Despite Signs to the Contrary, Gold at or Near Top

The thing that most likely raised quite a few eyebrows this week was – in addition to gold’s recent move by itself – the fact that gold rallied mostly without the dollar’s help. Yesterday (Jan. 5) I wrote that one swallow doesn’t make a summer and that a single session rarely changes much.

We didn’t have to wait for long – the situation seems to be getting back to normal.

Despite Signs to the Contrary, Gold at or Near Top - Image 1

Figure 1 - COMEX Gold Futures

After the January 4th rally, gold moved only insignificantly higher, and it’s even a bit lower in today’s pre-market trading.

Despite Signs to the Contrary, Gold at or Near Top - Image 2

Figure 2 - USD Index

While the USD Index didn’t decline on Jan. 4, it did in the following days – yesterday and in today’s pre-market trading. So, the gold-USD link seems to be relatively normal after all; it doesn’t – by itself – indicate further relative strength in gold.

There are three important things that one needs to note here.

The first one is what I already wrote previously – gold is not even above its Nov. 2020 high, while the USDX is below its 2020 low, which means that gold is weak relative to the USD Index and Monday’s (Jan. 4) rally seems to have been an exception.

The second one is also something that I wrote about previously – gold is right at its triangle-vertex-based reversal and it might have just topped (given its tiny decline despite a decline in the USDX).

The third one is that the USD Index has quite a steep declining resistance line that’s based on the early-November and late-November highs. Each previous attempt to break above it that we saw in the last few weeks failed. But thanks to the steepness of the line, the USD Index is at this line even despite today’s decline. All it takes for the USD Index to break above it is for it to do… nothing. This should be relatively easy given how excessive the bearishness is in this market, how similar it is to what we saw in early 2018, what’s happening in the RSI and even given the similarity between 2018 and now in the cryptocurrencies. You can see details on the chart below.

Despite Signs to the Contrary, Gold at or Near Top - Image 3

Figure 3 - USDX, USD, GOLD, GDX, and SPX Comparison

By the way, someone who is not interested in markets or investments at all just called me yesterday to ask if I can help an individual they knew with cryptos – this is a classic case study of something that you see in the final stages of a price bubble. It’s an example of the general public buying, and they tend to enter at the tops. Bitcoin is at about $35,000 when I’m writing these words - you have been warned.

How does it all combine? The gold-USD link is intact and a soaring USDX would likely trigger a sell-off in gold. There are many reasons due to which the USDX is likely to rally soon, even the situation in the cryptocurrency market makes the current time similar to early 2018. The triangle-vertex-based reversal in gold is right about now, so it seems that we won’t have to wait for long.

Despite Signs to the Contrary, Gold at or Near Top - Image 4

Figure 4 - COMEX Silver Futures

Additionally, silver is showing strength.

Despite Signs to the Contrary, Gold at or Near Top - Image 5

Figure 5 – VanEck Vectors Gold Miners ETF

Miners, however, are not showing strength. They even declined yesterday (by just one cent, but still) while gold moved a bit higher, but this is just a small confirmation of what we’ve been seeing for many weeks. My comments yesterday (Jan. 5) on the above chart remain up-to-date:

Miners were underperforming gold for many days and weeks, and they showed strength yesterday. Just like in the case of gold – it was a one-day phenomenon, and one swallow doesn’t make a summer.

During the day, the GDX ETF managed to rally above its 50-day moving average – just as it did at its November top. Unlike gold, miners are not very close to their November high. They corrected about 61.8% of the decline from this top. Moreover, please note that miners have corrected about 38.2% of the August – November decline. They haven’t even erased half of the decline that occurred in the previous months – so it’s definitely too early to say that miners started a new powerful rally here. Instead, we see that miners are making lower lows and lower highs.

Moreover, please take note of the spike in volume that we saw yesterday. There were very few cases when we saw something similar in the previous months, which was at the November high and at the July high, right before the final 2020 top. The implications are bearish.

CoT Details

Please see the table below:

Despite Signs to the Contrary, Gold at or Near Top - Image 6

Figure 6 - Commitment of Traders Report - Gold (Source: CFTC)

The latest data from the Commodity Futures Trading Commission (CFTC) shows that non-commercial traders (gold speculators) are net-long 268,872 futures contracts (the net of the two values in the green box). Week-over-week, speculators actually reduced their long positions by more than 8,000 contracts, while increasing their short positions by nearly 1,300 contracts.

But the real story?

Analyze the red boxes.

Commercial traders (gold producers) are net-short 307,254 futures contracts (the net of the two values in the red box). Similar to speculators, short-interest increased week-over-week, with long positions increasing by nearly 2,000 contracts and short positions increasing by nearly 6,000 contracts.

More importantly though, since Jun. 15, the two parties have drawn opposite lines in the sand. While speculators increased their long positions, producers took the other side of the trade. And despite the yellow metal leaping above $2,000 soon after (mainly momentum driven), gold topped less than two months later and fell by 15.4% before reaching a bottom on Nov. 30 (intraday peak to trough).

Please see the chart below:

Despite Signs to the Contrary, Gold at or Near Top - Image 7

Figure 7 - Gold Futures (Source: Tradingster Commitments of Traders [COT] Report)

To explain, the black and blue lines at the bottom depict the behavior of producers, while the green and purple lines above depict the behavior of speculators. Notice the large divergence in 2020? Well, the contrast increased again on Jun. 15.

This information is key, because today’s price action (and the lack of enthusiasm on the part of gold producers) mirrors what we saw back in June. Mark Twain once said, History doesn't repeat itself, but it often rhymes.” So, while speculators are tripping over themselves to buy bullion, producers are running in the opposite direction.

The behavior of producers is a sign that excess supply has flooded the physical gold market. And given their overwhelming preference to stay short, they don’t believe in the yellow metal’s recent run.

And why does their opinion matter?

Because gold producers build their extraction and mining forecasts around diligent supply/demand analysis. Thus, they study the gold market more intently than speculators. And because they have more to lose than just the trigger of a stop-loss, gold producers are usually on the right side of the trade.

Regarding silver, the results are identical. However, producers’ timing was much more prescient.

Despite Signs to the Contrary, Gold at or Near Top - Image 8

Figure 8 - Commitment of Traders Report - Silver (Source: CFTC)

The latest CFTC release shows that speculators remain net-long 54,779 futures contracts (the green box), while silver producers are net-short 75,826 futures contracts (the red box).

Despite Signs to the Contrary, Gold at or Near Top - Image 9

Figure 9 - Silver Futures (Source: Tradingster Commitments of Traders [COT] Report)

More importantly though, since Aug. 17, producers and speculators have traded in opposite directions. In September, with speculators still buying, the white metal rallied to an intraday high of $29.24 (on Sept. 1). However, in just over three weeks, silver plunged by 25.4% before bottoming on Sep. 24.

Is this the same old story but just a different day?

Well, like equities, the precious metals’ momentum won’t die easy, however, reality is starting to chip away at their fragile foundations.

Despite the U.S. dollar’s continued descent, commercial traders (businesses that need the USD for their day-to-day operations) remain overwhelmingly net-long (15,337 long contracts vs. 543 short). In contrast, speculators are the driving force behind the USD’s downward momentum, as the bearish narrative overpowers fundamental strength.

Please see the chart below:

Despite Signs to the Contrary, Gold at or Near Top - Image 10

Figure 10 – U.S. Dollar Futures (Source: Tradingster Commitments of Traders [COT] Report)

To explain, the black line at the bottom depicts the behavior of commercial traders, while the blue line depicts the behavior of speculators.

Notice the extreme divergence on the right side?

In September, there was a similar setup. Speculators increased their short positions, while commercial traders increased their long positions. As expected, speculators eventually reversed course, covering their shorts and ushering the USD Index higher by 2.2% from Sep. 21 to Sept. 25. And considering the even-wider divergence today, the forthcoming rally will likely be of a larger magnitude.

In addition, I wrote on Monday (Jan. 4) that the USD Index’s current RSI (Relative Strength Index) mirrors the double-bottom seen in 2017-2018.

Please see below:

Despite Signs to the Contrary, Gold at or Near Top - Image 11

Figure 11 – USD Index

I added:

As the initial pattern emerged (with the RSI below 30 in 2017), it preceded a significant rally, with the USDX’s RSI surging to nearly 70. And just like the chorus from your favorite song, the pattern repeated in 2018 with nearly identical results.

And as if the development needed any more validation, it occurred on the same day that emerging market (EM) currencies reached their strongest level (vs. the U.S. dollar) since 1997. More importantly though, notice how the behavior in 2017-2018 and 2020 is the near-inverse of the RSI data above?

Despite Signs to the Contrary, Gold at or Near Top - Image 12

Figure 12 – MSCI Emerging Markets Currency Index (Source: Bloomberg/Lisa Abramowicz)

Furthermore, with traders putting one more nail in the U.S. dollar’s coffin, look at the greenback’s performance versus the Chinese Yuan (CNH). On Dec. 28, the CNH enjoyed its largest one-day percentage gain since November and is now trading at its highest level since 2018 (For context, the USD is the base currency below, so a declining chart depicts CNH strength.)

Despite Signs to the Contrary, Gold at or Near Top - Image 13

Figure 13 – USD-Chinese Yuan (CNH) (Source: Bloomberg/Lisa Abramowicz)

The bottom line?

With bearish positioning moving from excessive, to extreme, to downright manic, a USDX rally is an avalanche waiting to happen.

And how will this affect the precious metals?

Well, referencing the 2018 analogue that I discussed previously:

  1. The USDX bottom coincided with the SPX top. Thus, once the USDX finds a floor, equities will likely fall from their lofty perch.
  2. Like dominoes, the USDX bottom also coincided with the precious metals’ top. (For context, the precious metals all broke down in September after the USDX broke above resistance.)

Overview of the Upcoming Decline

  1. As far as the current overview of the upcoming decline is concerned, I think it has already begun.
  2. During the final part of the slide (which could end within the next 1-10 weeks or so), I expect silver to decline more than miners. That would align with how the markets initially reacted to the COVID-19 threat.
  3. The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run, which does not make the short-term decline improbable. Markets can and will get ahead of themselves and decline afterward – sometimes very profoundly – before continuing with their upward climb.
  4. The plan is to exit the current short positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 1 – 5 weeks ). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom . It is a soft, but simultaneously broad instruction, so additional confirmations are necessary.
  5. I expect this confirmation to come from gold, reaching about $1,700 - $1,750 . If – at the same time – gold moves to about $1,700 - $1,750 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. However, it could also be the case that we’ll wait for a rebound before re-entering short position in silver – it’s too early to say at this time. It’s also possible that we’ll enter very quick long positions between those short positions.
  6. The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index . It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.

Letters to the Editor

Q: Thanks for your Mondays alerts, they are enlightening. I enjoy reading your analysis but almost every analyst out there believes that gold prices will keep climbing in the short term, meanwhile your analysis is contrarian to what the rest is sharing. You worded well last week what everyone and their brother is saying. Is there a reason why your analysis last year mentioned that bottom could be hit by year end 2020 and now is being pushed for another 10 weeks? Do you feel that history will repeat and you will be right this time, again?? Thanks, and I honestly respect your work.

A: Thanks for the kind words. It could be even more than 10 weeks. The volatility that we witnessed was based on the market’s reaction to the spread of COVID-19, and even though the cases continued to skyrocket as I had predicted previously, people’s fear declined substantially. I was expecting this to take place, but not to this extent. So, while the factors pointing to another bigger move lower remain intact (that’s why I’m posting the huge flagship analyses on Mondays – to keep these factors in mind), the expectations with regard to time are moving further into the future. The increased liquidity and participation of new “quarantine investors” (people investing/trading through leveraged instruments with relatively little capital, mostly because they have not much else to do while staying at home) could have made the short-term trends last longer as there’s more buying power before the moves run out of steam. As I wrote above, I expect the USD Index to soar, either soon or very soon, and the odds are that PMs and miners will respond by declining.

Q: I cannot see the bottom for the dollar Mr. P, nor the massive slide like last March. On the contrary, I feel commodities in general are on the rebound including oil . The dollar may have a short respite up, but it has no legs. I feel 2350 is the target for Gold in the 1st Q 2021. Oil to 65.00 in 2021.

A: I respect your opinion, but please note that it is quite often the case that what one “feels” is not necessarily what’s going to happen, precisely because the human mind is “by default” programmed to follow trends that are already well established and are nearing their end. Buying at the top feels great (while the prices are topping that is) – everyone else is buying, everyone else agrees, and the past shows that the market really does move in only one way. I even noticed that the word “feel” is being used more often in correspondence that we receive close to reversals. I’m not saying that “feelings” are a bad thing – of course they are not. They are an inherent part of life. But they are dangerous on the markets, because they tend to make one buy high (everyone is bullish) and sell low (everyone is bearish); and the opposite is what one should to do make money on the markets. Of course, it’s not as simple as doing the opposite of what feels right, because intuition also plays a role. It’s best to analyze the market with as little emotionality as possible and then make a decision. In my view, the USDX is extremely oversold and I provided several measures for that. This, plus several other factors makes me think that the next big move in PMs and miners is going to be to the downside.


Summing up, the situation on the precious metals market is not as bullish as it might appear based on Monday’s (Jan. 4) session alone. The triangle-vertex-based reversals in gold and silver along with huge volume spike in the GDX ETF and other technical signs, point to a looming decline in the prices of precious metals and mining stocks.

The USD Index and cryptocurrencies suggest that we’re seeing the repeat of early 2018, when the USD Index bottomed. Given the current correlations between PMs and the USD Index, the rally in the USDX is likely to have very bearish implications for the precious metals market.

The USD Index’s reversal yesterday suggests that PMs and miners are about to get a bearish push, and we might get exactly the same thing from the general stock market.

Despite a recent decline, it seems that the USD Index is going to move higher in the following months and weeks, in turn causing gold to decline. At some point gold is likely to stop responding to dollar’s bearish indications, and based on the above analysis, it seems that this is already taking place.

Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway. 

After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely earn much more in the following weeks and months), but you have to be healthy to enjoy the results.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:

Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $32.02; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $28.73; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $42.72; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $21.22; stop-loss for the JDST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway. In our view, silver has greater potential than gold does):

Silver futures downside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.

Gold futures downside profit-take exit price: $1,703

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash

Insurance capital (core part of the portfolio; our opinion): Full position

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).

Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief