Following the close of the U.S. presidential election and latest post-election euphoria, miners posted slight gains on Thursday and Friday, gains which are likely to be short-lived and followed by a sustained decline, if the history charts are any indication.

When compared to small breakouts over the declining resistance line in August, September and October as well as the small gains and sudden drop by the Gold Miners Bullish Percentage Index back in 2016, the most recent gains by miners are negligible and only predict an eventual and further trend downwards.

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 has caused the Gold Miners Bullish Percent Index to move up once again for a few days. It then declined once again. We saw something similar also this time. In this case, this 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. Given the situation in the USD Index, it seems that we’re seeing the same thing also this time.

Please note that back in 2016, after the top, the buying opportunity didn’t present itself until the Gold Miners Bullish Percent Index was below 10. Currently, it’s above 70, so it seems that miners have a long way to go before they bottom (perhaps a few months – in analogy to how gold declined in 2016).

On Thursday and Friday, miners moved and closed slightly above their 50% retracement of the preceding decline, the declining resistance line based on the August and September highs, and the October highs. The breakout was tiny, so it would require a confirmation. I expect to see its invalidation instead, especially given today’s pre-market decline in gold and the very bullish medium-term outlook in the USDX. In fact, at the moment of writing these words, the GDX ETF is down by over 4% in today’s trading on the London Stock Exchange.

Even if miners didn’t form a top on Friday, they are likely very close to it, as they once again rallied in the manner that is similar to other sessions that we marked with blue ellipses on the chart. The daily upswing on relatively strong volume that was preceded by a price gap is bullish in theory, but in practice this meant that a downturn was just around the corner 4 times out of 4, when we saw such a combination in the last few months. Consequently, the implications are not really bullish here.

In particular, what we saw in mid-September appears similar to what we see right now. Back then, the GDX ETF was also after a small breakout above its short-term, blue support line and the 50-day moving average. A relatively sharp short-term decline followed at that time, and the same seems likely also this time.

Also, let’s not forget that the GDX ETF has recently invalidated the breakout above the 61.8% Fibonacci retracement based on the 2011 – 2016 decline.

When GDX approached its 38.2% Fibonacci retracement, it declined sharply – it was right after the 2016 top. Are we seeing the 2020 top right now? This is quite possible – PMs are likely to decline after the sharp upswing, and since there are only several months left before the year ends, it might be the case that they move north of the recent highs only in 2021.

Either way, miners’ inability to move above the 61.8% Fibonacci retracement level and their invalidation of the tiny breakout is a bearish sign.

The same goes for miners’ inability to stay above the rising support line – the line that’s parallel to the line based on the 2016 and 2020 lows.

Last week, miners have once again moved back to the upper border of the rising long-term trade channel, but they failed to rally above it. This means that the bearish indications based on the above chart remain up-to-date.

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It’s evident that stocks have once again invalidated the breakout above their early-2020 high. They have also closed the week below the lowest weekly September close. Back in September, the S&P 500 index reversed on a weekly basis and rallied once again. This is similar to what happened in 2018 (August) when stocks first broke to new highs. Back then, the volatility was lower, and therefore it’s no wonder that the breakout held and this time (in September) it was temporarily invalidated.

Back in 2018, stocks moved to a new high (not significantly higher), and this time they didn’t manage to do so, but were quite close (the rally seems to have burned itself out in August).

The key take-away from this similarity is that once stocks slide below the September lows in intraday terms, they are likely to decline further. Perhaps much lower.

Back in 2018, stocks consolidated around the previous lows, and then they declined even more profoundly in the final part of the year. Could the same happen this time as well? Well, it could happen, but with so much money being injected into the system from various directions, we don’t want to say that it's inevitable.

What is highly likely in my view, however, is that stocks will slide, and when they do, they will take the precious metals sector with it. Especially silver, and mining stocks.

Moreover, let’s keep in mind that the situation continues to be excessive on the forex market.

Remember when in early 2018 we wrote that the USD Index was bottoming due to a very powerful combination of support levels? Practically nobody wanted to read that as everyone “knew” that the USD Index is going to fall below 80. We were notified that people were hating on us in some blog comments for disclosing our opinion - that the USD Index was bottoming, and gold was topping. People were very unhappy with us writing that day after day, even though the USD Index refused to soar, and gold was not declining.

Well, it’s exactly the same right now.

The USD Index was at a powerful combination of support levels. One of them is the rising, long-term, black support line based on the 2011 and 2014 bottoms. The other major support level and a long-term factor is the proximity to the 92 level – that’s when gold topped in 2004, 2005, and where it – approximately – bottomed in 2015, and 2016.

The USDX just moved to these profound support levels, broke slightly below them, and now it has clearly invalidated this breakdown. For many weeks, we’ve been warning about the likely USD Index rally, and we finally saw it.

Quoting my previous comments:

The USD Index moved briefly below the long-term, black support line and then it invalidated this breakdown before the end of the week. This is a very bullish indication for the next few weeks.

Before moving to the short-term chart, please note that the major bottoms in the USD Index that formed in the middle of the previous years often took the form of broad bottoms.

Consequently, the current back and forth trading is not that surprising. This includes the 2008, 2011, and 2018 bottoms.

A crucial aspect is that the rally that we’ve witnessed so far is just the tip of the bullish iceberg. The breakdown below the key support levels was invalidated, which is a strong bullish indicator. Since it happened on a long-term chart and the temporarily broken lines were critical, the implications are incredibly important as well– and they should be visible from the long-term perspective.

So, how high could the USD Index rally now be? At least to the 100 level (approximately). This way, the upcoming rally would almost match the rally that started after the previous major invalidation – the 2018 one.

Still, we wouldn’t rule out a scenario in which the USD Index rallies above its 2020 highs before another major top. After all, the USD Index is after a very long-term breakout that was already verified several times.

There isn’t a market that moves on its own in today’s globalized world economy. Most recently, gold has been correlated negatively with the USD Index and positively with the stock market. Right now, the implications of the general stock market and the USDX movements remain bearish for the next several weeks. However, precious metals could move higher in the next few hours or days.

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Welcome to this week's Gold Investment Update.

First, let’s discuss the white metal for a bit. Silver is not just any industrial metal. Used as money for centuries, much longer than the fiat currencies have been used, with its specific properties that are also widely used in many industries (best conductor of heat and electricity), with crude oil, it is perhaps one of the most versatile commodities.

As far as the white metal is concerned, on September 24^th, we have warned you about the possible temporary rebound.

Silver is after a major breakdown, and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any significant rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.

That’s exactly what happened.

So, is the counter-trend rally over? That’s entirely possible, particularly if we consider the USDX breakouts. However, given the possibility of higher stock market moves, silver could move somewhat higher before it slides once again.

In early March, silver moved higher before indeed plunging, so the current move up doesn’t invalidate this similarity, especially that the coronavirus cases are rising in a quite similar way (this similarity is most visible in Europe).

Technically, silver moved as high as it did on July 28th, on an intraday basis. The corrective rally is not as little as one might think while focusing on just Friday's upswing. But that is not the critical thing here. The key thing is that the breakdown below the rising support line was more than confirmed.

At this point, one might ask how do we know if that really is just a dead-cat bounce, and not a beginning of a new strong upleg in the precious metals sector. The reply would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very likely because of multiple factors, and the clearest of them are the confirmed breakdowns in gold and silver, and – most importantly – the confirmed breakout in the USD Index.

Now, since silver has already broken below its rising short-term support line, the corrective upswing might already be over.

Moreover, please note that from the long-term point of view, silver is not that strong.

While gold moved to new highs, silver – despite its powerful short-term upswing – didn’t manage to correct more than half of its 2011 – 2020 decline.

Silver has already invalidated its move above the lowest of the classic Fibonacci retracement levels (38.2%), which is not something that characterizes extraordinarily strong markets.

Silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.

If you look at the monthly silver volume levels, it seems likely that the next sizable downswing has already begun. The previous substantial monthly volume in silver accompanied the 2011 top. The analogy doesn’t get more bearish than this. Ok, it would, if there were multiple key tops confirmed by huge monthly volume. But the 2011 top was so significant that other tops are not comparable, except for the most recent one. Thus, the implications are bearish.

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Is silver just an industrial metal?

Not only an industrial metal, and not just any industrial metal. It served as money for centuries, much longer than the fiat currencies have been used. Its specific properties are also widely used in many industries (best conductor of heat and electricity), and perhaps the only more versatile commodity than silver is crude oil.

The first verse of the Correlation Matrix shows just how closely silver moves along with gold – the flagship monetary metal. The link is not particularly strong in the long run, but it is still strong enough despite that.

And what about the link with copper – which we’ll use as a proxy for the industrial metals?

There are times when silver and copper move in opposite directions. However, merely stating that they move in adverse directions for a few days is not particularly informative. It is just a very brief move that is being examined, and both moves could have been just random noise.

Just like the existence of snowballs doesn’t negate the fact that ice caps are melting at an accelerating rate, observing just a few days when silver and copper move in the opposite directions doesn’t mean that they will move in the opposite directions for longer.

Taking the last few years into account, there were periods when silver moved together with copper (recently) and periods when it moved in the opposite direction (in late 2016).

There were also times when both markets moved relatively independently from each other, and there were times when one market led the other. The latter would be quite informative if it wasn’t for the fact that sometimes silver leads copper, and sometimes it’s the other way around.

The bottom part of the above chart tells us that copper and silver are positively correlated for most of the time, but the link is far from being carved in stone.

So, what can the link between copper and silver tell us? Exactly what we wrote previously. Namely, silver is an industrial metal, but not only that. It’s also a monetary metal. In other words, silver has a dual nature.

What does the above mean from here on out? That its performance could be less than perfect if the general stock market slides, but it will most probably catch up with gold in a major way, once stocks finally bottom and start to climb once again.

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The stock market rebounded very nicely last week, and it even corrected more than 61.8% of the recent decline. Earlier this year, gold and stocks fell sharply together (in March) and then they both rallied back up to new highs. So, does this strength in stocks indicate upcoming strength in gold as well? Not necessarily.

Let’s start with examining the former.

The big news of the previous week was that the general stock market managed to move higher, despite the invalidation of the early-2020 high. This is something unusual for any market, as commonly invalidations of breakouts or breakouts are strong indications that the market is going to move in the opposite way. The invalidation of the breakout was therefore a strongly bearish sign.

So, what happened? Well, it could have been the case that the nothing-bad-will-happen-before-the-elections rule applied, and the rally was more orchestrated than natural. By that we mean that some powerful investors bought enough to trigger the rebound. And let’s keep in mind that the Fed pledged to play an active role right now – even more so than it did in 2008.

What does it mean going forward? It means that the slide could be delayed, but I don’t expect it to be averted entirely. After all, no market can be “triggered artificially”, “supported”, “set”, or “manipulated” for longer periods (of course, except the interest rates), and despite the massive money printing, the economy is not doing great. And that’s an obvious understatement.

From the technical point of view, we would like to point out three things:

1. Stocks have corrected more than 61.8% of the recent decline, so they could move higher in the short term. That’s not something certain, though.
2. In 2018 we saw a tiny invalidation of the breakout, then another move higher (slightly above the previous highs), and stocks plunged shortly thereafter.
3. In early 2020, the very initial decline was relatively small, and it was followed by another move higher (slightly above the previous high). Stocks plunged shortly thereafter.

Consequently, in analogy to two most similar situations to the current one from the recent past, it wouldn’t be surprising to see stocks move to or even slightly above the previous highs, before they turn south in a spectacular way.

This could mean a delay in precious metals’ and miners’ decline as well. Again, a decline, not its absence. Especially that the situation continues to be excessive on the forex market.

How did gold respond to the sizable upswing in stocks?

Gold moved above the declining resistance line, but stopped at its 38.2% Fibonacci retracement. Let’s keep in mind that stocks erased more than 61.8% of the preceding decline. This means that the reaction in gold was much smaller – not something that we would expect in case of a market that’s supposedly about to “take off”.

So, even if the general stock market moves to or slightly above its previous 2020 highs, it doesn’t mean that the same would be likely for gold. The decline of the latter would likely be delayed in this case, though. If the general stock market fails to rally, but the USD Index does, the gold price would be likely to plunge.

Moreover, please note that the move above the declining resistance line was not significant, and thus it would require a confirmation. Gold closed last week practically right at the resistance line, so it’s not that clear if the breakout is anything more than a blip on the radar screen. In today’s pre-market trading gold moved a bit lower, but not yet enough to invalidate the breakout.

Overall, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Gold is not showing strength here, despite what one might think based on Friday’s upswing alone.

Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it’s likely to slide in the upcoming weeks and/or months. Even if it doesn’t happen right away.

Summing up, the stock market’s strength is far from being a proof that gold is about to decline. Conversely, the relatively small size of gold’s upswing compared to the one in stocks is yet another factor pointing to lower gold prices over the next several weeks (not necessarily days, though). Gold is likely to move to new highs, based on many fundamental reasons, but not without declining first, on technical grounds.

Thank you for reading our free analysis today. Please note that the following is just a small fraction of today’s (this week’s flagship) Gold & Silver Trading Alert. It includes 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
Editor-in-chief, Gold & Silver Fund Manager

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