Nothing New in Gold, but Big News FOR Gold
Gold price didn’t do much yesterday, but USD’s comeback above the 61.8% Fibonacci retracement has major implications for it.
There are times when gold and the USD Index move in the same direction, but in the vast majority of cases, they move in opposite directions. This makes perfect sense, because no asset’s price can move completely independently from the value of the currency that it’s priced in (as long as it has a global market).
If the value of gold remains more or less the same from the point of view of non-USD-buyers, then if the value of the USD increases, it makes sense to pay fewer of those higher-priced dollars for gold, which means that the price of gold in the USD would decrease.
Now, this effect doesn’t have to work each and every day, but it works in general because the mechanism is quite obvious, and gold is obviously a global market.
This is why what we saw in the USD Index yesterday is so important.
In my Friday’s analysis, I wrote the following:
The USD Index is moving higher today, and while it didn’t move back above its 61.8% Fibonacci retracement just yet, it’s definitely moving north, and such an invalidation could take place any hour now.
The move below the early-August lows was already invalidated, but a move back above the 61.8% retracement will be the thing that confirms that the bottom is most likely in.
Generally, it takes three consecutive closes below a certain level to confirm a breakdown. So far we saw just one, and in today’s session the USDX moved higher. Invalidation later today or on Monday seems very much doable, and given how oversold the USD Index is, it’s likely to happen.
The major thing that just happened is that the USDX moved – and closed – back above the 61.8% Fibonacci retracement based on this year’s rally. This serves as the final confirmation that the bottom is indeed in.
The RSI at 30 indicated it, but the breakdown’s invalidation confirms it.
And you know what?
Seeing a bottom here is also perfectly supported by the USD Index’s long-term chart.
Long-term support lines are stronger and more important than short-term ones, and we just saw the USD Index move to its really long-term support line. Not only is this line based on the major 2011 and 2014 bottoms, but it also just served as support during the 2023 bottom.
This has very bullish implications for the following weeks and months. Based on the short-term chart alone, it might seem like this bottom is something of short-term importance only, but that’s not the case. This is likely one of the important, medium-term bottoms.
And since the U.S. currency and the precious metals market tend to move in opposite directions, the above means that the price of gold, silver, and – in consequence – mining stocks are likely forming important, medium-term tops here.
Therefore, yesterday’s lack of price movement in the precious metals had little consequence, but USDX’s invalidation had really important – and bearish – consequences for the precious metals sector.
The full version of today’s analysis - today’s Gold Trading Alert - is much bigger than what you read above, and it includes not only the initial downside target for the GDXJ (level from which juniors could rebound) but the entire price path that the GDXJ is likely to take (with specific target areas (for declines and rallies). I encourage you to subscribe and read those premium details today. Of course, as my premium subscriber, you’ll get the intraday Alerts whenever the situation requires them – that’s one of the parts of the service that my subscribers tend to enjoy the most.
Przemyslaw K. Radomski, CFA