The Gold Price and the USDX: Ready, Set…
Gold consolidated after breaking below its rising support line, and we saw the opposite in the USD Index. They are both ready for the next big move.
Unless one sees the rising support/resistance line based on the 2022 and 2023 lows, the recent price moves might seem random.
But they are far from being random.
In reality, the recent run-up was actually a comeback to the previously broken rising support line and the verifications of this breakdown. Since that time, we have seen a pause, which further emphasizes that the resistance held.
And… that was it.
No major rally.
No comeback above $2,000 (despite the attempt).
Just a regular verification of an important, short-term breakdown.
The implications are very bearish for the short term, especially when we factor in the similarity between now and the early-2022 performance.
Both declines started from very similar levels, and we first saw an initial slide that was then followed by a corrective upswing.
This time, the upswing was smaller, but that’s not surprising given the support/resistance levels that were in play back then and recently. Back in 2022, the 50-day moving average served as support, and this time we saw breakdowns below it and below the rising support line, and they were then both verified as resistance. This resistance limited the size of the corrective upswing.
Either way, the follow-up action is likely to be analogous anyway. And this means that declines in gold are likely just ahead.
Interestingly, we see something very similar on the USD Index chart.
On May 15, I described the above chart in the following way:
The big thing that happened last week was that the USD Index finally showed strength in a really meaningful manner.
Thanks to last week’s rally, the USD Index finally broke above the declining red resistance line based on the previous important highs.
This is a game-changer for the following weeks. On a day-to-day basis, a move lower to this red line would be normal, as breakouts can be verified in this way, and that’s nothing to write home about. In fact, the USD Index moved a bit lower in today’s pre-market movement, and yes, it’s perfectly normal. It doesn’t invalidate the massively bullish implications of the breakout.
The rally was really notable, and it’s visible at first sight while looking at the above daily chart. But the really big difference becomes visible when we consider what happened on a week-to-week basis.
As surprising as it may seem, the last weekly close was the highest weekly close since late March!
Indeed, the USD Index rallied since that time. The key point here is that this is most likely just the beginning. Yes, there will be some corrections along the way (in fact, we just saw one), but the odds are that the next big move is to the upside – and that it already started.
The USDX has a tendency to reverse close to the turn of each month, and that already happened. It helped to bring the RSI well below 70, clearing the way toward further gains.
Two things that I’d like to add today iare that the USD Index is forming a flag pattern, which might imply another very brief move to the downside, but that’s not the really important thing about it. The key thing is that the rally that is likely to follow the flag is likely to be similar to the one that preceded it.
This is the mirror image of what I wrote about gold earlier today. The USD Index is likely about to repeat its May rally, and gold is likely to repeat its decline. This has profoundly bearish implications for mining stocks.
Moreover, please note that the mid-March – today performance in the USD Index can be described as a bullish cup-and-handle formation. The flag formation is also the handle of the above-mentioned pattern. This is yet another reason to expect further rallies in the USD Index in the following weeks.
The most important details are present on the long-term chart, though.
Let’s zoom out.
The USD Index usually takes a breather relatively close to its previous highs after a major double bottom.
I marked that on the above chart with small red horizontal lines. The most recent short-term high is provided by the early high – at about 105-106. Interestingly, that’s also where we see the 200-day moving average.
This means that the USD Index could indeed rally more in the near term, and this means that the precious metals sector might move even lower before it corrects in a more meaningful manner.
On the other hand, we just saw a tiny breather, and it might be enough for the USDX to continue its rally without a bigger correction for several weeks.
The key thing to keep in mind is that what we see right now – along with the most recent very short-term decline – is something that we also saw in mid-2008, right before the USD Index’s sharpest rally in decades. Interestingly, we also saw it in 2011, right before gold’s top.
The preceding bottom was not a single V-shaped low, but rather a bottom that consisted of a few separate bottoms. The final short-term decline started with the RSI at about 50. And guess what – the current short-term decline also started with the RSI close to 50.
Consequently, given all the other links to 2008, it seems that a big rally in the USD Index is just around the corner.
The situation in the biggest component of the USD Index: the EUR/USD exchange rate, confirms the above outlook.
The RSI based on the Euro Index was just practically right at the 70 level, thus flashing a sell signal. These signals were very reliable in the past, especially when the Index was right after a short-term breakout.
Those breakouts were then invalidated, and bigger declines followed.
This small breakout was already invalidated.
Despite several attempts, the euro was not able to hold above its previous 2023 high.
It’s bearish on its own as a sign of weakness, but what really stands out is that those comebacks and (failed!) attempts to move to new highs are typical for the European currency. Tiny fakeouts were what preceded declines – massive ones – many times in the past. Even the situation in the RSI indicator (upper part of the above chart) points to the situation right now being similar to what happened previously.
And as the euro declines, the USD Index rises. And gold declines as well.
As gold declines, mining stocks are very likely to decline even more (as they’ve done in the previous months and years).
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Przemyslaw K. Radomski, CFA