Gold, silver, and mining stocks plunged yesterday as a response to USD's breakout. For several times, we wrote that PMs tend to react to breakouts and breakdowns in the USDX more than they do compared to other moves in the index, and yesterday's action served as the perfect confirmation for it.

The USD Index moved clearly and significantly above the declining resistance line. The three consecutive daily closes did not confirm the breakout, but traders still seem to think that a daily close above the resistance happens to be significant.

People might have thought that we were wrong to expect higher USDX values for weeks now and that our mid-year USDX broad bottoms theory is flawed. Last Friday, we even told you that the early breakout invalidation could not be taken at its face (bearish) value. This breakout proves that we were not that crazy after all. Thereby, the action that will likely follow will serve as the final proof.

The long-term USD Index chart above points out to the critical situation and how tiny the rally was so far. And yet, silver declined over $2 yesterday.

We've previously commented on the USDX chart above as follows:

The USD Index is at a powerful combination of support levels. One of them is the rising, long-term, black support line that's based on the 2011 and 2014 bottoms.

The other major, 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, and it's very oversold on a short-term basis. It all happened in the middle of the year, which is when the USDX formed major bottoms on many occasions. This makes a short-term rally here very likely.

While it might not be visible at the first sight (you can click on the chart to enlarge it), 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.

Based on the most recent price moves, the USDX is once again below the above-mentioned strong rising support line, but we doubt that this breakdown would hold. We expect to see an invalidation thereof that is followed by a rally.

The above is still valid, especially if we keep USD's yesterday's breakout into consideration.

The implications for the precious metals market are very bearish.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits: Analysis. Care. Profits.

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So far, 2020 has been an incredible and challenging year for the many markets, and that does not exclude gold, arguably one of the most important and most valuable commodities in the world.

The yellow metal's price is influenced by a myriad of obvious and non-obvious short and long-term factors, such as the long-term turning point and its self-similar pattern. In recent months, we've already discussed the presence of gold's long-term turning point in broad detail. Furthermore, only a couple of weeks ago, we've learned about the powerful self-similarity pattern in gold, making sense of similarly shaped patterns in the marketplace over different periods.

In today's analysis, we'll discuss both, starting with the former. Let's take a look at gold's long-term chart.

We used the purple lines to mark the previous price moves that followed gold's long-term turning points, and we copied them to the current situation. We copied both the rallies and declines, which is why it seems that some moves would suggest that gold moves back in time - the point is to show how important the turning point is in general.

The big change here is that due to gold's big rally, we moved our downside target for it higher. Based on the information that we have available right now, it seems likely that gold will bottom close to the $1,700 level. That's very much in tune with how much gold moved after the previous long-term turning points.

Having said that, let's take a look at gold's short-term chart.

Gold is already after the breakdown below the rising red support line, which makes the short-term outlook bearish, especially that this breakdown was confirmed.

And what about the likely target? Please note that the if gold declines to the 61.8% Fibonacci retracement based on the most recent rally, it would also decline - approximately - to the April - June lows... Making this support very strong. And - guess what - this price target is in tune with what we already wrote above based on the long-term turning point's consequences.

Moreover, that's not the most important thing about the above chart. The most important thing about this charts starts with the reply to one important question:

Do you get the feeling that you have already seen gold perform this way before?

Because you did.

The history rhymes, but this time, the similarity is quite shocking.

We copied the short-term chart and pasted it on the long-term chart above and next to the 2011 top. We pasted it twice, so that you can easily compare gold's performance in both cases in terms of both: price and time.

They are very similar to say the least. Yes, these patterns happened over different periods, but this doesn't matter. Markets are self-similar, which is why you can see similar short-term trends and long-term trends (with regard to their shapes). Consequently, comparing patterns of similar shape makes sense even if they form over different timeframes.

After a sharp rally, gold declined quickly. Then we saw a rebound, and a move back to the previous low. Then, after a bit longer time, gold moved close to the most recent high and started its final decline. This decline was less volatile than the initial slide. That's what happened when gold topped in 2011 (and in the following years), and that's what happened also this year. Ok, after the initial decline from the 2011 top, we saw two initial reactive rallies and in 2020 there was just one, but it didn't change the similarity with regard to time.

The patterns of this level of similarity are rare, and when they do finally take place, they tend to be remarkably precise with regard to the follow-up action.

What is likely to follow based on this pattern, is that we're likely to see the end of the slower decline, which will be followed by a big and sharp decline - similarly to what we saw in 2013.

How low could gold slide based on this similarity? Back in 2013, gold declined approximately to the 61.8% Fibonacci retracement based on the preceding rally (the one that started in 2008), so that's the natural target also this time.

And we already wrote about this particular retracement - it's approximately at the $1,700 level. This has been our downside target for weeks, and it was just confirmed by this precise self-similar technique.

Another interesting point is that gold made an interim low close to the 50% retracement and the previous lows. Applying this to the current situation suggests that we could see a smaller rebound when gold moves to about $1,760 - $1,800.

The interim downside target has very important trading implications. Even though gold's rebound might just be temporal, something much more profound is likely to take place in case of mining stocks and silver. You will find more details in today's flagship Gold & Silver Trading Alert. Subscribe now and read today's issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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In the global financial world, with a highly interconnected economic dependence, commodities, energy, materials, and in particular, currencies play a pivotal role in the stock market's heterogeneity and connectivity. This applies to gold as well as the world's busiest precious metal marketplace.

Under normal conditions, gold and the US dollar are in an inverse relationship. Due to its worldwide denomination in USD, any USD weakness pushes gold prices up, and vice versa. Therefore, as far as the USD Index piece of the puzzle is concerned, the situation is not what it appears to be at initially, as we've witnessed something genuinely perplexing.

Namely, the index invalidated its breakout, which is a bearish sign. The USDX was quite visibly above the declining resistance line, but it failed to hold these gains. In July, a failure to rally above its resistance meant another significant downturn, causing higher gold prices.

So, does the USD Index and gold await the same faith soon?

Not necessarily.

The USD Index is a weighted average of several currency exchange rates. The biggest weight (over 50%) is attributed to the euro exchange rate, and the second biggest weight is attributed to the yen exchange rate. So, let's see how the situation looks like in both currencies.

The euro is after a breakdown and a verification thereof. This is a very bearish situation, but bullish for the USD Index. Because of that, the situation with the euro is bearish for gold, at least in the short run.

And what about the Japanese yen?

Well, the situation is not that different as far as the implications are concerned, but the direct reason for it is.

As you can see on the Japanese yen index chart above, in the past 1.5 years, whenever the yen tried to rally above the 95 levels, it topped briefly and reversed its course.

In the mid-2019, this resulted in a prolonged gold decline, and by early 2020, it resulted in a sharp and deeper decline.

In recent weeks, we've detected the signal above (the yen index trying to break above 95) 4 times: once it was just before the final top in gold, and in all the remaining (3) cases, these were local tops in gold.

The implications of the current yen situation are bearish for gold, and they are bullish for the USD Index, as the Japanese currency is likely to have invalidated the breakout once again. History tends to repeat itself, after all.

Given the tips that the individual currency exchange rates give us, should we really expect a USD Index's breakout invalidation to lead towards lower values? Definitely not. The respective currency exchange rates are more "basic", and their outlooks outweigh the index chart that is essentially based on them.

This means that the legitimacy of USDX's invalidation's bearish implications is suspicious, to put it mildly.

In other words, the bearish outlook for gold didn't really change at all, even though we admit that it is not as bearish as it was before the USDX's breakout's invalidation. While we continue to predict lower gold prices, in the next several weeks (possibly months), based on the USDX action, we agree that the outlook is slightly less bearish than it was in the previous days.

Please note that gold has yet another triangle-vertex-based reversal that is just a few days away. Perhaps the yellow metal will move slightly higher once again and then start its plunge on Tuesday or Wednesday. During this time, the USD Index could regain its strength and attempt to break above its declining resistance line once more. Only this time, the breakout would be successful.

All in all, the outlook for the precious metals market remains bearish.

Thank you for reading today’s free analysis. Please note that the following is just a small fraction of today’s full Gold & Silver Trading Alert. The latter includes multiple details such as the interim target for gold that could be reached in the next few weeks.

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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits: Analysis. Care. Profits.

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