serves as a great confirmation that the move lower is about to take place.

And how should we expect the climax to unfold? Last week, I wrote the following:

Well, the GDXJ ETF may consolidate in the short term, but lower lows are still likely, and initial support should materialize at roughly $37 (the 61.8% Fibonacci retracement level). Thereafter, a short-term corrective upswing should follow before the GDXJ ETF reverses course once again and records its final bottom near the end of the year – at much, much lower price levels. All in all, it seems that our profits on the GDXJ (short position in it) are going to become MUCH bigger before this decline is over.

The above remains up-to-date. In fact, we already saw the short-term consolidation last week, so the decline could resume any day now.

In conclusion, the gold miners’ continued underperformance of the yellow metal is akin to a fire alarm signaling an impending blaze. And while many investors have forged through the smoke in 2021 and suffered a loss of breath in the process, our medium-term forecast does not change our outlook for gold, silver and mining stocks over the long term. With the trio underpinned by robust long-term fundamentals and their medium-term drawdowns likely to elicit secular buying opportunities, we’re confident that the precious metals will remain atop investors’ wish lists for years to come.

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.

 

Connection: When Gold Rises, Will Bitcoin Fall?

But first, let’s talk about gold and the miners. Yesterday’s session provided us with a perfect confirmation of the bearish case in the precious metals sector for the short term.

The reason is that what happened was bearish in two ways:

  1. Nothing happened in gold
  2. Daily declines in mining stocks

Short Term: Miners Still Looking Weak

First, the decline in mining stocks. A price action following a confirmed breakdown was exactly what I expected to happen to both junior miners and senior miners.

ChartDescription automatically generated

Senior miners – the GDX ETF – declined after verifying the breakdown below the neck level of the head and shoulders pattern.

ChartDescription automatically generated

Junior miners – the GDXJ ETF – declined after verifying the breakdown to new yearly lows.

Both are very bearish on their own as the confirmed breakdowns imply that another – bigger – short-term slide is about to start.

But they are even more bearish when compared to what happened in gold.

A picture containing histogramDescription automatically generated

Nothing happened in the case of the gold price, which means that miners had no good reason to decline yesterday. Well, except for the reason that they have been in a medium-term downtrend and due to myriads of technical reasons that I discussed previously. However, on a day-to-day basis, since gold didn’t move, miners shouldn’t have moved either, if their outlook was at least neutral.

Their outlook, however, is not neutral. It’s clearly bearish as they showed weakness relative to gold. What just happened is the exact opposite of what one should see at or after an important bottom – at that time gold stocks should outperform gold.

Consequently, the precious metals sector is likely to slide shortly, and profits from our short positions in the junior miners are likely to increase sooner rather than later.

That’s as far as the short-term implications are concerned.

Gold and Bitcoin: What’s in It for Me?

There is something else that I’d like to share with you today, though. I previously wrote that there’s a tendency for gold and bitcoin to move in the opposite directions in the short run, despite that they both moved higher in the long term – since 2014. I wrote that I’ll get back to this topic at some later date – and that day is today.

ChartDescription automatically generated

The upper part of the above chart features gold (regular colors) and bitcoin (blue), and the lower part of the chart features the USD Index.

At first glance, the performance of gold and bitcoin doesn’t seem to be that connected, besides the fact that they both moved higher in recent years. However, taking a closer look reveals that the link between them is not only present, but it’s actually quite strong.

I used the vertical, dashed lines to mark the moments when gold formed short-term bottoms and when bitcoin responded with declines. There were multiple cases like that! What’s remarkable is that even if bitcoin was soaring, it managed to correct a bit when gold was regaining strength. There were also some cases when bitcoin did nothing after gold’s bottom, but the moments when bitcoin ignored gold’s bottom and just continued to rally were rare.

I marked the first two (2014) cases with bold lines as that’s when the USD Index had been rallying particularly strongly. Since it seems that the USDX is starting a sizable upswing, these analogies might be most important.

Bitcoin declined in 2014 and the decline took the form of two smaller declines. One of them started close to the middle of the year (practically right at the vertical line) and the second started in the final few months of the year. What is most interesting, is that both bitcoin declines started when gold was forming short-term bottoms.

Bitcoin has been on the rise in the last several days, and given what we saw in gold – and in light of the above-discussed link – it’s perfectly normal, since gold has been declining (the recent pause seems too small to trigger any price moves). But most importantly, it tells us that when gold rebounds, it could be bitcoin’s chance to slide.

The 2014 decline might not seem like a big deal on the above chart, but that is only due to the perspective. When you look at the prices (the axis on the left side of the chart), you’ll see that bitcoin actually declined from about $600 to about $150. In other words, its price was reduced fourfold. That’s a huge decline. And a huge opportunity for those who are able to see it in advance.

This might or might not provide us with a great shorting opportunity in case of bitcoin, when gold rebounds (likely close to the previous 2021 lows), increasing this year’s profits, but it’s too early to say so with certainty at this time. I’ll keep looking for confirmations and I’ll report accordingly.

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: Celebration Time

Well, no. The rebound already happened in late July and early August, and what we see now is the trend being resumed. Consequently, even if it wasn’t for all the long-term analogies to the 2012-2013 declines in gold and gold stocks (HUI Index), one should expect the current short-term decline to be significantly bigger than the counter-trend upswing which ended earlier this month. At this time, the move lower is just somewhat bigger than the preceding rally. Thus, it’s not excessive and can easily continue.

However, let’s keep in mind that periods of very high volatility usually need to be followed by periods of relatively low volatility. That’s when investors verify if the “new reality” – the price levels after the decline – are justified or not. If the market votes “no”, we get huge rebounds and breakdowns’ invalidations. So far this week, the markets have been voting “yes”.

Consequently, the current back-and-forth trading is perfectly normal, and it’s in tune with what I wrote in the previous days – even in the case of the details. While the precious metals are taking a breather, the gold mining stocks continue to decline, but in a steadier manner. That’s what happened earlier this year (in February and in late-June / early-July 2021) and during the 2013 slide.

While a steady decline might not get as many heads turning as big daily slides, it also serves a very important purpose. You see, the mining stocks (GDX includes both: gold stocks and silver stocks) are now verifying the breakdown below the neck level of the head and shoulders pattern. Once this breakdown is verified (just one more daily close is needed), miners will be likely to fall much lower, as the target resulting from this formation is based on the size of its head. In this case, it implies a move to about $28.

In the case of the junior gold miners, the situation is even more bearish, as they just moved below the previous yearly lows, and they are confirming the breakdown.

Please note how the junior miners lost their momentum right after declining on relatively big volume. In yesterday’s analysis (Aug. 10), I commented on junior miners’ breakdown in the following way:

This move was not yet confirmed, but with the significant volume on which it took place, it looks quite believable. Therefore, it wouldn’t be surprising to see a few days of consolidation before senior miners move much lower.

As I wrote earlier today, gold and silver were not doing much yesterday (and in today’s pre-market trading at the moment of writing these words), but it’s a perfectly normal phenomenon.

In fact, if gold moves back to the previously broken lows at about $1,750, it won’t invalidate the bearish narrative.

The Most Powerful Tool – Self-Similarity

Gold has a triangle-vertex-based reversal close to the end of the next week, which means that it could continue to consolidate or move a bit higher in the next several days, and then slide once again. Please note that this would make the current decline very similar in terms of its pace to the decline that we saw in June. While the moves don’t have to be identical, the gold price quite often moves in similar patterns – I’ve seen this many times in the past decade (and beyond). For example, please note how similar the short-term declines that we saw between August 2020 and December 2020 were.

And while gold is consolidating after breaking below its June lows, the GDX is doing so after breaking below the neck level of the head-and-shoulders pattern and the GDXJ is trading sideways after breaking to new yearly lows, silver is also consolidating after a breakdown to new yearly lows.

Unless silver manages to soar back above the March lows shortly (and it seems unlikely that it does), it will be likely to fall profoundly once again soon.

The inverse of the above is likely the USD Index, which is verifying its second attempt to break above its inverse head-and-shoulders pattern.

The August 2020 highs are the next short-term resistance for the USD Index, but I don’t expect it to decline significantly from there. Instead, it seems to me that the USDX will rally to almost 98 based on the inverse H&S pattern, and then it might consolidate.

So, while the USD Index and the precious metals market might consolidate for a few days (or even up to two weeks), they are likely to continue their most recent sizable moves shortly thereafter. Consequently, while I can’t make any promises with regard to the performance of any asset, it seems that the profits on the short positions in junior miners are going to increase substantially in the coming weeks.

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 Slides Massively – Be Ready For More!

The USD Index (USDX)

While many investors forecasted a sharp decline in the USD Index, I warned on Aug. 2 that the stars were aligning for the greenback. And with gold, silver and mining stocks exhibiting strong negative correlations with the U.S. dollar, the latter’s rise could result in the former’s demise.

I wrote:

With the USD Index demonstrating late-week strength and bouncing off of the 38.2% Fibonacci retracement level, the greenback may have recorded a short-term bottom. In both 2008 and 2014, small moves lower solidified the USD Index’s short-term bottoms and remarkable rallies followed. In fact, the rapid reversals in both cases occurred with RSIs near 50 (close to the current reading of 53.32) and it’s likely a matter of when, not if, the greenback records a significant upward re-rating. The bottom line? The PMs will likely bear the brunt of the USD Index’s forthcoming strength.

And after the USD Index soared back above the neckline of its inverse (bullish) head & shoulders pattern last week – and caused gold, silver and mining stocks to plunge in the process – the USDX remains poised to recapture ~98 over the medium term.

Please see below:

To explain, the USD Index often sizzles in the summer sun and major USDX rallies often start during the middle of the year. For example, summertime spikes have been mainstays on the USD Index’s historical record and in 2004, 2005, 2008, 2011, 2014 and 2018, a retest of the lows (or close to them) occurred before the USD Index began its upward flights.

What’s more, profound rallies (marked by the red vertical dashed lines below) followed in 2008, 2011 and 2014. And with the current situation mirroring the latter, a small consolidation on the long-term chart is exactly what occurred before the USD Index surged in 2014. Likewise, the USD Index recently bottomed near its 50-week moving average; an identical development occurred in 2014. More importantly, though, with bottoms in the precious metals market often occurring when gold trades in unison with the USD Index (after ceasing to respond to the USD’s rallies with declines), we’re still far away from that milestone in terms of both price and duration.

Please see below (quick reminder: you can click on the chart to enlarge it):

Just as the USD Index took a breather before its massive rally in 2014, it seems that we saw the same recently. This means that predicting higher gold prices here is likely not a good idea.

As further evidence, the eye in the sky doesn’t lie. And with the USDX’s long-term breakout clearly visible, the smart money is already backing the greenback.

Please see below:

The bottom line?

Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop, ~98 is likely the next stop, and the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is fundamentally outperforming the Eurozone, the EUR/USD accounts for nearly 58% of the movement of the USD Index, and the relative performance is what really matters.

In conclusion, the USD Index’s comeback dropped the guillotine on gold, silver and mining stocks, and with the GDXJ ETF (profits on our short position here increased further) also plunging by more than 5% last week, the greenback is having a profound impact on the precious metals. Moreover, with the latter also pressured by rising interest rates and the Fed’s increasingly hawkish rhetoric, lower lows are likely to materialize over the medium term. However, with robust fundamentals signaling a significant comeback over the long term, we eagerly await the opportunity to go long the precious metals 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.

 

Gold: What’s Going To Happen After the Dust Settles?

This week’s back-and-forth movement in gold, silver, and mining stocks is neither particularly exciting nor interesting. There is, however, some fundamental news that I would like to cover today.

Nonetheless, let’s start with the charts. The single notable technical thing is today’s pre-market performance of gold vs. the performance of silver.

Here’s what gold did so far today:

It moved slightly higher in a relatively boring manner; it moved a bit higher after having moved a bit lower. Nothing to write home about.

And here’s what silver did so far today:

Silver moved higher as well, and while this move was relatively insignificant in nominal and percentage terms (+0.78%), it was much bigger than what we saw in gold (+0.22%); the difference is crystal-clear when we compare today’s pre-market moves to the most recent short-term highs in both precious metals.

Silver moved to its recent short-term high while gold is not even close to being halfway back up. This means that on a very short-term basis, silver is clearly outperforming gold.

This is also what tends to happen shortly before significant declines across the precious metals sector.

Now, the sizes of both moves were not that significant, so this performance could also be more or less random, and, if that was the case, the outperformance would be just accidental. Consequently, it’s not a game-changing signal in terms of its importance. It is something that’s on top of multiple other indications that we have, and the most important ones are not of a short-term nature at all. The long-term self-similarities in gold and the HUI Index (gold stocks) are the true key to understanding where the precious metals sector is likely to head next, and you already know about those, as I described them thoroughly on Monday.

Should We Fear Countertrends?

Having said that, let’s move to the less technical details and more fundamental ones. Before I proceed, though, I would like to reply to a question that I just received that will serve as a good segue from the world of the technicals into the world of the fundamentals. Here’s the question (the bold formatting was added by me):

You have made a compelling case and a very thorough one for the decline in the precious metals market, and yet the US treasury Bond yields decline and the USD-DXY continue to decline. The analysis needs to include the countertrend that exists and how this countertrend occurred. You refer to this in one-sentence statements which are not very clear.

There have been many short-term moves in Gold that have been fairly substantial, and the current trend in the USD and US 10yrT yield is significant. Explaining how the countertrends could and would move within your analysis and projections would help everyone… The daily analyses are much appreciated and I would like to have better understanding of the countertrend moves within your analyses, as well as the US Fed and the ECB influence.

And here’s my reply.

As far as the USD Index (USD-DXY) is concerned, then I wouldn’t say that it “continues to decline”, as it’s been on the rise since the beginning of this year. But let’s say that we’re talking about the last 2 weeks or so. In this case, the USD Index is indeed declining. The highest recent closing price was 92.98 (July 20). Yesterday’s closing price for the USD Index was 92.09, so the USDX is down by 0.89 – almost a full index point.

What did the 10-year yield do between those dates? The $TNX (10-year US Treasury Index) declined from 12.09 to 11.76. But if we took July 13 as the starting date (the recent short-term high in the $TNX), we would see that it moved from 14.15 to 11.76 – a substantial decline.

Ok, what did gold do during these times? Almost nothing. Gold moved from $1,811.40 (July 20) to $1,814.10 (August 3). So, while the USD Index declined by almost a full index point, gold moved higher by a mere $2.70.

And in the case of the TNX, between July 13 and yesterday, gold moved from $1,809.90 to $1,814.10 (it moved higher by a mere $4.20).

Based on this comparison, the reply is already quite evident. What if these trends continue? If these trends continue, gold is likely to do… Nothing.

Based on how gold tends to perform (based on the 2008 and 2011-2013 analogies), it’s time for gold to fall, and to fall hard. If it was just gold that was performing just as it did in all those years, it might not have been as critical. But gold stocks (the HUI Index) are doing the same thing! They are also repeating what happened in all those years. And based on these analogies, the markets are about to slide.

Now, what does the market do if it wants to move in a given direction (here: down) and it gets bullish signals from other markets or the from news? It ignores them. This could take the form of reacting in a weak manner and then, after the dust settles, moving slowly back down. That’s exactly what gold has been doing.

The bullish indications from the USD Index (reminder: they are of a very short-term nature only; the USDX tends to rally after bottoming in the middle of the year) and bond yields are simply delaying the PMs’ slide. At the same time, gold, silver, and mining stocks act like a spring that’s being coiled with bigger force. It doesn’t move, but when something finally changes (yields and the USDX move higher), something big (here: decline in the PMs) is likely to happen.

Having said that, let’s move to the more fundamental part of the analysis. I will also discuss the situation in bond yields more thoroughly in the upcoming analyses.

Work in Progress

With the USD Index patiently waiting for the release of the U.S. nonfarm payrolls report on Aug. 6, the greenback has recorded a muted start to the month. However, if payrolls outperform and investors accelerate the U.S. Federal Reserve’s (FED) taper timeline, a U.S. dollar surge could happen sooner rather than later.

In the interim, though, the U.S. labor market is trending in the right direction. Case in point: while Gusto – a software company that provides cloud-based payroll, benefits and human resource management solutions for U.S. businesses – largely downplayed the end of enhanced unemployment benefits in many states, an excerpt from the Jul. 27 report read:

“Looking at employment trends by employee age, we observe that around the time of governors’ announcements in the first week of May, hiring rates for workers 25 and older rose in states ending these benefits early, which indicates that UI did play a role in the labor supply decisions of a group of adult workers.”

Please see below:

To explain, the black line above tracks the cumulative headcount of adults 25 and older in the states where enhanced unemployment benefits ended early, while the brown line above tracks the same cohort in states where enhanced unemployment benefits are still in play. If you analyze the acceleration of the black line, it’s clear that fiscal benefits have impacted U.S. citizens’ desire to find employment.

Also noteworthy, Indeed revealed on Aug. 3 that U.S. job openings fell by “two points from last week” and that “job postings increased in May, June, and July at a slower pace than in March and April.”

Please see below:

At first glance, the results may seem disappointing. However, it’s important to remember that if job postings are declining, businesses have likely filled the vacancies. Think about it: when a person is hired, the job posting is no longer necessary. And with the latter declining at a time when enhanced unemployment benefits have ended for roughly 30% of Americans, the ‘coincidence’ signals that a restocking of the U.S. labor force is already underway.

Allocation to the Dollar Rises

Circling back to the USD Index, as indicated in the CoT reports, the non-commercial (speculative) futures traders, asset managers and leveraged funds’ allocation to the U.S. dollar are now at 2021 highs.

Please see below:

To explain, the dark blue, gray and light blue lines above represent net-long positions of non-commercial (speculative) futures traders, asset managers and leveraged funds. When the lines are falling, it means that the trio have reduced their net-long positions and are expecting a weaker U.S. dollar. Conversely, when the lines are rising, it means that the trio have increased their net-long positions and are expecting a stronger U.S. dollar. And if you analyze the right side of the chart, you can see that the trio have upped their bullish bets in recent weeks (with leveraged funds moving notably higher last week).

On the flip side, euro sentiment is moving in the opposite direction. And because the EUR/USD accounts for nearly 58% of the movement of the USD Index, the performance of the currency pair is extremely important.

Please see below:

To explain, the dark blue, gray and light blue lines above track the trio’s allocation to the euro. If you analyze the right side of the chart, you can see that speculative euro bulls are throwing in the towel.

Furthermore, the relative fundamentals also favor the greenback. With U.S. GDP growth poised to outperform the Eurozone, growth differentials still signal a stronger U.S. dollar. For example, Stellantis NV – a European automaker that was created following the merger of PSA Group and Fiat Chrysler in 2021 – increased its full-year 2021 earnings guidance on Aug. 3. The main reason? Higher output in North America.

Please see below:

Source: Stellantis NV

Households in the US Are… Wealthier?

On top of that, with U.S. fiscal benefits plumping consumers’ balance sheets, household savings in the U.S. far outweighs the Eurozone. For context, the construction of the European Union makes it difficult for the bloc to find common ground on fiscal policy. And while the lack of spending decreases the supply of euros relative to U.S. dollars, the growth outperformance should result in capital flowing into the U.S. and investors buying the U.S. dollar.

Please see below:

To explain, the stacked bars above depict various regions’ household savings over the last six quarters. If you analyze the column on the right side of the chart labeled “Q2,” you can see that the U.S. (the dark blue section) has much more household savings built up than the Eurozone (the light blue section). As a result, when U.S. citizens’ willingness to spend matches their ability to spend, the prospective economic outperformance is bullish for the greenback.

To that point, while the U.S. is about to recoup its pre-pandemic GDP growth trajectory, the Eurozone isn’t expected to reach the milestone until late 2022.

Please see below:

To explain, the chart on the left compares the Eurozone’s current growth trajectory (the blue line) with its pre-pandemic trend (the pink line). If you analyze the gap, you can see that the Eurozone is still a ways away from recapturing its past glory. Conversely, if you turn your attention to the chart on the right, you can see that the U.S. has already recouped its pre-pandemic GDP level (100) and the region is expected to exceed its pre-pandemic trend in the third or fourth quarter of 2021.

Finally, with the momentum shifting across emerging markets, foreign portfolio flows have stalled once again.

Please see below:

To explain, the stacked bars above categorize non-resident portfolio flows into emerging markets, while the black line above tracks the consolidated total. If you analyze the sharp fall in early 2020 and the sharp rise in late 2020, the former coincided with a sharp rise in the USD Index, while the latter coincided with a sharp fall in the USD Index. More importantly, though, if you focus your attention on the right side of the chart, you can see that non-resident portfolio flows into emerging markets continue to lose momentum. And if the dynamic persists, it will likely add even more fuel to the USD Index’s fire.

In conclusion, the precious metals’ performance was mixed on Aug. 3, as payrolls uncertainty has many assets stuck in consolidation mode. However, whether reality resurfaces on Aug. 6 or the PMs bask in what’s left of the summer sun, the bearish medium-term implications remain intact. With the U.S. labor market moving closer to the FED’s taper threshold, the PMs have become increasingly anxious. And after the U.S. 10-Year real yield hit another all-time low on Aug. 2, the metals’ inability to muster a relief rally is a sign of extreme weakness. The bottom line? While short-term bursts of strength are definitely possible and expected along the way, the PMs’ medium-term trend still remains down. And it seems that the current short-term corrective upswing in gold, silver, and mining stocks is over or about to be 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.

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 Jumps for Joy Only to Hit the Ceiling… Hard

The Gold Miners

While gold, silver and mining stocks jumped for joy following Fed Chairman Jerome Powell’s dovish remarks on Jul. 28, their sugar high ended on Jul. 30. And while I warned that FOMC press conferences often elicit short-term bursts of optimism, it was likely another case of ‘been there, done that.’

I wrote prior to the announcement:

While the PMs may record a short-term bounce – which often occurs following Powell’s pressers – lower lows are still likely to materialize in the coming months.

In the meantime, though, did you notice the tiny buy signal from the HUI Index’s stochastic indicator? And taking that into consideration, is it time to shift to the long side of the trade? Well, for one, it seems very likely that gold miners are declining similarly to how they declined in 2008 and 2012-2013. In both cases, there were local corrections within the decline. As a result, the recent strength does not justify adjusting our short positions in the junior mining stocks, and I continue to view them as prudent from the risk to reward point of view.

Second, after the HUI Index recorded an identical short-term buy signal in late 2012 – when the index’s stochastic indicator was already below the 20 level (around 10) and the index was in the process of forming the right shoulder of a huge, medium-term head-and-shoulders pattern – the HUI Index moved slightly higher, consolidated, and then fell off a cliff.

Please see below:

Can you see the HUI’s rally at the end of 2012 that followed a small buy signal from the stochastic indicator? I marked it with a purple, dashed line.

No? That’s because it’s been practically nonexistent. The HUI Index moved higher by so little that it’s impossible to see it from the long-term point of view.

With the shape of gold’s recent price action, its RSI, and its MACD indicators all mirroring the bearish signals that we witnessed back in December 2012, the current setup signals that we’re likely headed for a similar swoon. Thus, with both gold and the HUI Index sounding the alarm, if the bullish momentum continues, it’s likely to be very limited in terms of size and duration. Conversely, the following slide is likely to be truly profound.

For context, I warned previously that the miners’ drastic underperformance of gold was an extremely bearish sign. I wrote the following about the week beginning on May 24:

(…) gold rallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxy for the gold stocks… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains. That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks.

If it wasn’t extreme enough, we saw this one more time. Precisely, something similar happened during the week beginning on July 6. The gold price rallied by $27.40, and the HUI Index declined by 1.39.

Likewise, with the HUI Index’s ominous signals still present, if history rhymes (as it tends to), medium-term support will likely materialize in the 100-to-150 range. For context, high-end 2020 support implies a move back to 150, while low-end 2015 support implies a move back to 100. And yes, it could really happen, even though such predictions seem unthinkable.

In addition, the drastic underperformance of the HUI Index also preceded the bloodbath in 2008. To explain, right before the huge slide in late September and early October, gold was still moving to new intraday highs; the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market suffered materially. If stocks didn’t decline back then so profoundly, gold stocks’ underperformance relative to gold would have likely been present but more moderate.

Nonetheless, bearish head & shoulders patterns have often been precursors to monumental collapses. For example, when the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02. Thus, three of the biggest declines in the gold mining stocks (I’m using the HUI Index as a proxy here) all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern.

Furthermore, when the HUI Index peaked on Sep. 21, 2012, that was just the initial high in gold. At that time, the S&P 500 was moving back and forth with lower highs. And what was the eventual climax? Well, gold made a new high before peaking on Oct. 5. In conjunction, the S&P 500 almost (!) moved to new highs, and despite bullish tailwinds from both parties, the HUI Index didn’t reach new heights. The bottom line? The similarity to how the final counter-trend rally ended in 2012 (and to a smaller extent in 2008) remains uncanny.

As a result, we’re confronted with two bearish scenarios

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early-2020 low.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

In both cases, the forecast for silver, gold, and mining stocks is extremely bearish for the next several months.

As further evidence, let’s compare the behavior of the GDX ETF and the GDXJ ETF. Regarding the former, the senior miners’ (GDX) RSI rose above 50 last week. However, the milestone preceded several corrective tops in 2020 and 2021. Thus, last week’s Fed-induced strength has only broadened the right shoulder of its bearish H&S pattern, and if completed, the size of the head implies a drawdown to roughly $28.

Please see below:

Meanwhile, the GDXJ ETF invalidated the breakdown below the neckline of its bearish H&S pattern last week. However, with the milestone likely a speed bump along the junior miners’ bearish journey, a mosaic of indications signal that their medium-term outlook remains quite somber. For context, with the junior miners’ RSI at 48.35, several flirtations with 50 coincided with the short-term peaks in 2021 and were followed by material declines. I marked these cases with red ellipses. And yes, it was also the case during the final corrective pre-slide upswing in March 2020.

The bottom line?

If gold repeats its June slide, it will decline by about $150. Taking the entire decline into account (since August 2020), for every $1 that gold fell, on average, the GDX was down by about 4 cents (3.945 cents) and GDXJ was down by about 6.5 cents (6.504 cents).

This means that if gold was to fall by about $150 and miners declined just as they did in the past year (no special out- or underperformance), they would be likely to fall by $5.92 (GDX) and $9.76 (GDXJ). This would imply price moves to $27.76 (GDX) and $35.78 (GDXJ).

In conclusion, gold, silver, and mining stocks received a helping hand from the Fed last week, as the charitable contribution uplifted the precious metals. However, while the central bank achieved its objective and talked down the U.S. dollar, prior bouts of short-term optimism faded once reality reemerged. As a result, with the USD Index now in season and the 2012 analogue looking more prescient by the day, gold, silver, and mining stocks will likely suffer profound declines in the coming months. However, with their long-term fundamentals still extremely bullish, new highs will likely dominate the headlines in the coming years.

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, USDX: Did Powell Spoil the Party?

The War on Debt

With Jerome Powell, Chairman of the U.S. Federal Reserve (FED), struggling to adequately define “transitory” during his press conference on Jul. 28, the market narrative has shifted from ‘hawkish FED’ to ‘dovish FED.’ And with the U.S. dollar bearing the brunt of investors’ wrath, the ‘all-clear’ sign flashed in front of the PMs. However, with post-FED rallies mainstays in the PMs’ historical record, the recent euphoria is much more semblance than substance. Thus, while Powell’s persistent patience elicits fears of financial repression, today’s economic environment lacks many of the qualities that made the gambit viable in the past.

To explain, financial repression includes measures such as direct government financing (the FED prints money and lends it directly to the U.S. Treasury), interest rate caps (yield curve control) and extensive oversight of commercial banks (reserve requirements, controlling the flow of credit). In a nutshell: governments use the strategy to keep interest rates low and ensure that they can finance their debt. And with the U.S. federal debt as a percentage of GDP currently at 128% (updated on Jul. 29), some argue that’s exactly what’s happening. Moreover, with the U.S. 10-Year real yield hitting an all-time low of -1.15% on Jul. 28, is the FED simply turning back the clock to the 1940s?

To explain, during World War Two, surging inflation helped the U.S. government ‘inflate away’ its debt. Think of it like this: if an individual borrows $100 at a 2% interest rate and repays the balance in full after one year, the total outlay is $102. However, if inflation is running at 4% (negative real yield), putting that money to work should result in an asset that’s worth $104 by the end of the year. As a result, the individual nets $2 (104 – 102) due to the inflation rate exceeding the nominal interest rate. And as it relates to the present situation, if the FED keeps real yields negative, then asset price inflation and economic growth should outpace nominal interest rates and allow the U.S. government to ‘inflate away’ its debt.

However, the strategy is not without fault. For one, financial repression occurs at the expense of bondholders. And with pension funds still required to meet the guaranteed outlays for retirees, suppressing bond yields hampers their ability to match assets and liabilities without incurring more risk.

More importantly, though, the FED doesn’t control the long end of the U.S. yield curve. For one, the FED owns roughly 23% of the U.S. Treasury market, and it has a monopoly on confidence, not long-term interest rates. Second, the U.S. 10-Year Treasury yield has dropped because investors fear that the Delta variant and/or the FED’s forthcoming taper will depress the U.S. economy. And eager to front-run the potential outcome, bond investors have positioned for slower growth, lower inflation, and, eventually, a reenactment of the FED cutting interest rates.

For context, even Powell himself admitted on Jul. 28 that the decline has caught him off-guard:

Source: Bloomberg

Likewise, following WW2, the U.S. government implemented structural reforms that are not present today. For example, prudent fiscal policy emerged in the late 1940s, with the government reducing spending and prioritizing debt reduction. In stark contrast, today’s U.S. government is already finalizing an infrastructure package and the federal deficit as a percentage of GDP is still growing. For context, a deficit occurs when the governments’ outlays (expenditures) exceed its tax receipts (revenues).

Please see below:

To explain, the green line above tracks the U.S. federal surplus/deficit as a percentage of GDP. If you focus on the period from 1943 to 1950, you can see that after the deficit peaked in 1943, reduced spending and strong GDP growth allowed the green line to move sharply higher. Conversely, if you analyze the right side of the chart, you can see that current spending still outpaces GDP growth (green line moving lower), and stoking inflation is unlikely to solve the problem.

U.S. 10-Year Treasury Yield Decouples… By a Lot

Circling back to the bond market, the U.S. 10-Year Treasury yield currently trades at an all-time low relative to realized inflation.

Please see below:

To explain, the scatterplot above depicts the relationship between the headline Consumer Price Index (CPI) and the U.S. 10-Year Treasury yield (available data dates back to 1967). For context, the headline CPI is plotted on the horizontal axis, while the U.S. 10-Year Treasury yield is plotted on the vertical axis. If you analyze the dot labeled “Current Reading,” you can see that the U.S. 10-Year Treasury yield has never been lower when the headline CPI has risen by 5% or more year-over-year (YoY). In fact, even if the headline CPI declined to the FED’s 2% YoY target, the U.S. 10-Year Treasury yield at 1.27% would still be the lowest relative reading of all time.

However, it’s important to remember that different paths can still lead to the same destination. For example, if inflation turns out to be a paper tiger, a profound decline in inflation expectations will have the same negative impact on the PMs as a sharp rise in the U.S. 10-Year Treasury yield.

Please see below:

To explain, the green line above tracks the U.S. 10-Year Treasury yield, while the red line above tracks the U.S. 10-Year breakeven inflation rate. If you analyze the gap on the right side of the chart, it’s a decoupling of the ages. However, while the two lines are destined to reconnect at some point, if the red line falls off a cliff, the impact on the PMs will likely mirror the 2013 taper tantrum. For context, gold fell by more than $500 in less than six months during the event.

Finally, and most importantly, U.S. Treasury yields are only one piece of the PMs’ bearish puzzle. Knowing that one shouldn’t put all their eggs in one basket, betting the farm on the U.S. 10-Year Treasury yield would be investing malpractice. That’s why self-similar patterns, ratios, technical indicators, the relative behavior of the gold miners, the USD Index and the FED’s taper timeline are all prudently considered when forming our investment thesis.

As an example, if gold had a perfect correlation with the U.S. 10-Year real yield, the yellow metal would be trading at roughly $1,940. However, with many other factors worthy of our attention, gold’s material underperformance indicates that a mosaic of headwinds undermines its medium-term outlook.

In conclusion, Powell’s party was in full swing on Jul. 29, as the PMs and the USD Index headed in opposite directions. However, with the yellow metal still confronted with a tough road ahead, the fundamental outlook remains dicey over the next few months. For example, with the all-time imbalance in the U.S. Treasury market eliciting little optimism, it took Powell’s dovish remarks to ignite the recent fervor. And with both developments likely to reverse in the coming months, the PMs’ upside catalysts may fade with the summer sun.

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.

 

USDX: More Sideways Trading Ahead?

Yesterday’s (Jul. 27) supposedly big news was the breakdown below the neck level of the inverse head-and-shoulders pattern in the USD Index. Invalidations of breakouts are bearish, and what’s bearish for the USDX is usually bullish for gold, silver, and mining stocks. So, what happened? And what didn’t happen?

What happened was that the USD Index moved a bit below the declining neckline based on the previous intraday highs.

What didn’t happen was the move below the declining neckline based on the previous highs in terms of daily closing prices (dashed line).

So, was the breakout really invalidated? Not necessarily, especially that the USDX is moving back up in today’s pre-market trading (at least at the moment of writing these words).

Moreover, while the USD Index moved lower yesterday, gold refused to rally.

To be precise, it did move higher, but only by $0.60, so it generally ignored the USD’s movement.

Consequently, yesterday’s session might have seemed to be a game-changer at first sight, but it seems much more likely that it wasn’t one. In my view, yesterday’s price movement was the continuation of the back-and-forth trading that’s analogous to what we saw in the first half of June. Gold was moving back and forth in a boring manner then too. The boredom was over quite quickly and a big short-term slide followed – I think the same is likely to happen shortly.

Gold Miners’ Aid

Mining stocks’ performance also supports this scenario.

If it was the beginning of another sizable move higher in the PMs and miners, the latter would be likely to show strength before gold. And that’s not taking place.

Senior gold miners were practically flat yesterday, just as gold was – that is, only slightly higher. On the other hand, junior gold miners ended the session slightly lower – very close to their previous 2021 lows.

Junior miners (the GDXJ ETF) haven’t invalidated the breakdown below the neck level of the bearish head and shoulders formation. Consequently, the very bearish implications of the breakdown remain intact.

All in all, the precious metals sector seems poised for another move lower, quite likely to the previous yearly lows in the case of gold and well below the previous 2021 lows in the case of the mining stocks. Yesterday’s decline in the USD index doesn’t change that. To clarify, the above-mentioned targets will most likely be just interim stops within an even bigger decline that will get us to the ultimate buying opportunity for the PMs and miners later this year.

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.

USDX Defends Its Growth Thesis – Will It Pass With Honors?

The USD Index (USDX)

With investors putting the USD Index through a rigorous exam last week (ending Jul. 23), months of study helped the greenback pass the test with flying colors. Case in point: with the USD Index rising above the neckline of its inverse (bullish) head & shoulders pattern, the head implies a medium-term target of roughly 98. On top of that, with the USD Index’s textbook validation adding to the bullish momentum last week – with the greenback verifying its recent breakout and responding with further strength – the U.S. dollar is likely to graduate with honors in the coming months.

What’s more, the bullish breakout was further validated when the USD Index closed the week above the neck level of its H&S pattern, and it’s difficult to imagine a more sanguine sign for the U.S. dollar. Thus, with the greenback poised to move sharply higher in the coming weeks, gold, silver and mining stocks are likely to head in the opposite direction.

In addition, the USD Index often sizzles in the summer sun. To explain, major USDX rallies often start during the middle of the year, and with the dollar’s bullish IQ often rising with the temperature, gold, silver and mining stocks will likely feel the heat over the medium term.

If you analyze the chart below, you can see that summertime surges have been mainstays on the USD Index’s historical record and double bottoms often signal the end of major declines or ignite significant rallies. For example, in 2004, 2005, 2008, 2011, 2014 and 2018, a retest of the lows (or close to them) occurred before the USD Index began its upward flights. In addition, back in 2008, U.S. equities’ plight added even more wind to the USD Index’s sails. And if the general stock market suffers another profound decline (along with gold miners and silver), a sharp re-rating of the USDX is likely in the cards.

Please see below (quick reminder: you can click on the chart to enlarge it):

On top of that, the eye in the sky doesn’t lie. And with the USDX’s long-term breakout clearly visible, the smart money is already backing the greenback.

Please see below:

As further evidence, the latest Commitments of Traders (COT) report shows that non-commercial (speculative) futures traders have increased their long exposure to the U.S. dollar (the light blue line below). More importantly, though, with longs bouncing off a roughly 10-year low and the current positioning still well below the highs set in previous years, the U.S. dollar still has plenty of room to run.

Source: COT

Finally, as the polar opposite of the USD Index, the Euro Index’s recent symmetrical decline mirrors the drawdown that we witnessed in mid-2020. And while the breakdown below the neckline of its bearish head & shoulders pattern still requires further verification, a continuation of the trend could usher the index back to the June 2020 lows or even lower. For context, the EUR/USD accounts for nearly 58% of the movement of the USD Index.

In addition, when the Euro Index reached the neckline of its bearish H&S pattern in early April 2021, late September 2020, and late October 2020, a fierce rally ensued. However, this time around, the corrective upswing has been extremely weak. As a result, with lower highs and lower lows plaguing the Euro Index in recent weeks, it’s likely only a matter of time before the neckline officially breaks.

Please see below:

Even more relevant, the completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign. That’s another point for the bearish price prediction for gold.

The bottom line?

Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop, ~98 is likely the next stop, and the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is fundamentally outperforming the Eurozone, and the relative performance is what really matters.

In conclusion, the USD Index will likely emerge victorious in this epic battle of wits. Moreover, with the GDXJ ETF (our short position) avoiding mirroring gold’s recent strength, it seems that when the USDX finally does rally profoundly, junior mining stocks will fall substantially. However, following a profound climax, gold, silver and mining stocks will likely resume their secular uptrends.

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.

 

Junior Miners: New Yearly Lows! Will We See a Further Drop?

Gold’s yesterday’s intraday attempt to rally was not bullish. On the contrary, it was what usually happens right before a big slide. Especially given the USDX’s breakout.

Let’s start with the latter.

Yesterday there was a second session in a row when the USD Index closed above the neck level of the broad (~yearly) inverse head-and-shoulders pattern. Furthermore, it’s been moving slightly higher in today’s session, at least so far.

This is a very bullish price action – the USDX’s breakout was not accidental, nor was it based on geopolitical news (the latter tends to trigger temporary moves that are then reversed). Additionally, it was preceded by a consolidation. Consequently, it seems that this breakout has a huge chance of being confirmed (we need just one more – today’s – daily close) and followed by another sharp rally. The previous highs at about 94.5 are the initial upside target, but based on the inverse H&S pattern, the USDX is likely to rally to about 98.

Therefore, what just happened (the breakout above the formation’s neckline) has really bullish implications for the U.S. currency. And since the latter tends to move in the opposite direction to gold, silver, and mining stocks, it’s also very bearish for them.

Gold and Its Stocks

That would be enough on its own to make the outlook for the PMs bearish, but we have many more bearish indications, and some of them are truly profound. The most bearish confirmation of the bearish price prediction for gold doesn’t come from the USD Index but from the extreme underperformance of gold stocks relative to gold.

The GDX ETF (senior gold miners) moved below the recent lows, and it closed the day below the neck level of a head-and-shoulders pattern based on the 4-hour candlestick chart. At the same time, the GLD ETF is still relatively close to the middle of its previous decline. If the comparison is still unclear, please consider the mid-May bottom. The GLD ETF closed just slightly below it, while the GDX a few dollars below it.

And if you think this kind of relative weakness is bearish, just wait until you see what the junior mining stocks did.

Junior miners declined not only below the neck level of the recent head-and-shoulders pattern (very clearly in both: intraday and closing price terms), but they actually closed the day at new 2021 lows! And they didn’t invalidate this breakdown yesterday, despite the intraday attempt!

There are two markets that primarily impact the performance of the junior mining stocks. One is gold, and the other is the general stock market. Gold is now about $140 above its 2021 lows, while the S&P 500 is over 16% above its 2021 highs. And yet, the GDXJ is below its previous 2021 lows. It seems that choosing junior miners as a proxy for shorting the precious metals sector was a good decision – our profits are rising rapidly, and it seems that they are going to soar much more in the following weeks.

What’s more, juniors are underperforming senior gold miners too. You can see that by comparing the two previous charts and by examining their ratio.

The ratio declines when junior miners underperform seniors. This happens often when the general stock market declines – juniors are more correlated with the latter than the seniors. Interestingly, juniors underperformed recently, even while stocks were strong. If the general stock market declines from here, the underperformance is likely to take an epic form – just as it did in early 2020.

This level of underperformance and weakness is truly breathtaking.

If miners – in particular, juniors – were able to decline so much without meaningful help from gold and the general stock market, just imagine the carnage they will suffer once this “help” finally arrives.

And given the breakout above the neck level of the inverse head-and-shoulders pattern in the USD Index, it seems like the key trigger to set the wheels in motion is already here.

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.

 

USDX: A Crocodile Just About To Strike

Just as ignoring a crocodile hiding in plain sight, ignoring the USD Index is a dangerous activity. And while investors continue to drink from the pond, the greenback’s nose is literally perched at the water’s surface. The USD Index is currently consolidating below the neckline of its inverse (bullish) head & shoulders pattern, so its wide eyes are also glaringly visible. And with a strike liable to happen at any moment, a leap above 93 could make the USD Index devour gold, silver and mining stocks.

To explain, the USD Index often soars during the summer months (major USDX rallies often start during the middle of the year), and while the greenback’s back-and-forth movement has uplifted the PMs, once the USDX resumes its likely uptrend, the former’s optimism could dissipate rather quickly. As a result, if the ambush ushers the USD Index above 93, the next stop is likely 98.

Please see below:

Furthermore, the seasonal thesis remains intact: I mentioned above that the USD Index often records material upswings during the middle of the year. And with the hunter’s disguise nearly always catching overzealous investors by surprise, will the next trap be any different?

In fact, the USD index seems to be breaking above the neck level of its inverse head-and-shoulders formation at the moment of writing these words.

The week started with a breakout, so there’s plenty of time for the markets to react before the next bigger break takes place (the next weekend). In other words, this week could be quite volatile and nothing like the previous weeks’ boredom. Gold, silver, and mining stocks might slide quite profoundly before we hear Friday’s closing bell.

If you analyze the chart below, you can see that summertime surges have been mainstays on the USD Index’s historical record and double bottoms often signal the end of major declines or ignite significant rallies. For example, in 2004, 2005, 2008, 2011, 2014 and 2018, a retest of the lows (or close to them) occurred before the USD Index began its upward flights. In addition, back in 2008, U.S. equities’ plight added even more wind to the USD Index’s sails. And if the general stock market suffers another profound decline (along with gold miners and silver), a sharp re-rating of the USDX is likely in the cards.

Please see below (quick reminder: you can click on the chart to enlarge it):

On top of that, the eye in the sky doesn’t lie. And with the USDX’s long-term breakout clearly visible, a profound uptrend is already in place.

Please see below:

As another important variable, the Euro Index’s recent symmetrical decline mirrors the drawdown that we witnessed in mid-2020. And if the Euro Index breaks below the neckline of its bearish head & shoulders pattern, the steep decline could usher the index back to the June 2020 lows or even lower. For context, the EUR/USD accounts for nearly 58% of the movement of the USD Index.

In addition, when the Euro Index reached the neckline of its bearish H&S pattern in early April 2021, late September 2020, and late October 2020, a fierce rally ensued. However, this time around, the corrective upswing has been extremely weak. As a result, with lower highs and lower lows plaguing the Euro Index in recent weeks, it’s likely only a matter of time before the neckline breaks.

Please see below:

Even more relevant, the completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign. That’s another point for the bearish price prediction for gold.

The bottom line?

Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop, ~98 is likely the next stop, and the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is fundamentally outperforming the Eurozone, and the relative performance is what really matters.

In conclusion, while gold, silver and mining stocks are increasingly treading water, the USD Index’s jaws are expanding. And with the greenback poised to take a bite out of the trio’s performance over the medium term, the precious metals could be in for a long and arduous recovery. However, after the drama unfolds, gold, silver and mining stocks are poised to continue their long-term secular uptrends.

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.

Is FED Playing Cat and Mouse with Investors?

You Don’t Say!

At first it was nothing, then it was something, and now it’s…

Source: CNBC

Speaking with CNBC on Jul. 15, U.S. Treasury Secretary Janet Yellen – who preceded Jerome Powell as the Chairman of the U.S. Federal Reserve (FED) – said that declining long-term Treasury yields is “the market expressing its views that inflation does remain under control.” However, while the contradictory statements of “several more months of rapid inflation” and “inflation does remain under control” are quite humorous, she has a point: with bond investors eager to front-run the FED’s forthcoming taper, the U.S. 10-Year Treasury yield has been the main casualty. And with gold often moving inversely of the U.S. 10-Year real yield, the development has strengthened the yellow metal.

Please see below:

To explain, the gold line above tracks the London Bullion Market Association (LBMA) Gold Price, while the red line above tracks the inverted U.S. 10-Year real yield. For context, inverted means that the latter’s scale is flipped upside down and that a rising red line represents a falling U.S. 10-Year real yield, while a falling red line represents a rising U.S. 10-Year real yield.

If you analyze the relationship, you can see that one’s pain is often the other one’s gain. And if you focus your attention on the right side of the chart, you can see that the U.S. 10-Year real yield’s recent malaise has uplifted the yellow metal.

Despite that, while Powell and Yellen continue to make excuses for their lack of foresight, Powell actually told Congress on Jul. 15 that surging inflation caught ‘everyone’ by surprise.

Please see below:

Source: CNBC

However, while I’ve been warning for months that inflation was likely to boil, both policymakers are underestimating the lasting effects. And in the process, bond investors have buried their heads in the sand. Conversely, while “temporary” and “transitory” remain Powell’s favorite buzzwords, supply chain disruptions still haven’t fully filtered into the core Consumer Price Index (CPI).

Please see below:

Source: Robin Brooks/Institute of International Finance (IIF)

To explain, the chart on the left depicts the effect of supplier delivery times on the core Producer Price Index (PPI). If you analyze the relationship, you can see that the red and light blue lines are roughly three standard deviations above their historical average (follow the scales on the right side of both charts). Conversely, if you analyze the chart on the right, you can see that the core CPI (the light blue line) is still less than two standard deviations above its historical average. As a result, the core CPI still hasn’t felt the brunt of the inflationary surge.

What’s more, the New York FED released its Empire State Manufacturing Survey on Jul. 15. And with one header reading “Selling Prices Increase at Record-Setting Pace,” cost-push inflation remains alive and well.

Please see below:

Source: NY FED

In addition, New York’s’ manufacturing sector expanded rapidly and supply chain disruptions (delivery times) remain an issue. An excerpt from the report read:

Business activity grew at a record-setting pace in New York State, The headline general business conditions index shot up twenty-six points to 43.0. New orders and shipments increased robustly. Delivery times continued to lengthen substantially, and inventories expanded. Employment grew strongly, and the average workweek increased. Input prices continued to increase sharply, and selling prices rose at the fastest pace on record. Looking ahead, firms remained optimistic that conditions would improve over the next six months, with the index for future employment reaching another record high.”

Turning to the second major player in gold’s bearish forecast, the USD Index is hitting its stride. And as sentiment shifts, the U.S. dollar is gaining significant support from speculators.

Please see below:

To explain, the dark blue, gray and light blue lines above represent net-long positions of non-commercial (speculative) futures traders, asset managers and leveraged funds. When the lines are falling, it means that the trio have reduced their net-long positions and are expecting a weaker U.S. dollar. Conversely, when the lines are rising, it means that the trio have increased their net-long positions and are expecting a stronger U.S. dollar. And if you analyze the right side of the chart, you can see that non-commercial futures traders and asset managers have completely changed their tune (though leveraged funds’ movement has been minimal).

On top of that, the latest USD Outlook from Vanda Research offers an interesting take on the FED’s forthcoming taper. Predicting that a ‘buy the rumor, sell the news’ event will unfold over the next several weeks, the firm believes that speculators will likely front-run the expected announcement.

Please see below:

To explain, if you analyze the first chart on the left, the pink bars (two months before), the dark blue bars (actual event) and the light blue bars (two months after) depict speculators’ USD positioning before, during and after hawkish FED announcements. And if you analyze the relationship, more often than not, speculators buy the U.S. dollar in anticipation, hold throughout the event and then bail after the drama unfolds.

As further evidence, if you turn to the chart on the right, you can see that leveraged funds are notorious for front-running the FED’s actions. With eight weeks preceding major FED events often resulting in significant increases in net-long positioning, leveraged funds aim to strike while the iron is hot. The bottom line? With the Jackson Hole Economic Policy Symposium scheduled for Aug. 26-28 (roughly six weeks away), another front-run could already be underway.

Finally, while I’ve been warning for some time that the FED’s daily reverse repurchase agreements are the fundamental equivalent of a shadow taper (though, it doesn’t have the same psychological effect), the FED sold $776.261 billion worth of reverse repos on Jul. 15 and $859.975 billion worth of reverse repos on Jul. 14. More importantly, though, with the U.S. 10-Year Treasury yield often moving inversely of the FED’s international reverse repos, bond investors are behaving as if the taper is already underway.

Please see below:

To explain, the dark blue line above tracks the quarterly percentage change in the U.S. 10-Year Treasury yield, while the light blue line above tracks the FED’s inverted (scale flipped upside down) international reverse repos. If you analyze the relationship, you can see that the larger the liquidity drain, the more bond investors position for slower growth, lower inflation and a hawkish FED.

Conversely, the dynamic has the opposite effect on the USD Index. With U.S. dollars being siphoned out of the system, it’s akin to the FED reducing its QE program. As such, the liquidity drain (lower supply of dollars) is extremely bullish for the greenback.

In conclusion, while the PMs have been buoyed by falling real yields, their relative performance has been extremely subdued. From March through May, gold rallied sharply once the U.S. 10-Year real yield reversed course. This time around, however, the bounce has been tepid, as concerns over a prospective taper counters the bullish optimism. As a result, with the USD Index gaining steam, inflation surging and a taper announcement likely to commence in September, the PMs’ optimism could evaporate at the drop of a dime. Thus, it’s prudent to avoid reading too much into their recent strength.

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.