Gold Miners Message for the Precious Metals Rally / Commodities / Gold & Silver 2020

TheFed kept rates unchanged and while it was not immediately preceded by majorprice moves in the PMs, the no-change decision was followed by bullish priceaction in the following hours. This action extends into today’s pre-markettrading.

Mostinterestingly, however, the USD Index repeated its daily reversal confirming that lower values are to be expected. This confirms our yesterday’sanalysis.

The News in the USDIndex

Thismeans that the breakout in the greenback is likely to be invalidated shortly,and once that happens, the PMs are likely to move higher once again.

Thebreakout itself was neither huge, nor decisive, but it did take place. The USDXrallied above the rising red resistance line and reversed before the end of theday. Still, even taking into account the late decline, it ended the sessionhigher – above the resistance line.

Theimportant thing about this breakout is that – since it was relatively small –it would need to be confirmed for it to really matter. Based on the sizes ofthe previous rallies in the USD Index and the times when it corrected (bluelines on the above chart) it seems that the USD Index is about to start acorrective decline. Even the start of the decline would likely cause the USD toinvalidate its breakdown, thus giving way to a much bigger decline.

Tobe clear, we continue to think that the USD Index is headed much higher in thefollowing months and perhaps years, but this doesn’t mean that it will rally ina straight line.

Thevertical dashed line on the above chart shows what happened when the USDXentered such corrective downswings in the recent past. In almost all cases,gold and silver declined (usually relatively sharply) prior to USD’s declines.The July 2019 case may seem to be an exception, but it really isn’t one. Backthen, the USD formed two tops and the first top was indeed immediately precededby a quick dip in both precious metals. The true exception is what happened inDecember 2019 – in this case, gold and silver paused a bit before rallyingagain.

Allin all, in most cases the quick decline in metals right at the USD top wasnormal. While in most cases, it is the USD Index that can tell us somethingabout gold and silver, this time it might be the other way around first. ThePMs might have declined indicating that this was indeed the final part of theUSD’s rally, which in turn could imply a quick comeback of the PMs along with ashort-term correction in the USDX.

Meanwhile in PreciousMetals

Minerssoared back with vengeance, while gold and silver moved up just a little. Thismove might be accidental – after all, it was just one session – but it couldindicate that the precious metals market will be making another short-term runup instead of being done with the previous one. Theoretically it shouldn’tmatter because after all, PMs are likely to move higher in the short run,but it does matter in relative terms. It means that silver’s outperformanceis still ahead of us.

TheGDX ETF confirms the bullish outlook for the next several days.

Inyesterday’s analysis, we wrote that the GDX ETF reached its rising supportline without breaking below it, and that it was likely to trigger anotherrally, just like it did in mid-December and in early January. That’sexactly what happened.

Summary

Summingup, it seems that the USD Index has yet to decline and thus that the rally inthe precious metals sector is not over yet. Miners led the way yesterday, butsilver is likely to take up the baton shortly.

Theway in which the markets react to news in the first 24 hours is likely to bethe way that they move in the next several days as they continue to discountnew information. Yesterday’s and today’s (so far) price moves suggest that PMsare likely to move higher in the next several days.

Naturally,the medium-term outlook for the precious metals market remains very bearish andonce the short-term correction is over, the declines are likely to resume.

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Przemyslaw Radomski, CFA

Founder, Editor-in-chief

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