USDX Was First, Now Stocks, Then Bitcoin and Gold

Geopolitical events have only temporary impact on gold price. And it’s about to work this way once again.

Yes, the tensions in the Middle East are increasing once again, and gold moved higher yesterday. And yes, this effect is likely to be only temporary. Remember about the… War in Europe? In the immediate aftermath of the Russian invasion, gold moved higher, but most of the move happened beforehand, based on rising tensions. The key thing, however, is that once the war escalated, gold price declined, and then it kept declining for months, while the conflict didn’t end.

There were also many other cases, when gold reacted to geopolitical events in this way – it moves higher initially, and then it moves back down when the situation stops escalating, and then declines regardless of what happens – unless something really major and unexpected takes place. You can read more about this in our Explanations section.

Also, please note that while gold has a safe-haven appeal, this doesn’t necessarily apply in the case of silver and mining stocks.

And indeed – the GDXJ, proxy for junior miners – ended yesterday’s session over 1% lower even though the GLD ETF ended it 1.87% higher – which corresponded to about $40 rally in gold. Silver was up yesterday, but it’s down by over 1.2% in today’s pre-market trading (the same is the case with the GDXJ).

This is a critical underperformance of junior miners – and it serves as perfect confirmation of the point that I’ve been making. Namely, that the downside potential and the risk/reward ratio for a short position in junior mining stocks right now is better than the one in the case of gold.

There’s also one other – very important – reason for mining stocks’ poor performance, but I’ll move to that a bit later. For now, please take a look at the key context provided by the GLD ETF. Quoting my yesterday’s analysis:

(…) This was the final top for the price of gold for at least some time. At least that’s what the huge-volume sessions meant previously, especially when gold was similarly overbought as it was recently.

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I marked those periods on the above GLD ETF chart with red – when RSI based on the GLD was over 80 AND we saw a huge spike in the levels of volume, it meant that the big rally in gold price was over.

We saw volume spikes in several other cases, and RSI was very overbought in other instances as well, but it is the combination of both that makes that current case – and its three analogies so special.

RSI well above 70 indicates a red-hot sentiment, and the extremely high volume level proves that it reached its extreme as so much capital / gold exchanged hands.

Besides, gold didn’t “only” (as if it was a small feat, and it isn’t!) moved on huge volume while being extremely overbought. It also reversed on that huge volume, which means that the latter confirmed that reversal.

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Yesterday’s geopolitically driven rally does not nullify the powerful bearish implications of the huge-volume reversal, especially since it was confirmed by miners’ reversal.

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The bearish implications from the mining stocks extend beyond the reversal. Quoting my previous analysis:

Some might say that the GDXJ has just broken above its declining, blue resistance line based on its 2020 and 2022 tops, and that is a very bullish game-changer.

I disagree, given the situation in gold, the RSI reading, silver’s outperformance, USD Index’s breakout, and given the fact that when the GDXJ was breaking above its declining resistance lines (marked with orange), those breakouts didn’t hold. Instead, they were followed by tops. That’s how the 2022 top and the late-2023 top formed.

So, can we ignore everything else and view GDXJ’s breakout as a bullish game-changer? We can, but I don’t think that’s a good idea.

Please note that the breakout in 2022 that was shortly followed by a very important top and a $24+ decline, was followed by a rally that was similarly big to what we saw very recently.

This is not a deviation from the historic norms – it’s another bullish cycle that most likely comes to an end.

To further confirm the previous paragraph, I marked the 2022 rally with a green, dashed line, and I copied it to the most recent rally. They are almost identical in terms of size – the only difference (and not a big one, either) is that the current upswing was quicker.

Just as the 2022 rally was quickly erased – and then the GDXJ fell much more – the same is likely to happen this time.

In particular, the fall in mining stock prices could be dramatic if we see a major sell-off in the stock market.

And while I won’t say that we saw THE top with 100% certainty, I do want to quote what I wrote many weeks ago and then point to the similarity between the price patterns that we saw in 1929 and recently.

I posted the screenshot below over EIGHT weeks ago.

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Here’s what happened on August 8, 1929, and later:

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Stocks continued to move higher for about three weeks, and then they plunged in a massive way.

The top formed at the turn of the month and then the price declined in a back-and-forth manner for approximately two weeks. The decline accelerated in the second half of the month.

Seems similar? Because it should.

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Stocks recently (about two weeks ago, so about six weeks after I quoted the above) topped close to the turn of the month, and then they declined in a back-and-forth manner in the first half of the month.

And guess what they just did yesterday? Stocks’ decline accelerated – just like what it has done in 1929!

When stocks decline a bit more, they will erase their entire March rally – some said that stocks could only move up now, and it appears that it’s not the case. What is much more likely the case is that history is rhyming, and after a period of extreme strength and greed, comes a period of declines, perhaps extreme declines.

Please note that I’m still not ruling out a case in which the S&P 500 Index soars to about 5,300 and tops there, but this scenario is becoming less likely with each passing day.

And given what just happened in tech stocks.

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The NASDAQ just clearly (!) invalidated its breakout above the 2021 highs. This is a huge deal, as tech stocks were the most popular and leading ones during the current (previous?) rally.

AI will change the world! Bitcoin is the new dollar! And so on. The new paradigm.

And yes, AI will change the world, but it’s overhyped at the moment in my view. It’s Dot-com bubble 2.0. Just because AI will change the world, it doesn’t mean that it will all happen now. Sure, some advancements have become immediately useful, but the hype was way too big – just like it was the case with the Internet in general. It did change the world, but the initial rally in tech stocks – and in the stock market in general – was a speculative bubble. Most likely we saw one this time as well.

NASDAQ’s invalidation of the move above the previous highs is a huge deal, because it’s a clear technical sign that “this is it” – this is the top.

This is important for us, precious metals investors and traders, because of the specific link between tech stocks and mining stocks.

If this is the Dot-com bubble 2.0, then what happened in the 1.0 version is likely to apply this time a well – history rhymes, after all.

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The decline of tech stocks took mining stocks with them. To clarify – they both fell together until tech stocks reached their previous lows, and then miners bottomed out while tech stocks continued to slide.

In this case, the previous low is at about 10,000, so it looks like we’re about to see miners fall in a MAJOR way.

Oh, and speaking of bitcoin, did you notice that it invalidated its breakout as well?

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The momentum is gone, the breakouts above the 2021 highs are invalidated, and this popular USD alternative is declining while the USD itself is rallying.

Interestingly, this is the time when people are expecting bitcoin’s halving to trigger a rally as that’s what’s been taking place in each case that it happened.

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In my opinion, this argument is very weak. The truth is that bitcoin was in a long-term uptrend, and pretty much wherever you’d put any type of cyclical measure, it would show you that over the medium run, the price moved up.

And now, everyone and their brother (at least in the circles that are interested in cryptocurrencies) are expecting bitcoin to rally once again as the halving is likely to take place this Friday.

You know what happens when everyone interested in a given market expects some kind of event to trigger a substantial rally? They buy BEFORE that event takes place. And what – in this case – happens once the event does indeed finally take place? Since everyone interested had already bought, at that moment, the price… falls, despite the fundamental reasoning.

Sounds crazy?

That’s exactly what happened when the SLV ETF was launched. Remember what people were saying many years ago when this ETF was about to be launched? Silver was already rallying in expectation of this event that would make silver available to wider public, huge amounts of investment capital were supposed to drive the price of silver to the moon. Triple digit silver was a sure bet.

What happened?

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Silver rallied in the immediate aftermath of the SLV ETF being launched and then it plunged - erasing 1/3 of its value.

The EXPECTATIONS of the launch drove the price of silver higher, but when that finally took place, the rally was erased.

So, will bitcoin halving really drive its price higher in a sustainable way, just as it is widely expected? Nope.

With rallying USD and declining… Stocks, bitcoin, and many other assets, will gold, silver and mining stocks really hold ground? The history and analogies to 2008 and 2020 suggest otherwise. Precious metals and miners are likely to slide along with stocks as the USD rallies, at least initially (in terms of weeks/months). Then, as stocks continue to move lower, PMs and miners are likely to start a massive rally. The current rally in gold is likely over and what we see now are likely just temporary, geopolitically driven upswings that are likely to be followed by bigger declines, just like what we saw after powerful reversals that formed on huge volume levels.

Is this time really different? Those are expensive words on the market. What is much more likely is that history is rhyming once again. Let’s profit on it.

Again, I think that junior mining stocks offer a much better shorting opportunity than gold, so if that’s something you can do or are considering to do, I suggest getting details from my Gold Trading Alerts.

Thank you.

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