Gold Price’s Key Driver Flashes a Major Signal

Last week was truly a game-changer for the precious metals market because of what happened in the USD Index.

On Friday, I wrote that the huge profits that we have in our short position in the FCX are likely to be joined by massive profits from the short position in the junior mining stocks, and it seems that we won’t have to wait for that long, either.

Based on what happened during the day and during the week in general, the above became even more likely.

The key technical event that happened during the first week of May was the clear weekly shooting star reversal candlestick in gold. Last week, we saw something similar in gold – it repeated its previous reversal, which only strengthened it. However, since that was just a repeat of what we already saw, the key thing that changed last week took place elsewhere.

The big thing that happened last week is that the USD Index finally showed strength in a really meaningful manner.

Gold Price’s Key Driver Flashes a Major Signal - Image 1

Thanks to last week’s rally, the USD Index finally broke above the declining red resistance line based on the previous important highs.

This is a game-changer for the following weeks. On a day-to-day basis, a move lower to this red line would be normal, as breakouts can be verified in this way, and that’s nothing to write home about. In fact, the USD Index moved a bit lower in today’s pre-market movement, and yes, it’s perfectly normal. It doesn’t invalidate the massively bullish implications of the breakout.

The rally was really notable, and it’s visible at first sight while looking at the above daily chart. But the really big difference becomes visible when we consider what happened on a week-to-week basis.

Gold Price’s Key Driver Flashes a Major Signal - Image 2

As surprising as it may seem, the last weekly close was the highest weekly close since late March!

Both: the above and the breakout above the declining resistance line indicated that a big shift in the USDX is already taking place.

Gold Price’s Key Driver Flashes a Major Signal - Image 3

Let’s keep in mind that last week’s strength is most likely just a tiny first step in a big rally that’s likely to follow.

The double-bottom that we saw this year is similar to the broad bottoms that we saw in 2008 and 2011 – both happened before gold’s huge declines.

In particular, the situation seems similar to 2008 due to the situation in the stock market that’s likely about to collapse (e.g., due to high and soaring real interest rates).

And as the USD Index moves higher and the stock market moves lower, both in a massive way, the precious metals prices are likely to tumble, in particular junior mining stock prices.

Also, while the above provides a very bearish price forecast for gold and the rest of the precious metals sector in the long run, there is one additional thing that I would like to add as far as the very short term is concerned.

Gold Price’s Key Driver Flashes a Major Signal - Image 4

Namely, the volume on which the GDXJ ETF (a proxy for junior mining stocks) moved higher in the final hour of Friday’s trading was huge. When we saw something like that in a previous similar situation (after a bigger rally), that meant that the big slide was about to start, regardless of the immediate-term follow-up.

In my view, this looks like an extremely profitable set-up that points to an even greater potential than what we saw when we opened the current (profitable) short position in the FCX. This is not the time to ignore the precious metals sector – this is the time to pay close attention and for one to position themselves accordingly.

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