New Lows in the USDX but No New Highs in Gold? How Come?

And so, it happened – against the odds and rising real rates, the USDX is at a new yearly low. But is gold at a new yearly high?...

The decline in the USDX was truly significant.

New Lows in the USDX but No New Highs in Gold? How Come? - Image 1

And yet – everything that I wrote on the above chart yesterday holds true and remains up-to-date also today, despite the size of yesterday’s decline:

Things are very exciting on the USD Index front. Yes, it’s declining, and yes, it’s excitingly… Bullish.

I realize that for many market participants, a move higher will always be bullish, and a move lower will always be bearish, and I will still emphasize it once again. Bullish and bearish are words that refer to the future, whereas a rally or a decline are events that already happened.

This is not the same thing.

A rally can be bearish; or it can be bullish.

A decline can be bearish; or it can be bullish.

It’s the context, bigger trends, and other factors that really determine the outlook, not what happened very recently.

So, what is supposedly making the current move lower in the USD Index so excitingly bullish?

The facts.

And the fact is that whenever the USD Index moved to or below the 101 level this year, it then rallied back up – often in a sharp and profound manner.

That’s what’s happening right now and given this kind of analogy, the implications are really bullish.

And as they are bullish for the USD Index, they are bearish for the gold and silver prices.

The USD Index moved below 101 yesterday – in fact, it even moved close to 100 – and it’s now showing (so far) subtle signs of strength.

In all previous cases that we saw this year, those subtle signs were enough to trigger profound rallies. This worked in each case – no matter how far below 101, the USD Index fell.

The fact that the USDX just turned around (a bit, but still) makes it likely that we just saw the bottom or we’re about to see it.

Why did the USDX move sharply lower yesterday? I commented on it in yesterday’s intraday Gold Trading Alert:

Gold and silver just moved sharply higher based on a slightly-lower-than-expected CPI reading, so you might be concerned and wondering how it impacts the current outlook.

In short, lower CPI readings are BEARISH for gold, just like higher CPI (inflation) readings were bullish for gold. Remember how “inflation is rising, buy gold to protect yourself!” was the predominant narrative? Now it’s the opposite.

In the very near term, gold markets often react emotionally and not necessarily logically. This move higher is very likely to be reversed.

Also, since the USD Index is at new 2023 lows, one might expect gold to be trading at new yearly highs – after all, they move in the opposite direction.

Nothing like that is happening in the price of the yellow metal.

New Lows in the USDX but No New Highs in Gold? How Come? - Image 2

What we see instead is a relatively small (compared to the decline from the May high) corrective rebound.

This relative performance on its own tells us that whatever is happening is not making the outlook for gold bullish. It’s just a regular part of the bigger downtrend, similar to what we saw in late May and early June.

In fact, those situations are directly comparable because the 50-day moving average (marked with blue) was touched in the first case, and it was almost touched yesterday.

Interestingly, it was the same thing that stopped the corrective upswing in a very similar situation last year.

And if that doesn’t convince you about the truly bearish nature of the recent price moves, please note what happened in mining stocks.

New Lows in the USDX but No New Highs in Gold? How Come? - Image 3

  • But PR, miners rallied, what can possibly be bearish about it?

Remember the red, vertical lines that I placed on the above chart to show the recent analogy? Those were the moments when the nonfarm payrolls came out below expectations. Both previous cases marked the key yearly tops.


The thing is that top didn’t form exactly when the jobs report was released, but after a quick run-up that followed. Consequently, the fact that we saw a quick run-up this week is not something that invalidates this bearish (!) analogy – it’s something that fits right into it.

Besides, due to yesterday’s upswing, junior miners moved back to their rising resistance line (previous support) without breaking above it. It means that the GDXJ price currently verifies the breakdown below this level.

Given gold’s weakness, its proximity to the 50-day moving average, and – most importantly – how likely the USD Index is to reverse very soon, it seems that this breakdown in the GDXJ will be verified shortly, and this, in turn, means that the powerful medium-term decline is likely to be resumed very soon as well.

This creates great trading opportunities, not only in mining stocks but also in other markets. It’s not easy to take decisions against the emotional reactions of other market participants – congratulations on staying strong!

Remember, a rally doesn’t have to be bullish, and a decline doesn’t have to be bearish. In fact, tops can only form after rallies, and bottoms can only form after declines. Please keep that in mind the next time when you “feel” the urge to follow the current sentiment just because it “feels” like a good idea. It’s best to analyze the situation first and only then take action – skipping this step tends to be costly.

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