Yet another factor that points to the proximity of $1,700 as the next downside target…
Today is Martin Luther King Jr. Day, and in honor of the important civil rights leader, the stock market is closed. However, we are publishing today’s analysis as an exception because we understand that readers are eagerly waiting to read our thoughts about last week’s closes and what may lie ahead.
After incoming U.S. President Joe Biden unveiled his $1.90 trillion stimulus package on Thursday evening (Jan. 14), crickets were heard across the gold market. The once boisterous crowd yawned with boredom, as rising U.S. yields and a resurgent U.S. dollar soaked up all of the attention (and the liquidity).
But preceding the despair, gold’s fate was sealed when it reached its triangle-vertex-based reversal point after a short-term rally (a topping indicator that I warned about previously). And now, with the miners’ underperformance prophesying a much steeper decline, fireworks could be on display in the coming weeks.
Please see below:
Figure 1 – Gold Continuous Contract Overview and Slow Stochastic Oscillator Chart Comparison
Gold is after a significant decline and also a pause that immediately followed. This means that it can slide once again any day (or hour) now. The tiny buy signal from the Stochastic indicator (lower part of the above chart) was already nullified by a sell signal. A similar occurence resulted in declines in late November.
Interestingly, please note that back in November, gold’s second decline (second half of the month) was a bit bigger than the initial (first half of the month) slide that was much sharper. The January performance is very similar so far, with the difference being that this month, the initial decline that we saw in the early part of the month was bigger.
This means that if the shape of the price moves continues to be similar, the next short-term move lower could be bigger than what we saw so far in January and bigger than the decline that we saw in the second half of November. This is yet another factor that points to the proximity of $1,700 as the next downside target.
In addition, fundamentals are also starting to take effect. The U.S. 10-Year yield has surged by more than 19% since the New Year, and despite Friday’s (Jan. 15) pullback, it still closed above Wednesday’s (Jan. 13) low.
And like a double-edged sword, the rising 10-year yield is accelerating the EUR/USD’s 2021 fall from grace (another development that’s hurting gold’s short-term prospects). And because the EUR/USD accounts for nearly 58% of the movement in the USD Index, a continuation of the trend could spell trouble for gold (As I mentioned on Jan. 15, gold’s 250-day correlation with the USDX is – 0.80.)
In summary, lower gold prices remain the path of least resistance. Until the miners start pulling their weight, gold is stuck in limbo. And because bearish technicals and fundamentals support another move lower for the GDX ETF, gold is unlikely to buck the trend. However, once the dynamic reverses, it will provide an attractive opportunity to profit from the eventual upswing.
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Przemyslaw Radomski, CFA