Where Is Gold's Rally in Response to USD Weakness? / Commodities / Gold & Silver 2019

Yesterday,the USD Index moved substantially lower while precious metals barely yawned.Why is gold not rallying? What does the gold-USD link tell us now, incombination with latest developments throughout the PMs sector? Let’s examinethese and many more clues together.

Almostnothing happened yesterday in gold and silver, while miners moved a bit lower.The latter is a bearish indication, but not the most important one that we saw.The key issue is that what happened in the gold-USD link showed that gold waspreviously not showing strength with regard to the US currency. Yesterday’saction confirmed our yesterday’s thoughts on that matter. We explained thereasoning behind the lack of decline in gold in light of USD’s rally in thefollowing way:

One reason might bethat gold is simply showing strength, as it doesn’t want to move lower – it’swaiting for factors on which it could rally. But we don’t think that this thecorrect interpretation. There are multiple long-term bearish factors thatremain in place and thus it seems that there might be a differentinterpretation. And there is. Actually, there are two reasons due to which thismight be the case.

First, gold is oftenreacting to major breakouts in the USD Index (and breakdowns), not necessarilyto smaller moves that lead to the breakouts (breakdowns). The investors simplydoubt that the USD strength will be upheld and don’t sell their gold based onthe above.

(…)

Second reason may bethe very recent discrepancy between the triangle-vertex-based reversals in theUSD Index and the precious metals market. The USDX reversal took place earlier,so it may still be the case that the recent resilience of the precious metals sector is a way in which the natural delay takes place.

Consequently, therecent “strength” in gold may be no real strength at all.

Let’ssee what happened in the USD Index yesterday:

Quotingyesterday’s Gold& Silver Trading Alert:

The USD Index moved tothe declining red resistance line. It’s not visible on the above chart, but theUSDX moved a bit higher in today’s pre-market trading and thanks to this, theabove-mentioned line was reached. The line was reached, but not broken, so thefact that gold investors are hesitating seems natural.

Moreover, the recentmovement in the USD Index (approximately since the second week of January)looks like a corrective zigzag pattern. That’s yet another reason for tradersto doubt the recent strength. 7

Naturally, the bigpicture for the USDX remains bullish (and our profits on the EUR/USD pair keep on growing even though we took part of them off the table yesterday). Thefact that USD keeps on rallying since Fed’s dovish remarks (a strongly bearishfactor for the USDX) is more important than the above assumptions.

TheUSD Index has indeed corrected after moving to the declining resistance line.The key thing about this decline is that it didn’t take gold todamoon. Gold and silver mostly ignoredUSD’s decline despite early gains and mining stocks even declined. If gold’s previous lack of decline despiteUSD’s strength was really a sign of strength, it would have rallied stronglyyesterday. It didn’t and miners even declined, which shows that it was not thefactor behind the recent gold-USD dynamics. This further increases thechance that gold’s decline was simply delayed.

Goldminers’ decline was important as it was the lowest closing price of the monthand at the same time, it was the first daily close that was visibly below allthe rising short-term support lines. The breakdown presented on the above goldstock chart is now much clearer than it was before and the implications of the above chart more bearish.

Everythingthat we wrote yesterday about gold’s and silver’sdaily charts remains up-to-date, so instead of repeating it today, we willprovide you with an update on two more long-term oriented factors.

Japanese Yen, Triangles andTechnicals

Let’s take acloser look at the Japanese yen. It’s the second most heavily-weightedcomponent within the USD Index. It’s worthy of our attention as precious metalstend to move in tune with it. Just take a look at the chart below:

Most prominentfeatures are both the triangles(created by two support lines starting from the late 2008 bottom and thedeclining resistance line that’s based on the 2013 and 2015 tops) and thementioned declining resistance line. Triangles help us with determining thetime and direction of the next turning point, while the resistanceline obviously serves as a resistance. Here, we see that after reaching thesecond triangle, the gold-yen ratio indeed turned down (just as it did afterreaching the first triangle top). However, it later made a higher low andturned up. Now comes the declining resistance line – the ratio is so close toit currently that any room for further increases is minuscule. The odds favor adownside resolution, both in the ratio and in the price of gold. If not immediately, then shortly. Most factors(including gold’s, silver’s and miners’ triangle-based reversals) suggest the“immediately” scenario, though.

That was the gold-yen ratio. Next, we will visit theJapanese yen itself:

The weekly chartshows the yen to be after a verified breakdown below two rising support lines.These support lines have been drawn using either intraday or closing prices.The price is currently in the process of invalidation of the short-termbreakout above both the rising support lines. Invalidation of a breakout is astrongly bearish development and as a result, we can expect the yen to headlower. Remembering the strength of the gold-yen link, it’s one more reason for PMs prices to decline intandem.

Summary

Summing up, the recent rally and kind ofresilience in the PMs complex may appear encouraging, but it doesn’t change themedium-term trend and outlook, which remain bearish. It seems that gold’sreaction to the strength in the USD Index is simply delayed.

The upside is quitelimited, while the downside remains enormous. The reversals have been reachedlast week. As PMs, miners, and the USD Index move beyond their reversal dates,the chance for any meaningful upswing in the former before medium-term decline’scontinuation, is decliningwith the time passing.

Naturally, the above isup-to-date at the moment of publishing it and the situation may – and is likelyto – change in the future. If you’d like to receive follow-ups to the aboveanalysis (including the intraday ones, when things get hot), we invite you subscribe to our Gold& Silver Trading Alerts today.

Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

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