Gold Begins to Wobble. Is It a Sign of a Greater Fall? / Commodities / Gold and Silver 2022
Gold is still running on thewar-fumes, but its last moves bring to mind only bearish associations. Worseyet, a rising dollar appeared on the horizon.
On the technical front, we saw that the juniormining stocks moved higher in the first part of the session, butthen declined and ended the day practically unchanged.
Why did junior miners rally initially?Perhaps for technical reasons. They were moving higher in their immediate-termtrend, and thus, it might have been necessary for them to reach a resistancelevel before they could return to their downtrend.
Junior miners just found the resistancein the form of the declining line based on the previous March highs. After atiny attempt to break above this line, the GDXJ declined and the breakoutwas invalidated, suggesting that the rally is over.
Now, the above-mentioned resistance lineappears to be the upper border of the triangle pattern, which might concern youbecause triangles are usually a “continuation pattern”. In other words, themove that preceded the triangle is usually the type of move that follows it.The preceding move higher was up, so the following move could be to the upsideas well.
However, for this to happen, juniorminers would first need to confirm the breakout above the line, and we saw theopposite taking place yesterday – the breakoutabove the line was invalidated.
If – instead – we see a decline below thelower border of the triangle, the pattern would likely be followed by adecline. Please note that I wrote “usually” and now “always” with regard to thebullish implications of triangles.
If we look beyond the above chart, thebearish case is more justified than the bullish one.
I don’t mean just the extremelybearish situation ingold’s long-term chart, where it’s clear that gold is repeating its2011-2013 performance, with the recent top being analogous to what we saw in2012.
If it wasn’t for theUkraine-war-tension-based rally, gold would have likely topped close to itscurrent levels, which would be a perfect analogy to where it topped in 2012 –close to its preceding medium-term highs.
The fact that theRSI indicator moved lower recently after being close to 70 indicatesthat the top is already behind us.
If history is about to rhyme (and that’svery probable in my view), gold is likely to decline in a back-and-forth mannerbefore it truly slides without looking back. Basically, that’s what we’ve beenseeing recently. The recentconsolidation is not a bullish development, but something in perfect tune withthe extremely bearish pattern from 2012.
I don’t mean “just” the above, because wesee similar analogies insilver and gold stocks (the HUIIndex), and we get other indications (of more short-term nature)from the USD Index and the general stock market.
Thetechnical picture of the S&P 500 index suggests that the final top and theinitial corrective upswing are over.
Thegeneral stock market closed the week below its February highs, which means thatthe small breakout above them was invalidated. This is a very bearishindication for the following weeks. Many more investors are likely to becomeaware of the new interest-rate-hike-driven medium-term bear market once the S&P500 breaks to new 2022lows. That’s when the decline is likely to accelerate, quite likely also insilver and mining stocks that are usually most vulnerable to stock marketmoves.
Moreover,let’s keep in mind that the USD Index is likely to soar once again soon, triggeringdeclines in the precious metals market.
Inmy previous analyses, I commented on the USD Index in the following way:
Ifwe focus on the USD Index alone, we’ll see that yesterday’s decline wasabsolutely inconsequential with regard to changing the outlook for the USDX. Itsimply continues to consolidate after a breakout above the mid-2020 highs.Breakout + consolidation = increasing chances of rallies’ continuation. A bigwave up in the USD Index is likely just around the corner, and the preciousmetal sector is likely to decline when it materializes.
Asthe war-based premiums in gold and the USD appear to be waning, ahigh-interest-rate-driven rally in the USD is likely to trigger declines ingold. The correlation between these two assets has started to decline. Whenthat happened during the last two cases (marked with orange), gold plummetedprofoundly shortly thereafter.
The USD Index rallied recently, onceagain clearly verifying the breakout above its mid-2020 high. This means thatthe USD Index is now likely ready to rally once again. Naturally, this hasbearish implications for the precious metals sector.
Allin all, technicals favor a decline in the precious metals sector sooner ratherthan later.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Toolsfor Effective Gold & Silver Investments - SunshineProfits.com
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