Gold’s, Gold Stocks, and the Dollar’s No-Change Change

Not every day has to have new meaningful signals. Sometimes, though, a pause is just as meaningful.

Not every day has to have new meaningful signals. Sometimes, though, a pause is just as meaningful, and that’s what happened yesterday.

Sometimes the market simply takes a breather and verifies what happened previously. Will the previous moves be invalidated? Or will it hold? That’s what we saw yesterday, and that’s what you can see on the below charts.

Starting with the USD Index – one of gold’s key price drivers – we see that there was no move below the 50% Fibonacci retracement level nor the declining red support line.

The takeaway is simple. The moves above those levels were meaningful and are most likely the start of another move higher in the USD Index. This – due to strongly negative correlation between them – has profoundly negative implications for the precious metals market.

The U.S. dollar was not the only market out there that confirmed its previous moves. We saw the same thing in the case of the junior mining stocks.

Juniors (the GDXJ ETF serves as a proxy for them) moved sharply higher on Tuesday and then moved back down. As I explained yesterday, the lower border of the price gap stopped the decline, but there was something else that also happened.

The thing is that the GDXJ ETF failed to move back above the December 2022 highs on a sustainable basis. The only attempt that had been mase was shortly followed by a move back below those highs.

That’s how price moves become verified.

This means that while – theoretically – nothing happened on the above-mentioned markets (and the same goes for the gold and silver prices), actually something changed. The risk-to-reward ratio for the move lower improved because, due to the verification of the breakdown, the uncertainty regarding the downtrend decreased.

In other words, since we got yet another bearish confirmation, the outlook for gold just became even more bearish.

Before summarizing, I would like to include one of my replies right here in the analysis, as it seems to me that it’s something that everyone (or most) is interested in.

Q: (…) I had a question about the future of the $6000 price of gold. So if we’re not looking so much at stagflation but at entering a decent recession, or worse, then gold doesn’t necessarily have the incentive to go higher in a depression or recession, unless there is inflation.

So, do you think the reason we're going to have a $6000 gold or more is because you think they're going to really turn on the quantitative easing while lowering rates all at the same time, causing more inflation to return, and at that future timing, we may not be able to handle inflation again but actually move into hyperinflation or some form of that or some degree of that, causing gold to go to the moon? I'd love to hear your full thoughts on the subject, and even a little teaser soon, please.

Thank you, PR. I’ve been loving all your recent insights!

A: My take is that given the existence of cryptos and the fact that governments and monetary authorities already try to figure out how to use the system to their advantage (to have a firmer grip on how things are going in the economy), it’s very difficult to predict what the monetary and economic future will really look like.

Inflation has become political some time ago, so that’s what the monetary authorities will fight. The jobs reports show strength in the economy, so there’s little reliable reason to expect the Fed (at least the Fed) to stop raising interest rates, given that inflation is still high. They might be cautious, but they are likely to keep raising them, thus making the real interest rates soar. This is indeed very likely to result in a recession.

My take is that at some point, the situation will become so bad and so perplexing to everyone that very few people will realize what’s going on, but almost everyone will hate the economic/monetary system. Then, at this point, the new government-backed crypto might be introduced as the “savior,” and whoever says this idea with the loudest voice will initially be called a “hero.”

I don’t want to debate whether this would really be something good, because there are quite many reasons for a government-backed crypto (e.g., financial aid for the poor could be spent on most things, but not all, for example, not on gambling) and quite many against it (you didn’t vote for the current ruling party in the last elections – “whoosh!” Your money is now worth half of what it used to be worth – sadly, I’m only half joking). Given enough transparency, the system might work, but… Is the world truly and brutally ready for "enough transparency"?

Whatever happens, it’s likely to be very chaotic, and during those times (note: I’m not talking about the next few weeks or months, but about the following years), it’s great to own gold and silver. Whether it’s chaotic through hyperinflation, massive bankruptcies, stagflation, or even a complete changeover in the monetary system, it is of secondary importance in my view. The technical analysis will help one forecast what’s likely around the corner well before the fundamental news catches up with the price formations – as is almost always the case. The key thing is to know where – in those technicals – and at what to look.

There are many pitfalls and anti-intuitive behaviors out there (like silver soaring and breaking higher just before sliding – over and over again). In order to avoid them, one should know themselves, their motivations, and have a plan (both in general and for their investments/trading) as well as make sure they understand what’s happening on the charts and what’s likely to happen next. It’s been a great honor to be providing you with my observations and insights on gold, silver, and mining stocks for well over a decade.

All in all, the outlook for the precious metals market remains bearish, and yesterday’s inaction after important weekly reversals and other bearish confirmations simply confirms the bearish case.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

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