While we are waiting for the USD Index to make up its mind, something really important is taking place where very few are looking.
The USDX is after two invalidations of breakdowns below its late-2023 low as well as other lows, and the odds are that we’re seeing a major, medium-term, broad bottom in progress.
The breakout above the declining resistance line in the USD/YEN is confirmed, which serves as an early heads-up that the USDX is about to rally as well.
That’s likely to trigger declines in the precious metals market – as indicated in the GDXJ and as I’ve been discussing previously based i.a. on the time of the year – being more or less time in the month before the U.S. elections when in the previous cases (2016 and 2020) gold topped.
Also, everything bad that could have happened to the USD Index (realistically speaking), has most likely already taken place, including the huge rate cut by the Fed. By now, markets had more than enough time to react to all this. So, those who wanted to sell, have likely already done so.
And yet, there was no breakdown – just back-and-forth trading at the previous lows. The implication here is that we’re most likely seeing a major bottom here. This, in turn, means that we’re likely seeing a major top in the precious metals sector.
On a side note, the market tops and bubbles are all characterized by the “new paradigm” theory that makes it seems as if the market had only one way to go – up. In this case it might be because China and Chinese investors are buying gold.
Sure, this might be the case, but are the Chinese investors immune to the fear and greed cycles? Are they not going to secure their profits at some point and sell or even short? No, they undergo the same cycles. They might react slightly different, but the general principle is still present.
The link between the Chinese stock market and gold shows something interesting.
Gold and mining stocks tend to perform well in the first part of the decline in the Chinese stocks, but then the precious metals sector declines in a much more profound manner. Either this (like in 2007/2008), or we get a decline in both at the same time (2015).
I commented on Chinese stocks’ breakdown a couple of months ago stating that they were likely to decline as the breakdown in them was verified. That’s taking place right now.
For now, the precious metals sector did not react by declining, but… It seems that the tipping point was just reached.
The RSI based on the Chinese stocks just moved below 30, which might not seem like a big deal until you see what happened when it took place in 2008 – the year that seems analogous to the current one. That was the moment when (approximately) gold and mining stocks (middle part of the above chart) topped.
Consequently, based on the above and many other factors that I outlined in my previous analyses, a big move higher in the USD Index and a following move lower in the precious metals sector remain to be the most likely outcome from here.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief