Gold’s rally was likely just a technical phenomenon, nothing more…
In the previous analyses, I wrote that gold’s short-term potential should be understood as a “possibility” and not a “likelihood”. Yesterday’s price action across the board confirms that this continues to be a valid approach.
The PMs and miners moved lower as a response to a small move higher in the USD Index. This sounds quite normal, but please note that yesterday’s daily gain in the USD Index was almost exactly the same as what we had seen in the previous two trading days. And on those previous two trading days, gold had rallied.
This means that gold’s rally was likely just a technical phenomenon, nothing more. It needed to verify the breakdown below an important support line and that’s exactly what seems to have happened. During this move, silver was particularly strong, and miners were particularly weak, which is exactly what one should expect to see if a given rally is actually a correction within a bigger downtrend. The opposite – strong miners along with relatively weak or regular performance of silver – would have indicated a bigger rally. But that’s now what we saw recently.
On Tuesday (Dec 8), gold closed a little above the lowest daily close of September, but this breakout was invalidated on the very next day (Dec 9). The breakdown appears to have been confirmed which opens the way to additional declines, making the $1,700 a likely target for the next short-term decline.
Please note that at the moment of writing these words, the USD Index erased about half of its Wednesday rally – and gold is slightly down anyway, seemingly having completed its counter-trend rally. Still, if the USDX slides to about 90, gold might re-test the recent highs – but it definitely doesn’t have to.
Speaking of the USD Index, here’s what I wrote about it last Thursday (Dec 3):
The USD Index broke below its previous 2020 lows and this breakdown is almost confirmed. However, since today’s pre-market low (at the moment of writing these words) is 90.78, it seems that the target for the bottom – the 90 level – is at hand. Therefore – and due to also another factor that I’ll discuss shortly – the implications for gold as not as bullish as they might seem at the first sight.
Why would the bottom in the USD Index form at about 90? Because this would be yet another way in which the history could rhyme. In case of the USD Index, we have more of a 1:1 repeat of what we already saw a few years earlier.
Namely, it appears that the USD Index is repeating its 2017 – 2018 decline to some extent. The starting points of the declines (horizontal red line) as well as the final high of the biggest correction are quite similar. The difference is that the recent correction was smaller than it was in 2017.
Since back in 2018, the USDX’s bottom was at about 1.618 Fibonacci extension of the size of the correction, we could expect something similar to happen this time. Applying the above to the current situation would give us the proximity of the 90 level as the downside target.
“So, shouldn’t gold soar in this case?” – would be a valid question to ask.
Well, if the early 2018 pattern was being repeated, then let’s check what happened to precious metals and gold stocks at that time.
In short, they moved just a little higher after the USDX’s breakdown. I marked the moment when the U.S. currency broke below its previous (2017) bottom with a vertical line, so that you can easily see what gold, silver, and GDX (proxy for mining stocks) were doing at that time. They were just before a major top. The bearish action that followed in the short term was particularly visible in the case of the miners.
Consequently, even if the USD Index is to decline further from here, then the implications are not particularly bullish for the precious metals market.
In fact, as the USD Index shows more weakness, gold might simply manage to rally back to its September lows ($1,851 in intraday terms, $1,866 in terms of the daily closing prices, or somewhere between them) and then slide once again. This would be in perfect tune with what happened in early 2018, and also what I discussed previously.
The above remains relevant, especially the part that I bolded. At that time, on December 3, the precious metals sector was indeed just before a top. The GDX ETF was just after a (Dec 2) daily close at $35.97, and yesterday’s (Dec 9) closing price is $35.40. In the meantime, there was a single-time spike.
If the above similarity to early 2018 continues, we can expect the precious metals sector to decline or at least not to rally significantly, despite another move lower in the USD Index.
Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.
Przemyslaw Radomski, CFA