The gold miners’ 2021 gains prompted a standing ovation among investors. However, they didn’t notice a magic trick until everything vanished.

The Gold Miners

After the HUI Index plunged by more than 10% and made all of its 2021 gains disappear, the magic trick left investors in a state of shock. But while Mr. Market still hasn’t sawed the HUI Index in half, the illusionist is likely gearing up for his greatest reveal. Case in point: while the Zig Zag Girl captivated audiences in the 1960s, the HUI Index’s zigzag correction leaves little to the imagination. And with the recent swoon a lot more than just smoke and mirrors, the HUI Index’s short-term optimism will likely vanish into thin air.

To explain, despite the profound drawdown, the HUI Index hasn’t been able to muster a typical relief rally. Moreover, with ominous signals increasing week by week, if history rhymes (as it tends to), the HUI Index will likely find medium-term support in the 100-to-150 range. For context, high-end 2020 support implies a move back to 150, while low-end 2015 support implies a move back to 100. And yes, it could really happen, even though such predictions seem unthinkable.

Please see below:

Furthermore, the underperformance of gold stocks relative to gold is also worthy of attention. With the junior miners often performing the worst during medium-term drawdowns, short positions in the GDXJ ETF will likely offer the best risk-reward ratio. To that point, if you held firm in 2008 and 2013 and maintained your short positions, you almost certainly realized substantial profits. And while there are instances when it’s wise to exit one’s short positions, the prospect of missing out on the forthcoming slide makes it quite risky.

To explain, I warned that the recent plunge was weeks in the making:

I wrote the following about the week beginning on May 24:

What happened three weeks ago was that gold rallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxy for gold stocks… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains. That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks.

Thus, while the HUI Index remains steady for the time being, back in 2008, the ominous underperformance signaled that trouble was ahead. To explain, right before the huge slide in late September and early October, gold was still moving to new intraday highs; the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market suffered materially. If stocks hadn’t declined back then so profoundly, gold stocks’ underperformance relative to gold would have likely been present but more moderate.

Nonetheless, the HUI Index’s bearish head & shoulders pattern is extremely concerning. When the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02. Thus, three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern.

In addition, when the HUI Index peaked on Sep. 21, 2012, that was just the initial high in gold. At that time, the S&P 500 was moving back and forth with lower highs. And what was the eventual climax? Well, gold made a new high before peaking on Oct. 5. In conjunction, the S&P 500 almost (!) moved to new highs, and despite the bullish tailwinds from both parties, the HUI Index didn’t reach new heights. The bottom line? The similarity to how the final counter-trend rally ended in 2012 (and to a smaller extent in 2008) remains uncanny.

As a result, we’re confronted with two bearish scenarios:

1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early-2020 high.
2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

Keep in mind though: scenario #2 most likely requires equities to participate. In 2008 and 2020, sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500. However, with the Fed turning hawkish and investors extremely allergic to higher interest rates, the likelihood of a three-peat remains relatively high.

If we turn our attention to the GDX ETF, lower highs and lower lows have become mainstays of the senior miners’ recent performance. Moreover, while the GDX ETF’s swift drawdown occurred on significant volume, the recent bounce hasn’t garnered much optimism. As a result, we’re likely witnessing a corrective upswing within a medium-term downtrend.

Please see below:

Finally, comparing the current price action to the behavior that we witnessed in 2012, back then, the GDX ETF corrected back to the 38.2% Fibonacci retracement level and then continued to make lower highs before eventually rolling over. And today, the senior miners are displaying similar weakness. Gold stocks are declining even while correcting, and the lack of meaningful upswings signals that the current environment is very bearish.

In conclusion, while gold, silver, and mining stocks will attempt to pull rabbits out of their hats, the bunnies’ bounce will likely fade over the medium term. Moreover, with the precious metals searching for a magic bullet that likely doesn’t exist, another disappointment could leave investors without an ace in the hole. The bottom line? While gold, silver, and mining stocks will likely dazzle the crowd in the years to come, their wizardry could resemble black magic in the coming months.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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Just before the hunt begins, the hunter needs to be sure its prey feels safe. Will we see a promising short-term rally in gold?

After the USD Index reasserted its dominance once again, its bellowing howl sent shivers down the spine of currency traders. When the U.S. Dollar Index is on the hunt, the precious metals are often its prey. The alpha wolf is poised to lead the pack over the medium term, and the sheep will likely be sent to the slaughter, but the predator needs to gather force first; a peaceful period of prosperity should ensue over the next several days. And this short-term decline could help uplift gold, silver, and mining stocks.

To explain, I warned last week that a short-term decline was likely after the USD Index’s RSI (Relative Strength Index) jumped above 70. And after eliciting some weakness, another pullback to the 38.2% Fibonacci retracement level also aligns with the price action that we witnessed in 2016.

Please see below:

To that point, after the USD Index broke above its short-term declining resistance line in 2016, it followed that up by retreating a bit below its rising support (dashed) line and then consolidated for about a month before rallying sharply. In the process, the USD Index corrected to approximately its 38.2% Fibonacci retracement level before rallying once again (in fact, it moved slightly below it). For context, there was also a huge intraday reversal in the following days, but it was an event-driven one (it was when Donald Trump won the elections), so it’s unlikely to be repeated. As of today, with the 38.2% Fibonacci retracement level at about 91.3, the USDX could bottom close to this level. Now, this might not seem like a big deal, but it becomes quite important once one considers what happened in gold during the final part of the move to the 38.2% retracement in 2016. That was when gold made most of its gains.

However, given the yellow metal’s inability to bounce after its profound decline, the forthcoming rally will likely be weaker than originally expected. For context, the initial projection was based on the similarity to gold’s behavior in 2012. However, with the yellow metal struck in neutral and failing to gain any traction, the current environment seems more bearish than it was in 2012. The bearish gold price forecasts currently seem justified , in the medium term.

Moreover, if the USD Index can surpass 93, the greenback will complete its inverse head & shoulders pattern, and the milestone implies a short-term target of roughly 98.

Let’s keep in mind that the near-term decline in the USD Index is likely to be small – and nothing more than a blip on the radar screen, when viewed from the long-term point of view. The USD Index often records material upswings during the middle of the year. If you analyze the chart below, you can see that summertime surges have been mainstays on the USD Index’s historical record. Likewise, double bottoms often signal the end of major declines and often ignite significant rallies. For example, in 2004, 2005, 2008, 2011, 2014 and 2018, a retest of the lows (or close to them) occurred before the USD Index began its upward flights. In addition, back in 2008, U.S. equities’ plight added even more wind to the USD Index’s sails. And if the general stock market suffers another profound decline (along with gold miners and silver), a sharp re-rating of the USDX is likely in the cards.

Please see below (quick reminder: you can click on the chart to enlarge it):

If that wasn’t enough, the thesis is also supported by the USD Index’s long-term chart. To explain, the USDX’s long-term breakout remains intact, and if we steady the binoculars, the greenback’s uptrend is clearly in place.

Please see below:

Moving on to the Euro Index, the recent symmetrical decline mirrors the drawdown that we witnessed in mid-2020. And if the Euro Index breaks below the neckline of its bearish head & shoulders pattern, the slide could be fast and furious. For context, completion of the right shoulder signals a decline to (roughly) the June 2020 lows or even lower. However, with a short-term corrective downswing in the USD Index likely to usher the Euro Index higher, the development should help support gold, silver, and mining stocks this week.

Please see below:

For context, I wrote previously:

The completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign. That’s another point for the bearish price prediction for gold.

Circling back to the 2016 analogue, the USD Index has already hopped into the time machine. And with the flashback eliciting memories of past glory, a reenactment won’t be applauded by the PMs.

As you can see on the above chart, what we saw this year was quite similar to what happened in 2016. The analogy that I described previously worked just like in the past. Namely, the back-and-forth movement after the breakout was followed by a quick rally.

The bottom line?

Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is outperforming the Eurozone and the EUR/USD accounts for nearly 58% of the movement of the USD Index – the relative performance is what really matters.

In conclusion, while wolves will likely circle gold, silver and mining stocks over the medium term, the leader of the pack – the USD Index – is well-fed for now and shouldn’t disrupt the precious metals’ short-term corrective upswing. However, when its stomach growls and the hunt continues, the alpha’s bared teeth, fixed stare, and horizontal ears may scare gold, silver and mining stocks to death. Thus, while the precious metals are likely safe in the short term, the nights might grow colder and darker even amid the summer sun.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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Gold sank profoundly on Jun. 17, taking its crew along. While it has the strength to go up for one more breath, other PM assets may not be that tough.

The Gold Miners

While investors believed that superficial strength indicated clear skies ahead, I warned on Jun. 14 that storm clouds were likely to rain on gold, silver and mining stocks’ parade.

I wrote:

Not only has gold’s RSI fallen precipitously, but the yellow metal’s stochastic oscillator is also at levels that preceded significant historical drawdowns. As a result, while a $100+ decline is likely to materialize in the short term, an even larger decline will likely occur over the medium term. And with the 2008 and 2012-2013 analogues becoming even more valid by the day, gold’s ominous path forward will likely catch many market participants by surprise.

And with the technical realities finally drowning the yellow metal, it was a tough pill to swallow for those that didn’t heed the warning.

Please see below:

As part of the problem, the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. However, once one zooms out and looks at the situation from a broad perspective, it’s clear that: “What has been will be again, what has been done will be done again; there is nothing new under the sun.” (-Ecclesiastes 1:9)

Therefore, while investors often focus all of their attention on the yellow metal, I warned on Jun. 14 that the HUI Index’s ominous behavior signaled significant downside for gold, silver and mining stocks.

I wrote:

With the HUI Index acting as the PMs’ canary in the coal mine, the bearish implications are as clear as day when eyeing the long-term chart. In the past three weeks, two key events unfolded:

1. The stochastic oscillator delivered a clear sell signal.
2. The self-similarity patterns became increasingly valid.

And with last week’s price action adding further confirmation, investors’ optimism is showing severe cracks in its foundation.

On top of that, even though the HUI Index plunged by more than 10% last week, the carnage may not be over. Case in point: the HUI Index is in the midst of forming the right shoulder of its bearish head & shoulders pattern, and if completed, could result in a profound decline over the medium term. For context, with gold approaching its late-April bottom and its rising medium-term support line, the yellow metal could bounce at roughly $1,750. In the process, the gold miners may follow suit. However, the bearish implications remain intact over the medium term, and a significant slide is likely to follow.

Please see below:

To explain, if you held firm in 2008 and 2013 and maintained your short positions, you almost certainly realized substantial profits. And while there are instances when it’s wise to exit one’s short positions and re-enter at more attractive prices, the smooth declines of gold, silver, and mining stocks mean that the risk-reward of doing so is tilted toward the downside. Or to put it more bluntly, the prospect of missing out on the forthcoming slide makes exiting the short positions a risky investment decision. For context, we believe that holding the short position is the most prudent course of action. However, if gold, silver and mining stocks become extremely oversold, we may consider covering on a short-term basis.

If that wasn’t enough, I warned previously that the recent plunge was weeks in the making:

I wrote the following about the week start started on May 24:

What happened three weeks ago was that gold rallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxy for gold stocks… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains. That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks.

To that point, the HUI Index is still following two medium-term historical analogies. To explain, back in 2008, right before a huge slide, in late September and early October gold was still moving to new intraday highs, but the HUI Index was ignoring that, and then it declined despite gold’s rally. However, it was also the case that the general stock market declined then. If stocks hadn’t declined back then so profoundly, gold stocks’ underperformance relative to gold would likely be present but more moderate.

Moreover, in 2012, the HUI Index topped on Sep. 21, and that was just the initial high in gold. At that time the S&P 500 was moving back and forth with lower highs – so a bit more bearish than the current back-and-forth movement in this stock index. And what was the eventual climax? Well, gold moved to new highs and formed the final top (Oct. 5). It was when the S&P 500 almost (!) moved to new highs, and despite both, the HUI Index didn’t move to new highs. Thus, the similarity to how the final counter-trend rally ended in 2012 (and to a smaller extent in 2008) ended is uncanny.

On top of that, the stochastic oscillator (which flashed a clear sell signal) is singing a similar tune. Not only do these signals often precede massive price declines on their own, but the analogies of 2008 and 2012 serve as confirmation that the huge decline has only just begun and that forecasting lower gold prices is currently justified.

Thus, if history rhymes, as it tends to, the HUI Index will likely decline profoundly and find medium-term support in the 100-to-150 range. For context, high-end 2020 support implies a move back to 150, while low-end 2015 support implies a move back to 100. And yes, it could really happen, even though it seems unthinkable.

The HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over. Now, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02.

That’s why I previously wrote that “it wouldn’t be surprising to see a move to about 300 in the HUI Index”. And that’s exactly what we saw (a move above 320 is still close to 300 from the long-term point of view). To clarify, one head-and-shoulders pattern – with a rising neckline – was already completed, and one head-and-shoulders pattern – with a horizontal neckline – is being completed, but we’ll have the confirmation once miners break to new yearly lows.

Furthermore, three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the declines exceeded the size of the head of the pattern.

As a result, we’re confronted with two bearish scenarios:

1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early 2020 high.
2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

Keep in mind though: scenario #2 most likely requires equities to participate. In 2008 and 2020, the sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500. However, with the Fed turning hawkish and investors extremely allergic to higher interest rates, the likelihood of a three-peat remains relatively high.

Let’s zoom in.

To explain, the senior miners’ weekly decline occurred relatively uninterrupted, with little buying pressure witnessed on Jun. 18. Moreover, not only did the GDX ETF close below its April lows and its March highs, but it also dipped below the 61.8% Fibonacci retracement level. Thus, while the senior miners’ RSI (Relative Strength Index) signals a buying opportunity (by falling below 30), the technical damage (breakdown below the 61.8% Fibonacci retracement) justifies the bearish outlook even in the short run. Of course, I remain on the lookout for this breakdown’s invalidation as it would be a sign of potential strength.

Finally, let’s consider the size of the possible corrective upswing based on the analogy to 2012. Back then, the GDX ETF’s corrective upswing didn’t recapture 61.8% or even 38.2% of its previous decline, and the bullish correction was rather “muted” relative to gold. Thus, the notable detail here is that the GDX ETF started its November 2012 correction with the RSI close to 30, but also when it moved slightly below its previous (August) lows, and the final short-term bottom took place after the second (!) day when it declined on big volume.

So, if history is going to continue to rhyme (which seems likely), even if gold corrects quite visibly, gold stocks’ corrective upswing might not be that significant. If we see “screaming short-term buy signals” or something like that, we might close or even briefly switch to the long side, but for now, the trend remains down.

In conclusion, gold, silver and mining stocks’ plight was a humbling experience for many investors. And while the recent slide highlights the importance of investing without emotion, we remain confident that the precious metals will soar once again. However, because secular bull markets don’t occur in a straight line, based on the similarity to how similar situations developed in the past, a final profound decline will likely occur before the metals resume their resurgence. As a result, even though gold, silver, and mining stocks are poised to shine in the long run, I still think that short positions in the precious metals sector – especially in the junior miners – currently remain attractive from a risk-reward perspective.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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Gold declined yesterday, or I should say, it rushed down at breakneck speed. And while it might have been a surprise for some, it wasn’t for me.

However, we should stay alert to any possible changes, as no market moves in a straight line. Tread carefully.

On a side note, while I didn’t check it myself (well, it’s impossible to read every article out there), based on the correspondence I’m receiving, it appears I’ve been the only one of the more popular authors to be actually bearish on gold before the start of this week. Please keep that in mind, along with me saying that yesterday’s decline is just the beginning, even though a short-term correction might start soon. Having that in mind, let’s discuss what the Fed did (and what it didn’t do) in greater detail.

Look What You Did

With the U.S. Federal Reserve’s (FED) reverse-repo nightmare frightening the liquidity out of the system, I highlighted on Jun. 17 that the FED raised the interest rate on excess reserves (IOER) from 0.10% to 0.15%.

I wrote:

The FED hopes that by offering a higher interest rate that it will deter counterparties from participating in the reverse repo transactions. However, whether it will or whether it won’t is not important. The headline is that the FED is draining liquidity from the system and increasing the IOER is another sign that the U.S. federal funds rate could soon seek higher ground.

Please see below:

To explain, the red line above tracks the U.S. federal funds rate, while the green line above tracks the IOER. If you analyze the behavior, you can see that the two have a rather close connection. And while we don’t expect the FED to raise interest rates anytime soon, officials’ words, actions and the macroeconomic data signal that the taper is likely coming in September.

And in an ironic twist, while the question of whether it will or whether it won’t seemed reasonable at the time, the tsunami of reverse repurchase agreements on Jun. 17 signal that 0.15% just isn’t going to cut it. Case in point: while the FED hoped that the five-basis-point olive branch would calm institutions’ nerves, a record $756 billion in excess liquidly was shipped to the FED on Jun. 17. For context, it was nearly $235 billion more than the daily amount recorded on Jun. 16.

Please see below:

To explain the significance, I wrote previously:

A reverse repurchase agreement (repo) occurs when an institution offloads cash to the FED in exchange for a Treasury security (on an overnight or short-term basis). And with U.S. financial institutions currently flooded with excess liquidity, they’re shipping cash to the FED at an alarming rate.

The green line above tracks the daily reverse repo transactions executed by the FED, while the red line above tracks the U.S. federal funds rate. Moreover, notice what happened the last time reverse repos moved above 400 billion? If you focus your attention on the red line, you can see that after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. Thus, with current inflation dwarfing 2015 levels and U.S. banks practically throwing cash at the FED, is this time really different?

Furthermore, I noted on Jun. 17 that the FED’s latest ‘dot plot’ was a hawkish shift that market participants were not expecting.

I wrote:

The perceived probability of a rate hike by the end of 2022 sunk to a 2021 low on Jun. 12. However, after the FED’s material about-face on Jun. 16, I’m sure these positions have been recalibrated.

Please see below:

And as if the chart above had been inverted, the perceived probability of a rate hike by the end of 2022 has now surged to more than 90%.

The Death Toll of June 17th

In addition, while I’ve been warning for months that the bond market’s fury would eventually upend the PMs, not only has the FED’s inflationary misstep rattled the financial markets, but the U.S. 30-year fixed-rate mortgage (FRM) jumped to 3.25% on Jun. 17.

Please see below:

Source: Mortgage News Daily

Furthermore, please read what Matthew Graham, COO of Mortgage News Daily, had to say:

“Markets were somewhat surprised by the Fed's rate hike outlook. Granted, the Fed Funds Rate (the thing the Fed would actually be hiking) doesn't control mortgage rates, but the outlook speaks to how quickly the Fed would need to dial back its bond buying programs (aka "tapering"). Those programs definitely help keep rates low. The sooner the Fed begins tapering, the sooner mortgage rates will see some upward pressure.”

To that point, with tapering prophecies officially morphing from the minority into the consensus, the PMs weren’t the only commodities sent to slaughter on Jun. 17. For example, the S&P Goldman Sachs Commodity Index (S&P GSCI) plunged by 2.37% as the inflationary unwind spread. For context, the S&P GSCI contains 24 commodities from all sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals.

Exacerbating the selling pressure, China’s National Food and Strategic Reserves Administration announced on Jun. 17 that it would release its copper, aluminum and zinc supplies “in the near future” in a bid to contain the inflationary surge that’s plaguing the region. As a result, if the psychological forces that led to the surge in cost-push inflation come undone, the USD Index could move from the outhouse to the penthouse.

To explain, I wrote on Apr. 27:

Why is the behavior of the S&P GSCI so important? Well, if you analyze the chart below, you can see that the S&P GSCI’s pain is often the USD Index’s gain.

To explain, the red line above tracks the USD Index, while the green line above tracks the inverted S&P GSCI. For context, inverted means that the S&P GSCI’s scale is flipped upside down and that a rising green line represents a falling S&P GSCI, while a falling green line represents a rising S&P GSCI. More importantly, though, since 2010, it’s been a near splitting image.

Inflation Is Still There

In the meantime, though, inflationary pressures are far from contained. And while the S&P GSCI’s plight would be a boon for the USD Index, the greenback still has plenty of other bullets in its chamber. Case in point: with the FED poised to taper in September and investors underpricing the relative outperformance of the U.S. economy, VANDA Research’s latest FX Outlook signals that over-optimism abroad could lead to a material re-rating over the summer.

Please see below:

To explain, the chart on the right depicts investors’ expectations of economic strength across various regions. If you analyze the second (CAD) and the third (GBP) bars from the right, you can see that positioning is more optimistic than the economic growth that’s likely to materialize. Conversely, if you analyze the first bar (USD) from the left, you can see that positioning is more pessimistic than the economic growth that’s likely to materialize. As a result, with U.S. GDP growth poised to outperform the U.K., Canada, and the Eurozone, an upward re-rating of the USD Index could intensify the PMs selling pressure over the medium term.

On top of that, while the inflation story is far from over (and will pressure the FED to taper in September), the Philadelphia FED released its Manufacturing Business Outlook Survey on Jun. 17. And while manufacturing activity dipped in June, “the diffusion index for future general activity increased 17 points from its May reading, reaching 69.2, its highest level in nearly 30 years.”

In addition, “the employment index increased 11 points, recovering its losses from last month,” and “the future employment index rose 2 points … [as] over 59 percent of the firms expect to increase employment in their manufacturing plants over the next six months, compared with only 5% that anticipates employment declines.” For context, employment is extremely important because a strengthening U.S. labor market will likely put the final nail in QE’s coffin.

But saving the best for last:

“The prices paid diffusion index rose for the second consecutive month, 4 points to 80.7, its highest reading since June 1979. The percentage of firms reporting increases in input prices (82 percent) was higher than the percentage reporting decreases (1 percent). The current prices received index rose for the fourth consecutive month, moving up 9 points to 49.7, its highest reading since October 1980.”

Please see below:

Source: Philadelphia FED

Investment Clock Is Ticking

Also, signaling that QE is living on borrowed time, Bank of America’s ‘Investment Clock’ is ticking toward a bear flattener in the second half of 2021. For context, the term implies that short-term interest rates will rise at a faster pace than long-term interest rates and result in a ‘flattening’ of the U.S. yield curve.

Please see below:

To explain, the circular reference above depicts the appropriate positioning during various stages of the economic cycle. If you focus your attention on the red box, you can see that BofA forecasts higher interest rates and lower earnings per share (EPS) for S&P 500 companies during the back half of the year.

As further evidence, not only is the FED’s faucet likely to creak in the coming months, but fiscal stimulus may be nearing the dry season as well.

Please see below:

To explain, the blue bars above track the U.S. budget deficit as a percentage of the GDP. If you analyze the red circle on the right side of the chart, you can see that coronavirus-induced spending was only superseded by World War Two. Moreover, with the law of gravity implying that ‘what goes up must come down,’ the forthcoming infrastructure package could be investors’ final fiscal withdrawal.

The Housing Market

Last but not least, while the S&P 500 has remained relatively upbeat in recent days, weakness in the U.S. housing market could shift the narrative over the medium term.

Please see below:

To explain, the red line above tracks the S&P 500, while the green line above tracks U.S. private building permits (released on Jun. 16). If you analyze the arrows, you can see that the former nearly always rolls over in advance of the latter. For context, the S&P 500 initially peaked before building permits in 2018 and alongside in 2015. However, in 2018, when the S&P 500 recovered and continued its ascent – while building permits did not – the U.S. equity benchmark suffered a roughly 20% drawdown. Thus, if you analyze the right side of the chart, you can see that building permits peaked in January and have declined significantly. And if history is any indication, the S&P 500 will eventually follow suit.

In conclusion, the PMs imploded on Jun. 17, as taper trepidation and the USD Index’s sharp re-rating dropped the guillotine on the metals. And with the FED’s latest ‘dot plot’ akin to bullet holes in the PMs, the walking wounded is still far from a recovery. With inflation surging and the FED likely to become even more hawkish in the coming months, the cycle has materially shifted from the goldilocks environment that the metals once enjoyed. And with the two-day price action likely the opening act of a much larger play, the PMs could be waiting months for another round of applause.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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The precious metals seem to be ready for vacation deep dives, but all signs indicate that the USDX will stay on the side of the pool, perfectly dry.

The USD Index (USDX)

With the USD Index washing away its sins in recent weeks, the greenback has recorded five daily rallies of more than 0.40% since May 26. And with the up days growing stronger and the down days growing weaker, the change in the trend will be clear to more and more traders, which eventually would likely cause a shift in the sentiment. Case in point: while gold, silver and mining stocks are looking forward to their summer vacations (deep dives seem to be in the vacation plans, especially given today’s pre-market ~$20 decline in gold), the USD Index has been hard at work rehabbing its reputation. And with the U.S. dollar easily the cleanest shirt among the currency basket of dirty laundry, the smell of fresh linen has begun to pique investors’ interest.

For one, not only are the USD Index’s fundamentals trending up, but the technicals are also moving in the same direction. And after the USD Index closed visibly above its previous weekly close, the greenback’s verified breakout above its declining resistance line remains a source of optimism. Moreover, while the USD Index still remains below its dashed rising resistance line and its 50-day moving average, subtle signs signal that the dollar is slowly cleaning up its act.

Please see below:

Second, while the USD Index’s rally occurred slowly at first in 2016, the momentum gathered steam as sentiment shifted. And while we’re only in the first stage of the two-stage process, it’s important to remember that investors are forward-looking.

Third, the USD Index recently bounced off of a triple (declining) bottom and prior instances were followed by significant rallies (the identical patterns formed in mid-and-late 2020 and are marked by the shaded green boxes above). During that time, the USD Index originally declined steadily before zigzag corrections culminated with new lows. However, with the third time being a charm, the third distinctive bottom was the final one.

For context, the USDX sunk like a stone in July 2020, before moving back and forth while still declining in August. Similarly, in November 2020, the USDX fell from grace once again (there was one exception) before moving back and forth while still declining in December. More importantly, though, ever since the final days of March, we’ve seen the same thing all over again. After the USD Index lost its confidence in April, we saw back-and-forth movement with lower lows and lower highs in May. However, with the third distinctive low likely already achieved, the USD Index’s best days may lie ahead.

Head & Shoulders Patterns Ahead

And what happened to gold, silver and mining stocks in the time of the two previous analogues?

Well, in August, gold topped without waiting for USD’s final bottom – which is natural, given how extremely overbought it was at the time. Likewise, in early January gold topped (which was much more similar to the current situation given the preceding price action) when the USDX formed its third and final distinctive bottom.

In addition, while the development is more of a wildcard at the moment, the USD Index might be in the early innings of forming an inverted head & shoulders pattern. For context, an inverted H&S pattern is a bullish development that if formed, could usher the USD Index to about 97-98. However, completing the right shoulder requires an upward breach of 93 (the blue line on the chart above), so at this point, it’s more of an indication than a confirmation.

However, if we turn the pattern upside down, the Euro Index might be in the midst of forming a bearish H&S pattern. If you analyze the right side of the chart below, you can see that the symmetrical pattern has the current price action mirroring the summer of 2020. And while we’re still in the early innings of forming the right shoulder, three peaks were recorded during the second half of 2020 before the Euro Index eventually rolled over. Likewise, with a symmetrical setup that seems to already be in motion, the Euro Index may be heading down a similar path of historical ruin. In the second half of 2020, the decline was not that big, but it’s no wonder that this was the case as that was only the left shoulder of the pattern. Completion of the right shoulder, however, would imply another move lower, at least equal to the size of the head – to about the June 2020 lows or lower.

Please see below:

Moreover, with the USD Index’s triple bottom mirrored by a likely triple top in the Euro Index, last week’s decline actually ushered the Euro Index materially below the dashed resistance line of its monthly channel. And with the price action mirroring what we witnessed in mid-to-late 2020 – right before the Euro Index plunged – investors’ confidence could soon turn into fear.

Furthermore, the completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign, and if the Euro Index reverses, it could weigh heavily on the precious metals over the medium term. That’s another point for the bearish price prediction for gold.

The 2016 Analogue

Also, foretelling another revival, the USD Index has hopped into the time machine and set the dial to 2016. With the flashback scrubbing the stains off of the USD Index’s 2016 downswing, Mr. Clean could be arriving at just the right time.

As you can see on the above chart, what we saw this year is quite similar to what happened in 2016. If the analogy continues, the back-and-forth trading is likely to be followed by an upward acceleration. The trigger for it could be the rally back above the 50-day moving average and the rising dashed line. The confirmed breakout above both in 2016 resulted in sharper rallies in the USDX and much lower gold prices (gold declined about $200 between early October 2016 and its December 2016 lows).

Finally, the USD Index’s long-term breakout also remains intact. And when we steady the binoculars and observe the currency landscape, the greenback’s recent weakness is largely inconsequential.

Also, please note that the correlation between the USD Index and gold is now strongly negative (-0.93 over the last 10 days). The same thing happened in early January 2021 and in late July – August 2020; these were major tops in gold.

The bottom line?

Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term. Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is outperforming the Eurozone and the EUR/USD accounts for nearly 58% of the movement of the USD Index – the relative performance is what really matters.

In conclusion, investors are well aware of the USD Index’s dirty laundry, and the euro’s squeaky-clean image is starting to show stains. Moreover, with the U.S. Federal Reserve (FED) poised to come clean and scale back its asset purchases in September, the USD Index should shine over the medium term. More importantly, though, with gold, silver and mining stocks exhibiting strong negative relationships with the U.S. dollar, the greenback’s eventual shower could send all of the precious metals’ gains down the drain.

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Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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