The geopolitical tensions increase but fear thereof already peaked. The implications for the markets are clear.
And that is that the precious metals sector has either already peaked (in tune with the previous triangle-vertex-based reversals) or that it’s about to peak shortly – in analogy to what happened in 2022 after the fear/concern with war in Europe peaked. At least if we measure the fear and concern using Google Trends and the interest in “war”.
The gold futures chart paints a very interesting picture at this moment.
While spot gold ended Friday’s session visibly higher, due to different closing hours, gold futures actually formed a daily reversal, and closed the week below the rising red resistance line and the $2,000 mark.
This is a very bearish sign, especially that we see it after a powerful short-term rally and RSI very close to 70. This suggests that the top is either in or at hand – which is in perfect tune with what appears likely based on the sentiment analysis.
The fact that the USD Index appears to have finished its consolidation doesn’t help gold’s forecast either.
The current situation is similar to what we saw in the middle of 2022, and I marked both cases with red ellipses.
Back in mid-2022 and recently, the USD Index rallied significantly, and the RSI shot up well past the 70 level. Then the USDX corrected and so did the RSI. Back in 2022, the correction was over, when the RSI moved below 50 and the USDX touched its 50-day moving average (marked with blue). We saw both recently, so it seems that the bottom is in.
What happened next in 2022? The USDX soared to new highs, then consolidated a bit and then soared once again.
Gold price, on the other hand, was reluctant to decline at first, but finally it gave in and plunged.
Well, gold is currently holding up pretty well, but the reversal in gold future suggests that the rally is close to being over or completely over.
Meanwhile, the GDXJ rallied on Friday, but it’s still well below the previous highs, and below our entry for the current short position, which remains profitable (just as the position in the FCX). In other words, miners continue to underperform gold despite the intraday run-up.
And before anyone says that there’s something special about this run-up, please note that it’s something that we saw also in early August. After the very first part of the decline and a move below the 50-day moving average (marked with blue), the GDXJ rallied sharply back above this MA… Only to invalidate this move and slide down in the following days.
Will we see something like that also this time?
It’s definitely possible that we won’t have to wait for miners’ slide for long, but it’s also possible that it will be delayed by several days – due to the situation in stocks.
I previously wrote that after stocks (S&P 500) break below their head and shoulders pattern, they will be likely to slide to approximately 4,100. Friday’s intraday low was 4,103.78, and RSI moved very close to 30, which suggests that we might see a rebound here.
If we do, then mining stocks might get a very brief boost. It’s not likely to be big and / or it’s not likely to last for long and it might not happen at all, especially if gold declines while stocks move higher.
Consequently, the most likely scenario from here is that the profits on our short positions will grow either right away, or – if not – then soon, anyway.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief