Gold and USD Index are always connected – the former can’t break from the currency it’s priced in. And right now, that provides us with extra clues.
Things are very exciting on the USD Index front. Yes, it’s declining, and yes, it’s excitingly… Bullish.
I realize that for many market participants, a move higher will always be bullish, and a move lower will always be bearish, and I will still emphasize it once again. Bullish and bearish are words that refer to the future, whereas a rally or a decline are events that already happened.
This is not the same thing.
A rally can be bearish; or it can be bullish.
A decline can be bearish; or it can be bullish.
It’s the context, bigger trends, and other factors that really determine the outlook, not what happened very recently.
So, what is supposedly making the current move lower in the USD Index so excitingly bullish?
And the fact is that whenever the USD Index moved to or below the 101 level this year, it then rallied back up – often in a sharp and profound manner.
That’s what’s happening right now, and given this kind of analogy, the implications are really bullish.
And as they are bullish for the USD Index, they are bearish for the gold and silver prices.
Besides, please note that the gold price just managed to move slightly above its previous July high, while the USDX moved below its June lows. If gold was to move above its June high, it would have to soar above $2,000. It’s nowhere close to those levels, so its underperformance – and refusal to follow USDX’s bullish indications – is clear.
This implies that it’s very unlikely that gold’s short-term breakout above the declining resistance line will hold.
What is much more likely is that it will be followed by a sizable decline, just like what we saw in June (please note that dashed line) when we saw something analogous.
The same with GDXJ.
It moved just a little above the declining resistance line, and the breakout was not confirmed. Will it be confirmed? Given the above and given how weak mining stocks have been relative to gold and to stocks in the previous weeks, it’s very doubtful.
A reversal and a move to the previous 2023 lows (and then below them) is a much more likely outcome. This creates great trading opportunities, not only in mining stocks but also in other markets.
Remember, a rally doesn’t have to be bullish, and a decline doesn’t have to be bearish. In fact, tops can only form after rallies, and bottoms can only form after declines. Please keep that in mind the next time when you “feel” the urge to follow the current sentiment just because it “feels” like a good idea. It’s best to analyze the situation first and only then take action – skipping this step tends to be costly.
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Przemyslaw K. Radomski, CFA