Gold, Dollar, and Important Reversals

There are times when gold moves on its own, but it generally can’t disconnect from the currency it’s priced in.

This means that analyzing what’s happening in the USD Index is crucial while determining when gold, silver, and mining stocks are going to move next.

And right now, we have some very interesting dynamics between gold and the USDX that point to a bigger move lower in the former. Let’s take a closer look on the below chart.

Gold, Dollar, and Important Reversals - Image 1

The USD Index is after a breakout above the declining red resistance line, and this breakout was more than confirmed.

The recent move lower seems to be nothing more than just post-breakout correction.

Now, at this point, you might be thinking that we already saw something similar to the most recent rally in March, and it was just a corrective upswing, after which the decline resumed. However, this time, the rally takes a much more measured pace, which means that it’s much more sustainable.

Moreover, if you compare gold’s action back then and now, it becomes clear that those two cases are different, like night and day.

Gold is currently magnifying USD’s rallies by declining much more, so the implications for the former are very bearish.

Of course, the current support provided by the $1,900 level in gold is something that generates a brief exception from this bearish link between the two, but that’s rather normal.

Moreover, please note that the mid-March – today performance in the USD Index can be described as a bullish cup-and-handle formation. This is yet another reason to expect further rallies in the USD Index in the following weeks.

Most important details are present on the long-term chart, though.

Let’s zoom out.

Gold, Dollar, and Important Reversals - Image 2

Zooming out allows us to see that the really big rallies were usually preceded by a multi-bottom, and/or by a volatile correction in the early part of the rally.

Please take a look at the 2008 and 2011 bottoms in the USD Index. They were broad, multi-bottom patterns – the same with the 2020-2021 bottom. Is it any wonder that we’re seeing this kind of performance here?

These were also the times after which gold declined. And most importantly – it’s yet another factor confirming the analogy between now and 2008.

Consequently, given all the other links to 2008, it seems that a big rally in the USD Index is just around the corner.

Moreover, please note that there were many times when the USD Index formed major bottoms in the middle of the year. I marked those cases with vertical, red, and dashed lines. This is where we are once again, which has very bullish implications for the following weeks and months.

The situation in the biggest component of the USD Index: the EUR/USD exchange rate confirms the above outlook.

Gold, Dollar, and Important Reversals - Image 3

The RSI based on the Euro Index was just practically right at the 70 level, thus flashing a sell signal. These signals were very reliable in the past, especially when the Index was right after a short-term breakout.

Those breakouts were then invalidated, and bigger declines followed.

This small breakout was already invalidated.

Despite several attempts, the euro was not able to hold above its previous 2023 high.

Its bearish on its own as it’s a sign of weakness, but what really stands out is that those comebacks and (failed!) attempts to move to new highs are typical for the European currency. Tiny fakeouts were what preceded declines – massive ones – many times in the past. Even the situation in the RSI indicator (upper part of the above chart) points to the situation right now being similar to what happened previously.

And as the euro declines, the USD Index rises. And gold declines as well.

As gold declines, mining stocks are very likely to decline more (as they’ve done in the previous months and years).

The thing that I would like to add today is that in all three previous cases, there was a final small rally before the slide. I marked them with black arrows. Given this kind of pattern, seeing a small rally here is a normal part of a bearish pattern, not a bullish sign.

Still, please keep in mind that the above is about the medium term only. In the near term, we might see a reversal after the precious metals market moves just a little lower. This might created a short-term buying opportunity very soon – similar to the ones that we took advantage of in May and in July last year. Naturally, I will keep my Gold Trading Alert subscribers informed about this great opportunity.

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