I told you that gold’s rally was likely temporary, and we already see first evidence that this was indeed the case.
The key thing is that gold quickly invalidated its move above the 61.8% Fibonacci retracement, and that it lost its upward momentum.
Remember the early-April rally that took gold to new highs? It then continued to rally until it moved above the previous high, broke above it and then paused. This time we do NOT see something like that. Instead, gold likely only moved above its 61.8% retracement due to the FOMC-based uncertainty, and now that the dust has settled, it’s going back down.
What is really remarkable here is how strongly gold is reacting to whatever is happening in the USD Index. Quoting my previous analyses:
It seems that gold is closely watching what’s going on in the USD Index.
Yesterday’s move lower in the USDX corresponded to gold’s rally, and today’s (so far tiny) move higher caused gold to move lower.
However, since we know that a mover higher is the most likely outcome from here, it’s clear that the opposite is likely for the precious metals sector. Naturally, the bullish outlook for the USD Index is based not just on the inverse head-and-shoulders bottom pattern that it completed recently, but also on many other factors. (…)
The all-important 61.8% Fibonacci retracement levels based on the 2022 top and the 2018 / 2020 lows were reached and the USDX reversed from them. At the same time, the USDX verified the breakout above its declining, medium-term support line.
Plus, the RSI indicator flashed a clear buy signal by moving below 30 and now back above it. We saw something similar in 2018 (especially that it was the second of two similar tops) and that was THE bottom. Lower USD Index values were never seen since that time.
What’s even more remarkable is that both bottoms – the current one and the 2018 one – formed when politicians (Mnuchin then, Trump now) said things that were particularly bearish for the USDX or at least that were viewed as such by the markets (the tariffs are fundamentally bullish for the USDX, even though markets’ emotional reaction was as if the opposite was the case). The latter (a price decline while the fundamentals improved) is a great reason to think that the USD Index is going to move higher in the medium term.
The short-term indications suggest that the bottom is already in and that the more visible rally is about to begin.
This, in turn, is likely to have a profoundly bearish impact on the precious metals sector and commodities. Since stocks are likely to decline as well, mining stocks and commodity stocks (like FCX) and silver (which moves like both: a precious metal, and a commodity) are likely to affected to a particularly significant extent. And we’re going to take advantage of it when it happens.
On a short-term basis, we see that the USDX is on the verge of breaking above its steep, declining resistance line. At the same time, a rally above this line will also take the USD back above its last year’s lows, thus invalidating the breakdown.
This is the most likely way forward, and when it happens, it will become clear to many market participants that the trend has reversed.
That’s when the declines in the precious metals market will become much bigger.
The same with copper, however, the declines here are quite clear already. It’s simply the case that copper has much further to fall than gold, and it seems that it simply just can’t wait to start declining. Copper was just trading at fresh monthly lows just a few hours ago. It now moved back up a bit, but since it’s after two breakdowns and the 61.8% retracement stopped the correction once again, the odds are that the declines will be resumed shortly.
And since big moves in copper align with big moves in stocks and precious metals… They are all likely to fall soon.
Speaking of stocks, they tried to move to new short-term highs, but it seems that they failed – it was just another verification of the breakdown below the rising red line.
Also, let’s keep in mind that the medium-term technical picture fully supports the above short-term indications.
The recent months of trading are very similar to what we saw about three years ago – not only in terms of the price movements, and not only in terms of the RSI movement, but also in terms of time. The orange rectangles are identical, which means that the specific head-and-shoulders top pattern that we saw in late 2021 and early 2022 is also similar to the current H&S pattern in terms of time!
This means that the current comeback to the previous (July 2024) high is quite normal. The same goes for the small move above the 61.8% Fibonacci retracement. That’s exactly what we saw in 2022, before the biggest part of the decline.
In both cases stocks moved close to the same moving averages before topping.
Given the situation in the USD Index and the early indications from copper, it looks like a top.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief