The USD Index let out a roar heard across all markets. The king of the financial jungle arrived, along with the greenback’s largest single-day gain.

Just as the African landscape sometimes needs to show the strongest of its inhabitants, so does the less remote but equally ferocious financial environment. This time, the USDX seems to have won the fight – its fangs and claws turned out to be the sharpest, and so are the rallies. There is nothing left for gold and its acquaintances than to run through the forest… run.

Sometimes, even jackals need to find shelter to lick their wounds in patience, waiting for a better time to come back to fight. However, they will come back eventually – they always do.

What About Gold, One of the Jackals?

With a triple-top in gold’s stochastic oscillator akin to three warning signs of a nervous breakdown, the yellow metal is still recovering from last week’s crisis of confidence. And with the price action mirroring what we witnessed in early January – right before gold suffered a significant slide – the yellow metal could soon need therapy.

Please see below:

To explain, while gold’s corrective upswing was slightly bigger than I had anticipated, please note that the length thereof was in tune with the border of the green ellipse I used to mark the likely upside target area. In other words, the recent rally was not a game-changer. The yellow metal’s inability to crack $1,800 highlights the medium-term implications that I’ve been warning about. As a result, it’s become increasingly clear that gold’s recent strength was nothing more than a short-term upswing within a medium-term downtrend.

For more on the significance of gold’s stochastic oscillator, I wrote previously:

The first sell signal occurred slightly below the 80 level, the second was above it, and the same was the case with the third one.

Since back in early 2021, the stochastic indicator moved to new highs – and so far it hasn’t – and since the USD Index might even move slightly lower before finding its short-term bottom, gold could move slightly higher on a temporary basis, before topping. Perhaps (there are no certainties on any market, but this seems quite possible in the near term) it would be the round nature of the $1,800 level and the 300-day moving average that’s very close to it that would trigger a reversal and another massive decline. From the medium-term point of view, another $20 rally doesn’t really matter. It’s the few-hundred-dollar decline that’s likely to follow that really makes the difference.

In addition, it seems that gold is moving in a way that’s somewhat similar to what we saw between mid-April 2020 and mid-June 2020. It’s trading sideways below $1,800 but above ~$1,660. Back in 2020, the range of the back-and-forth movement (size of the short-term rallies and declines) was bigger, but the preceding move was also more volatile, so it’s normal to expect smaller short-term volatility this year (at least during this consolidation).

Why is this particularly interesting? Because both consolidations (the mid-April 2020 – mid-June 2020 one and the March 2021 – today one) could be the shoulders of a broad head-and-shoulders pattern, where the mid-June 2020 – early-March 2021 performance would be the head. The breakdown below the neck level – at about $1,660 – would be extremely bearish in this case because the downside target based on the pattern is created based on the size of the head. The target based on this broad pattern would be at about $1,350 (I marked it with a thin dashed red line on the chart below – you might need to click on it to expand it for this line to become visible). Is this level possible? It is. When gold soared above $2,000, almost nobody thought that it would decline back below its 2011 highs (well, you – my subscribers – did know that). Gold below $1,500 seems unthinkable now, but with rallying long-term rates and soaring USD Index, it could really happen.

The Lion - USD Index (USDX)

After delivering a ferocious 0.75% rally on Apr. 30 – the greenback’s largest single-day gain since Mar. 4 – the USD Index let out a roar that was heard across all corners of the financial markets. And while gold, silver and mining stocks are still cackling in disobedience – as evidenced by the trios’ decelerating correlations over the last 10 days – every once in a while, the lion has to show the jackals who he is.

To explain, as the USD Index’s recent plight elicits whispers of a new order in the currency kingdom, the greenback’s stoic behavior has been misjudged as weakness. And while the vultures circle and prophecies of the USD Index’s demise become louder, the lion is slowly moving to his feet.

Case in point: with the zeitgeist forecasting new lows for the greenback, non-commercial (speculative) futures traders are still holding firm. Despite the greenback’s suffering, the immaterial decline in net-long positioning last week was relatively muted and highlights investors’ quiet respect for the U.S. dollar.

Please see below:

Source: COT

Moreover, with prior periods of extreme pessimism followed by monumental rallies in the USD Index, unless ‘this time is different,’ it’s simply a matter of when, not if, the U.S. dollar feasts on the precious metals’ overconfidence.

To explain, I wrote previously:

When net-speculative short interest as a percentage of total open interest (based on the CoT data) became extremely high in 2014 and 2018, the USD Index recoded two of its sharpest rallies in history. How sharp? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!)negative and then they became significantly (!) positive, without paying attention to any tiny moves (like the one that we saw last summer).

In short, rallies that followed periods of extreme pessimism include:

• The big 2008 rally (over 16 index points)
• The big 2009 – 2010 rally (over 14 index points)
• The 2011 – 2012 rally (over 11 index points)
• The 2013 rally (“only” over 5 index points)
• The big 2014 – 2015 rally (over 20 index points)
• The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114. Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to (roughly) the 38.2% Fibonacci retracement level. And while the current decline is of a much larger magnitude than what we saw in mid-April 2018, the USD Index is still following its June 2018 analogue by declining slightly below another critical Fibonacci retracement – the 61.8% one. Moreover, amid the greenback’s surge on Apr. 30 – which I warned was forthcoming – the USD Index invalidated its breakdown below the 61.8% Fibonacci retracement level. The bottom line? The sharp reversal is extremely bullish for the U.S. dollar.

More importantly, though, when the USD Index resumed its uptrend in June 2018 – marked by the vertical dashed line near the middle of the chart – the measured move higher also coincided with an accelerated drawdown of gold, silver and mining stocks.

Please see below:

To explain, I wrote on Apr. 21:

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, it seems that another classic retracement worked – the 61.8% one.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

As further evidence, I warned on Apr. 30 that the USD Index was ripe for a reversal. And while entering long positions in the USD Index is an appetizing thought, shorting the gold miners offers much more bang for our buck.

I wrote (with regard to possible long positions in the USD Index futures):

I would be looking to re-enter long positions as soon as the USD Index confirms the breakout above the declining resistance line. At the moment of writing these words, the USDX is already trading back above this line, so the only thing that it needs to do now is to stay there. Still, given today’s pre-market movement, it seems that we might even see an invalidation of the move below the 61.8% Fibonacci retracement. A weekly close above both levels would be very bullish for the short term and a sign for me to get back to the long positions.

But – that is all based on the assumption that I would want to have any position in the USDX. And I don’t because I think that having a short position in mining stocks provides a much better risk-to-reward ratio.

That’s exactly what we saw – a weekly close above both levels.

Adding even more ferocity to the USD Index’s roar, the recent downtrend has not invalidated its long-term breakout. And with the long-term implications taking precedence over the medium- and short-term ones, the USDX’s uptrend remains intact.

Please see below:

The bottom line?

Given the magnitude of the 2017-2018 upswing, ~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 doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates, and the latter move on a relative basis.

In conclusion, with mischievous market participants nipping and clawing at the USD Index’s mane, it’s only a matter of time before the greenback strikes back with a vengeance. And while the precious metals consider the USD Index’s territory up for grabs, the greenback’s pride is unlikely to stay hidden for much longer. As a result, while gold, silver and mining stocks’ gaze across the grassland, the sun has likely set on their recent rallies. However, once the wet season washes away the litany of financial-market imbalances, the eventual bloom will allow the precious metals to grow stronger in the long run.

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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Indicators are pointing to gold and mining ETFs running out of breath. They don’t seem to have what it takes to the move to the finish line.

Despite gold, silver and mining stocks’ recent corrective upswings, the precious metals are running out of steam. After bursting off of the lows – while failing to recognize that it’s a marathon and not a sprint – the precious metals’ late-week breather signals that their stamina isn’t what it used to be.

Moreover, with false breakouts and sanguine sentiment causing an adrenaline rush that’s likely to fade, the precious metals’ transformation from stalwart to sloth could leave investors feeling increasingly dejected.

Case in point: with the HUI Index (a proxy for gold mining stocks) already verifying the breakdown below the neckline of its bearish H&S pattern – which didn’t occur until later in 2008 – the miners’ outlook is actually more bearish now than it was then.

Please see below:

To explain, note that the 2007 – 2008 and the 2009 – 2012 head and shoulders patterns didn’t have the right shoulders all the way up to the line that was parallel to the line connecting the bottoms. I marked those lines with green in the above-mentioned formations. In the current case, I marked those lines with orange. Now, in both 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 – the recent high was slightly above 299.

This means that the recent rally is not a game-changer, but rather a part of a long-term pattern that’s not visible when one focuses on the short-term only.

The thing is that the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. During the walk, this might result in getting lost, and the implications are no different in the investment landscape.

From the day-to-day perspective, a weekly – let alone monthly – rally seems like a huge deal. 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)

The rally is very likely the right shoulder of a broad head and shoulders formation. “Very likely” and not “certainly”, because the HUI Index needs to break to new yearly lows in order to complete the pattern – for now, it’s just potential. However, given the situation in the USD Index (i.a. the positions of futures traders as seen in the CoT report, and the technical situation in it), it seems very likely that this formation will indeed be completed. Especially when (not if) the general stock market tumbles.

In addition, 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 decline exceeded the size of the head of the pattern.

Can we see gold stocks as low as we saw them last year? Yes.

Can we see gold stocks even lower than at their 2020 lows? Again, yes.

Of course, it’s far from being a sure bet, but the above chart shows that it’s not irrational to expect these kind of price levels before the final bottom is reached. This means that a $24 target on the GDX ETF is likely conservative.

In addition, mining stocks are currently flirting 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.

I know, I know, this seems too unreal to be true… But wasn’t the same said about silver moving below its 2015 bottom in 2020? And yet, it happened.

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 words ‘all-time high’ becoming commonplace across U.S. equities, the likelihood of a three-peat remains relatively high.

Senior Miners: GDX ETF

Moving on to the GDX ETF, the senior miners were unable to hold the upper trendline of their corrective zigzag pattern. Similar to the price action in late 2020/early 2021, the GDX ETF rallied slightly above the upper trendline of its roughly one-and-a-half-month channel before eventually rolling over. More importantly, though, the GDX ETF’s failure in early 2021 ended up being a prelude to the senior miners’ severe drawdown.

Please see below:

Furthermore, with the senior miners likely to peak in the coming days, the GDX ETF is poised to move from the right shoulder of its bearish H&S pattern. Following in the HUI Index’s footsteps, the GDX ETF’s correction back to the high of its left shoulder signals that the upward momentum has likely run its course.

If that wasn’t enough, the GDX ETF’s stochastic oscillator is also flashing a clear sell signal. If you analyze the two red arrows positioned at the bottom of the chart above, you can see that the black line has once again crossed the red line from above. As a result, the GDX ETF’s days are likely numbered.

Junior Miners: GDXJ ETF

As further evidence on this bearish scenario, let’s take a look at other proxies for the mining stocks. When analyzed through the lens of the GDXJ ETF, the junior miners remain significant underperformers.

Please see below:

To explain, the GDXJ ETF is now back below its late-Feb. highs - please note how weak it remains relative to other proxies for mining stocks. Unlike the HUI or the GDX, the GDXJ didn’t move visibly above its late-Feb. highs and it had already invalidated this small breakout.

Moreover, the GDXJ/GDX ratio has been declining since the beginning of the year, which is remarkable because the general stock market hasn’t plunged yet. This tells us that when stocks finally slide, the ratio is likely to decline in a truly profound manner – perhaps similarly to what we saw last year.

So, how low could the GDXJ ETF go?

Well, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range. Conversely, if stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

Also, contrasting the GDX ETF’s false breakout, both the HUI and the XAU indices ended the week below the necklines of their previous (based on the rising necklines) bearish H&S patterns. Moreover, if you analyze the right side of the charts below, while both the HUI and XAU indices initially bounced above their necklines, investors quickly sold the rallies.

Mirroring the GDX ETF, both indices are also eliciting sell signals from their stochastic oscillators. And with the GDX ETF the only wolf still howling at the moon, expect the senior miners to follow the rest of the pack lower in the near future.

Also, eliciting bearish undertones, the HUI Index/S&P 500 ratio has recorded a major, confirmed breakdown. And with the ratio nowhere near recapturing its former glory, it’s another sign that the GDX ETF is a significant outlier.

Please see below:

When the ratio presented on the above chart above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index. If you analyze the right side of the chart, you can see that the ratio has broken below its rising support line. For context, the last time a breakdown of this magnitude occurred, the ratio plunged from late-2017 to late-2018. Thus, the development is profoundly bearish.

Playing out as I expected, a sharp move lower was followed by a corrective upswing back to the now confirmed breakdown level (which is now resistance). Mirroring the behavior that we witnessed in early 2018, after breaking below its rising support line, the HUI Index/S&P 500 ratio rallied back to the initial breakdown level (which then became resistance) before suffering a sharp decline. And with two-thirds of the analogue already complete, the current move lower still has plenty of room to run. Likewise, the early-2018 top in the HUI Index/S&P 500 ratio is precisely when the USD Index began its massive upswing. Thus, with history likely to rhyme, the greenback could spoil the miners’ party once again.

In addition, the HUI to S&P 500 ratio broke below the neck level (red, dashed line) of a broad head-and-shoulders pattern and it verified this breakdown by moving temporarily back to it. The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline, the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market):

1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: if the stock market plunges, all bets are off. Why so? Well, because when the S&P 500 plunged in March 2020, the GDX ETF moved from $29.67 to below $17 in less than two weeks. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

The Gold Miners Bullish Percent Index ($BPGDM)

As another reliable indicator (in addition to the myriads of signals coming not only from mining stocks, but from gold, silver, USD Index, stocks, their ratios, and many fundamental observations) the Gold Miners Bullish Percent Index ($BPGDM) isn’t at levels that trigger a major reversal. The Index is now approaching 47. However, far from a medium-term bottom, the latest reading is still more than 37 points above the 2016 and 2020 lows.

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, with the sentiment still relatively elevated, it will take more negativity for the index to find the true bottom.

The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of 2020. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place.

But has it already run its course?

Well, in 2016 and early 2020, the HUI Index continued to move lower until it declined below the 61.8% Fibonacci retracement level. The emphasis goes on “below” as this retracement might not trigger the final bottom. Case in point: back in 2020, the HUI Index undershot the 61.8% Fibonacci retracement level and gave back nearly all of its prior rally. And using the 2016 and 2020 analogues as anchors, this time around, the HUI Index is likely to decline below 231. In addition, if the current decline is more similar to the 2020 one, the HUI Index could move to 150 or so, especially if it coincides with a significant drawdown of U.S. equities.

The NASDAQ

Circling back to the NASDAQ Composite, the unwinding of excessive speculation could deliver a fierce blow to the gold miners. Case in point: when the dot-com bubble burst in 2000, the NASDAQ lost nearly 80% of its value, while the gold miners lost more than 50% of their value.

Please see below:

Right now, the two long-term channels above (the solid blue and red dashed lines) show that the NASDAQ is trading well above both historical trends.

Back in 1998, the NASDAQ’s last hurrah occurred after the index declined to its 200-day moving average (which was also slightly above the upper border of the rising trend channel marked with red dashed lines).

And what happened in the first half of 2020? Well, we saw an identical formation.

The similarity between these two periods is also evident if one looks at the MACD indicator. There has been no other, even remotely similar, situation where this indicator would soar so high.

Furthermore, and because the devil is in the details, the gold miners’ 1999 top actually preceded the 2000 NASDAQ bubble bursting. It’s clear that miners (the XAU Index serves as a proxy) are on the left side of the dashed vertical line, while the tech stock top is on its right side. However, it’s important to note that it was stocks’ slide that exacerbated miners’ decline. Right now, the mining stocks are already declining, and the tech stocks continue to rally. Two decades ago, tech stocks topped about 6 months after miners. This might spoil the party of the tech stock bulls, but miners topped about 6 months ago…

Also supporting the 2000 analogue, today’s volume trends are eerily similar. If you analyze the red arrows on the chart above, you can see that the abnormal spike in the MACD indicator coincided with an abnormal spike in volume. Thus, mounting pressure implies a cataclysmic reversal could be forthcoming.

Interestingly, two decades ago, miners bottomed more or less when the NASDAQ declined to its previous lows, created by the very first slide. We have yet to see the “first slide” this time. But, if the history continues to repeat itself and tech stocks decline sharply and then correct some of the decline, when they finally move lower once again, we might see THE bottom in the mining stocks. Of course, betting on the above scenario based on the XAU-NASDAQ link alone would not be reasonable, but if other factors also confirm this indication, this could really take place.

Either way, the above does a great job at illustrating the kind of link between the general stock market and the precious metals market (gold, silver, and mining stocks) that I expect to see also this time. PMs and miners declined during the first part of the stocks’ (here: tech stocks) decline, but then they bottomed and rallied despite the continuation of stocks’ freefall.

Even more ominous, the MACD indicator is now flashing a clear sell signal. And because the current reading is analogous to the one that preceded the dot-com bust, the NASDAQ Composite – and indirectly, the PMs – continues to sail toward the perfect storm.

With all of that said: how will we know when a medium-term buying opportunity presents itself?

We view price target levels as guidelines and the same goes for the Gold Miners Bullish Percent Index (below 10), but the final confirmation will likely be gold’s strength against the ongoing USDX rally. At many vital bottoms in gold, that’s exactly what happened, including the March bottom.

In conclusion, with the gold miners running low on strength, stamina and staying power, their fragile foundation is already crumbling beneath the surface. With the HUI, XAU and GDXJ proxies unable to match wits with the GDX ETF, the lone survivor is unlikely to put up much of a fight going forward. Moreover, with the USD Index poised to bounce off of the 61.8% Fibonacci retracement level (the precious metals have a strong negative correlation with the U.S. dollar), the foursome are likely to huff and puff their way to lower prices. However, after a period of medium-term recovery, the precious metals will be ready to run with the bulls once again.

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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A culminating point has been reached. With the USD Index being backed up by solid fundamentals, can gold hold the line?

Have you ever noticed how often the language of war is used in finance and economics articles? A given company is on the defensive or the offensive, a stock is pushing forward, something else is rallying, positions are being taken… who will fire first? It’s the case of continuous push and pull factors that makes military strategies and concepts relevant in the subject of money.

Now, when it comes to gold and the USD Index, it’s not the great battle of our time (in reference to today’s title), as Gandalf explained to Pippin in The Lord of the Rings, but it’s a battle, nonetheless. For the yellow metal, it could even be the deep breath before the plunge. We’ll soon find out.

With an epic struggle for supremacy set to unfold in the coming weeks, battle lines have officially been drawn: with the USD Index hovering near its 50-day moving average and gold recapturing its 50-day MA, negatively correlated assets have officially collided. And, as the rules of engagement specify that to the victor go the spoils, which one is likely to wave the white flag?

Well, with the USD Index built on a foundation of relative fundamentals and gold a beneficiary of shifting sentiment, the former remains locked and loaded and poised to neutralize the threat. Case in point: despite the USD Index’s recent recoil, non-commercial (speculative) futures traders actually increased their net-long positions last week.

Please see below:

Source: COT

Moreover, let’s keep in mind that when net-speculative short interest as a percentage of total open interest (based on the CoT data) became extremely high in 2014 and 2018, the USD Index recoded two of its sharpest rallies in history. How sharp? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, without paying attention to tiny moves (like the one that we saw last summer).

In short, rallies that began with extreme pessimism include:

• The big 2008 rally (over 16 index points)
• The big 2009 – 2010 rally (over 14 index points)
• The 2011 – 2012 rally (over 11 index points)
• The 2013 rally (“only” over 5 index points)
• The big 2014 – 2015 rally (over 20 index points)
• The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114. Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to its previous highs. And in similar fashion, the current weakness is nearly identical. More importantly, though, with the 61.8% Fibonacci retracement level sitting just below the USD Index’s 50-day MA, the cavalry is already on the way.

Please see below:

The current correction is much bigger than what we saw in mid-April 2018, so it seems that what we see right now is more of an analogy to what we saw in June 2018. That was the first big correction after the breakout – above the 50-day moving average and the declining blue resistance line – that definitively ended the yearly decline.

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, I marked those retracements with red. The USD Index is already below the first two (taking today’s pre-market decline into account) and it seems to be on its way to reach the final – most classic – 61.8% retracement. This kind of retracement provides substantial short-term support and it’s something that’s likely to trigger a rebounding.

This retracement is slightly above the 90.7 level, and at the moment of writing these words, the USD Index is trading at 91.14. This means that the USD Index can reach its very strong short-term support any day – or hour – now.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

Of course, just because the bottom is likely to be formed in the following months, doesn’t mean that it’s in at this time or that it’s a good idea to ignore the bearish implications of the situation in the USD Index (as well as other indications pointing to lower gold prices).

As further evidence, the USD Index’s 2020 decline has not invalidated its long-term breakout. And with the long-term implications taking precedence over the medium- and short-term ones, the USDX still has its guns pointed in the right direction.

Adding reinforcements to its infantry, the USD Index also has another ally in the U.S. 10-Year Treasury yield. After sitting out much of the rally in 2020, the former has been following in the latter’s footsteps since the New Year’s Day. And while the U.S. 10-Year Treasury yield’s frailty has been a negative over the last two weeks, the dynamic could be about to flip.

Please see below:

Trending in the opposite direction of the USD Index futures, non-commercial (speculative) futures traders have moved from net-long to net-short the U.S. 10-Year Treasury Note. For context, bond prices move inversely of yields, so a lower U.S. 10-Year Treasury results in a higher U.S. 10-Year Treasury yield. And after non-commercial (speculative) futures traders reduced their long positions by nearly 43,000 contracts and increased their short positions by more than 44,000 contracts, speculators went from being net-long nearly 84,600 contracts to net-short nearly 2,700 contracts.

Please see below:

As a result, if the U.S. 10-Year Treasury yield and the USD Index engage in an all-out offensive, their military might could indicate the death knell for the precious metals. Case in point: if you analyze the table below, you can see that gold, silver and the mining stocks often move inversely to the U.S. dollar.

The bottom line?

Given the magnitude of the 2017-2018 upswing, ~94.5 is likely the USD Index’s first stop. And 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.’s absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates, and the latter move on a relative basis.

In conclusion, the generals have mapped out their strategies, soldiers have manned the perimeter, and the loser of the upcoming battle will likely end up losing the war. However, with the precious metals being outmanned and outgunned, the USD Index will likely plant its victory flag, while gold, silver and the mining stocks are forced to retreat and regroup. As a result, a major fallback is likely before the precious metals can resume their long-term uptrend. Due to the USD’s breakdown below the 50% retracement, they could decline in the very near term (while gold rallies a bit more – say to $1,800 or so), but don’t let that trick you into thinking that the next big move is going to the upside. In my view, that’s actually likely to be an important top that’s then going to be followed by an even more important decline in the precious metals and mining stocks. Then, after several weeks or months of declines, PMs can bottom and finally soar without huge declines on the horizon.

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.

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Przemyslaw Radomski, CFA
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Keep your eye on the ball. Just because the GDX ETF went up last week doesn’t mean that it’s in an uptrend. Corrections are part of the game.

Just as the USD Index recently (last week) suffered a countertrend decline within a medium-term uptrend, so has the GDX ETF experienced a corrective upswing within a medium-term downtrend.

Nothing moves in a straight line, so recent developments in both the gold miners and the USD Index are nothing to worry about. Everyone is still on track. Gold and the miners are headed for a medium-term downtrend and the USD Index is still gathering steam and will be leaving the station.

With the gold miners attempting to dig themselves out of their 2021 hole, the labor of love could end as quickly as it began. With a temporary retreat of the USD Index last week and dormant U.S. Treasury yields doing much of the heavy lifting, the GDX ETF had plenty of help breaking down its wall of worry.

However, with April showers likely to derail further construction activity, off-site momentum may not be as kind. Case in point: the GDX ETF is still trading below the neckline of its bearish head & shoulders pattern, and while the senior miners’ bounce above their March high may seem like a ground-breaking event, the synthetic strength is likely to hammer the miners over the medium term. Why so? Well, like a current running on extremely low voltage, Friday’s (Apr. 9) intraday bounce occurred on relatively low volume – with the positive momentum evaporating into the close.

Please see below:

As further evidence, the March/April corrective upswing took the form of a zigzag pattern, which is indicative of a countertrend move within a medium-term downtrend. In addition, if you analyze the chart above, notice how fits and starts were part of the senior miners’ price action back in January? In both cases, the GDX ETF moved above the declining blue resistance line and the 50-day moving average. Yet … the GDX ETF is lower now than it was then.

Furthermore, back in January, the GDX ETF initially ignored gold’s daily (Jan. 6) weakness. Thus, Friday’s (Apr. 9) outperformance by the GDX ETF is far from an all-clear. In fact, it could be the final creak before the foundation crumbles.

Some might say that mining stocks are showing strength compared to gold as the GDX to gold ratio broke above its declining resistance line.

However, I don’t think it’s fair to say so. I think that seeing a breakout in the GDX to gold ratio is not enough for one to say that the miners to gold ratio is breaking higher.

After all, the GDX ETF is just one proxy for mining stocks, and if miners were really showing strength here, one should also see it in the case of other proxies for the mining stocks when compared to gold.

For instance, the HUI Index to gold ratio, the XAU Index to gold ratio, and the GDXJ (junior mining stocks) to gold ratio.

There is no breakout in the HUI to gold ratio whatsoever. In fact, the ratio is quite far from its declining resistance line. Even if we chose other late-2020 tops to draw this line, there would still be no breakout.

There is no breakout in the XAU to gold ratio either. The previous attempts for the XAU to gold ratio to rally above their 2020 high marked great shorting opportunities, which is very far from being a bullish implication.

But the most bearish implication comes from gold’s ratio with another ETF – the GDXJ.

The breakout in the GDXJ to gold ratio is only tiny and unconfirmed. These moves always (since Oct. 2020) provided sell signals – the small breakout below the declining resistance line were always invalidated and they were then followed by visible short-term declines.

Five out of five previous attempts to break above the declining resistance line failed and were followed by short-term declines. Is this time really different?

It seems to me that the five out of five efficiency in the GDXJ to gold ratio is more important than a single breakout in the GDX to gold ratio, especially considering that the latter was preceded by a similar breakout in mid-March. That breakout failed and was followed by declines.

Taking all four proxies into account, it seems that the implications are rather neutral to bearish. Especially when taking into account another major ratio - the one between HUI and S&P 500 is after a major, confirmed breakdown.

When the ratio presented on the above chart above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index. If you analyze the right side of the chart, you can see that the ratio has broken below its rising support line. For context, the last time a breakdown of this magnitude occurred, the ratio plunged from late-2017 to late-2018. Thus, the development is profoundly bearish.

Playing out as I expected, a sharp move lower was followed by a corrective upswing back to the now confirmed breakdown level (which is now resistance). Mirroring the behavior that we witnessed in early 2018, after breaking below its rising support line, the HUI Index/S&P 500 ratio rallied back to the initial breakdown level (which then became resistance) before suffering a sharp decline. And with two-thirds of the analogue already complete, the current move lower still has plenty of room to run. Likewise, the early-2018 top in the HUI Index/S&P 500 ratio is precisely when the USD Index began its massive upswing. Thus, with history likely to rhyme, the greenback could spoil the miners’ party once again.

In addition, the HUI to S&P 500 ratio broke below the neck level (red, dashed line) of a broad head-and-shoulders pattern and it verified this breakdown by moving temporarily back to it. The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline, the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market):

1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: if the stock market plunges, all bets are off. Why so? Well, because when the S&P 500 plunged in March 2020, the GDX ETF moved from $29.67 to below $17 in less than two weeks. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

Also supporting the potential move, the GDX ETF’s head and shoulders pattern – marked by the shaded green boxes in the first chart above – signals further weakness ahead.

I wrote previously:

The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.

Turning to the junior gold miners, the GDXJ ETF will likely be the worst performer during the upcoming swoon. Why so? Well, due to its strong correlation with the S&P 500, a swift correction of U.S. equities will likely sink the juniors in the process. Besides, junior miners have been underperforming recently even without general stock market’s help.

Furthermore, erratic signals from the MACD indicator epitomizes the GDXJ ETF’s heightened volatility. Remember though that the MACD indicator is far from a light switch. While false buy signals often precede material drawdowns, the reversals don’t occur overnight. As a result, it’s perfectly normal for the GDXJ ETF to trade sideways or slightly higher for a few days before moving lower.

Please see below:

And unlike its senior counterpart, the GDXJ ETF cemented its relative underperformance by moving lower on Friday.

So, how low could the GDXJ ETF go?

Well, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range. Conversely, if stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

Some people (especially the permabulls that have been bullish on gold for all of 2021, suffering significant losses – directly and in missed opportunities) will say that the final bottom is already in. And this might very well be the case, but it seems highly unlikely. On a side note, please keep in mind that I’m neither a permabull nor a permabear for the precious metals sector, nor have I ever been. Let me emphasize that I’m currently bearish (for the time being), but about a month ago, we went long mining stocks on March 4 and exited this profitable trade on March 11.

As another reliable indicator (in addition to the myriads of signals coming not only from mining stocks, but from gold, silver, USD Index, stocks, their ratios, and many fundamental observations) the Gold Miners Bullish Percent Index ($BPGDM) isn’t at levels that elicit a major reversal. The Index is now back at 40. However, far from a medium-term bottom, the latest reading is still more than 30 points above the 2016 and 2020 lows.

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, with sentiment still relatively elevated, it will take more negativity for the index to find the true bottom.

The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of 2020. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place.

But has it already run its course?

Well, in 2016 and early 2020, the HUI Index continued to move lower until it declined below the 61.8% Fibonacci retracement level. The emphasis goes on “below” as this retracement might not trigger the final bottom. Case in point: back in 2020, the HUI Index undershot the 61.8% Fibonacci retracement level and gave back nearly all of its prior rally. And using the 2016 and 2020 analogues as anchors, this time around, the HUI Index is likely to decline below 231. In addition, if the current decline is more similar to the 2020 one, the HUI Index could move to 150 or so, especially if it coincides with a significant drawdown of U.S. equities.

In conclusion, akin to Humpty Dumpty, “all the King's horses and all the King's men” are unlikely to put the GDX ETF back together again. With the HUI Index to gold ratio, the XAU Index to gold ratio and the GDXJ ETF to gold ratio all splintering beneath the surface, the GDX ETF’s recent strength simply masks all of the cracks in the precious metals’ foundation. Furthermore, with the USD Index and U.S. Treasury yields threatening to swing the wrecking ball, the metals’ house of cards could soon face demolition. Thus, even though the long-term outlook for gold, silver, and mining stocks is very bullish, the short- and perhaps medium-term outlooks remain profoundly bearish, and investors that ignore the warning signs will likely find themselves submerged in the rubble.

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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Previously dismissed, the USDX may now be back with a vengeance. Sentiment is swinging away from shorts and there is an uncanny historical pattern.

With a potential bearish pattern already broken, the USDX is resuming its journey northward. And why is it geared to do well? Is it because the U.S. economy is ripping head? Definitely not - that’s not happening. It’s rather because other regions (think Europe and Japan) are doing even worse.

The dollar’s imminent rise doesn’t mean that gold can’t still experience some very short-term upswing, but for the medium-term, the precious metals continue to face bearish headwinds.

With the greenback laying back and enjoying a well-deserved Easter vacation, gold, silver and the gold miners avoided a dollar-drama for at least another day. However, with the USD Index working to regain its supremacy, along with investors’ respect, the ‘death of the dollar’ narrative has quietly dissipated from the investing zeitgeist.

Case in point: the USD Index has broken above its monthly declining resistance line and has already made four new highs since the New Year. More importantly though, because the precious metals have a strong negative correlation with the U.S. dollar, the upward momentum has coincided with an 8.78% drawdown of gold, a 6.18% drawdown of silver and a 6.41% drawdown of the GDX ETF.

Please see below:

And showing no signs of slowing down, with a well-rested USD Index itching to get back to work, we could see ‘business as usual’ in the coming days. On Apr. 2, I warned that a short-term correction could usher the USD Index back to its March high.

That’s exactly what happened yesterday (Apr. 5).

However, with the corrective culmination approaching the finish line, the USD Index remains poised to resume its uptrend.

Adding to the optimism, the tide has already gone out on a sea full of USD Index shorts. And because Warren Buffett once said that “only when the tide goes out do you discover who's been swimming naked,” highly leveraged speculators could be the next to follow.

Please see below:

To explain, notice how oversold periods in 2014 and 2018 – where net-speculative short interest as a percentage of total open interest (based on the CoT data) was extremely high – preceded sharp rallies in the USD Index? Thus, with 2021 the most extreme on record, the forthcoming rally should be significant.

How significant? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Wayback Playback

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, so without paying attention to tiny moves (like the one that we saw last summer), let’s focus on the more meaningful ones (like the one that we see right now – the net positions just became visibly positive – over 16%, after being very negative for quite some time.

In short, that’s how the following profound rallies started:

• The big 2008 rally (over 16 index points)
• The big 2009 – 2010 rally (over 14 index points)
• The 2011 – 2012 rally (over 11 index points)
• The 2013 rally (“only” over 5 index points)
• The big 2014 – 2015 rally (over 20 index points)
• The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114.

Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

Moreover, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. Please see below:

To explain, I wrote on Friday (Apr. 2):

What we saw yesterday definitely qualifies as a small correction. In fact, even if it was doubled it would still be small. And – more importantly – it would be in perfect tune with what happened in 2018 during the big rally.

After rallying visibly above the:

• 93 level
• 200-day moving average
• 61.8% Fibonacci retracement level based on the final part of the decline

the USD Index moved back below the 93 level. This happened in May 2018 and it happened last week.

Since both rallies are so similar, it’s nothing odd that we see a pullback in a similar situation.

Back in 2018, the pullback was small and quick. It ended without the USD Index reaching its 200-day moving average. The pullback ended when the USDX moved approximately to its previous high and slightly below the 61.8% Fibonacci retracement.

Applying this to the current situation (previous high at about 92.5, the 61.8% Fibonacci retracement at about 92.7, and the 200-day moving average at 92.66), it seems that the USD Index would be likely to find its bottom in the 92.3 – 92.7 area.

Because of this, the outlook remains profoundly bearish for the gold, silver, and mining stocks over the medium term (even though the next few days are relatively unclear, especially due to gold’s triangle-vertex based reversal that’s due this week). If you analyze the table below, you can see that the precious metals tend to move inversely to the U.S. dollar.

The 2017-2018 Analogue

But as the most important development affecting the precious metals, the USD Index’s 2017-2018 analogue is already unfolding before our eyes. With this version likely to be titled ‘The Resurgence: Part 2,’ while history often rhymes, it’s rare for it to rhyme with this level of specificity. For context, in 2018, the USD Index’s breakout above its 50-day moving average is exactly what added gasoline to the USDX’s 2018 fire. And after the 2018 breakout, the USDX surged back to its previous high. Today, that level is 94.5.

Even more ominous for the precious metals, when the USD Index turned a short-term decline into consolidation in mid-2018, can you guess what happened next? Well, the USD Index moved significantly higher, while gold moved significantly lower.

Please see below:

USDX Broke a Potential Bearish Pattern

Likewise, a potentially bearish pattern that I had been monitoring – where the USD Index’s price action from July to October 2020 mirrored the price action from December 2020 to February/March 2021– has officially been broken. With the USD Index’s medium-term breakout trumping the former, the potentially bearish pattern has been invalidated and the USD Index remains on a journey to redemption.

But to what end?

Well, if we look back at 2020, the USD Index attempted to recapture its previous highs. But lacking the upward momentum, the failure was followed by a sharp move lower. Today, however, the USD Index has broken above its previous highs and the greenback verified the breakout by consolidating, moving back toward the previous lows and rising once again. Now, the USD Index is visibly above its previous highs.

Taken together, and given the magnitude of the 2017-2018 upswing, ~94.5 is likely the USD Index’s first stop. And in the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

No, not because the U.S. is doing so great in economic terms. It’s because it’s doing (and likely to do) better than the Eurozone and Japan, and it’s this relative performance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates and the latter move on a relative basis.

In conclusion, while the USD Index’s decline on Apr. 5 created a goldilocks environment for the precious metals, the latter should have enjoyed a much larger upswing. However, with the U.S. 10-Year Treasury yield jumping by another 2.37% and the precious metals still shaken from a string of false breakouts, their relatively weak performance was quite revealing. Think about it: if gold, silver and the gold miners can’t make up ground when their main adversary retreats, how are they likely to respond when the USD Index regains its mojo? As a result, with the USD Index’s attitude about to shift from accommodating to unkind, gold, silver and the gold miners will likely see lower levels before forming a lasting bottom.

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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