Gold declined quite visibly in today's pre-market trading (moving briefly below $2,000) and it happened right before miners' daily reversal. This seems to be a very bearish indication for the next several hours, and it might really be the case that the PMs will slide right away. However, we are still not ruling out a situation in which gold tests the previous highs once again, before finally topping.

Gold declined in a specific zig-zag pattern, which is a consolidation pattern. We saw something somewhat similar in late February. The initial decline was not THE decline yet. Gold first tested the previous high and then topped in the most profound way. The thing that confirmed the top, was when gold failed to hold the breakout above the previous highs. Will we see something like that once again?

It's unclear at this time. The shape of the decline so far makes both outcomes possible.

The USD Index seems to have formed a double-bottom pattern, but... We still can't rule out a scenario in which the double-bottom pattern would turn into a triple-bottom pattern. The USDX just reversed and declined a bit, and gold reacted with another rally. So, it seems that if the USD Index continues to trade sideways, gold will do the same thing.

After all, most of the bottoms in the USD Index that formed mid-year (marked with purple ellipses) were rather broad, so we wouldn't rule out something similar also this time.

Then again, gold is very overbought in the short run (and so is silver and the rest of the precious metals sector), so it's likely to be vulnerable to a meaningful show of strength in the USDX.

Will the latter finally rally soon? This seems likely based on the invalidation of the breakdown below the rising long-term support line, but a rally without another move closer to the recent lows is far from being a sure bet.

Gold is not likely to form a broad top here, as it's not the kind of performance that gold exhibited after similarly sharp rallies in the past - in 2006, 2008, 2009/2010, and 2011. Interestingly, all the above-mentioned spike tops formed close to gold's long-term cyclical turning point - which is also where gold is right now.

So, on one hand we could (but don't have to) have a broader bottom in the USD Index (which might indicate a broader top in gold), and on the other hand, we could have a spike-high in gold based on analogy to similar short-term rallies and long-term turning points. What's the most likely outcome here?

In my view, it would be most useful to look at gold's top that formed at the most similar price levels - the 2011 top.

There was an initial top in early August, then an initial top, and then - after several days - the final top. Gold's plunge was significant even after the first top. However, it was not significant after the initial early-August-2011 top.

The USD Index had been trading sideways, forming a broad bottom in 2011 and while the first decline in gold took place practically without USD's help, it was the decisive move higher in the USDX that really changed the picture.

Will the USD Index rally significantly from here? That's most likely in our view. But will this happen without an additional move to the previous lows? This is unclear.

Since markets don't move in isolation, we might get the final "go" signal from a different market. And this could be the stock market.

In yesterday's analysis, we wrote that all in all, gold is likely to rally far in the long run, but in the short run it's vulnerable to a sizable decline, when the economic implications of the pandemic's continuation become obvious to investors.

The S&P 500 is approaching its previous 2020 high. Given the economic background, I find this performance unfounded. But the markets can stick to a certain emotional trend for longer than many investors can remain logical, which would fit the above picture.

Back in 2015 stocks topped below their previous highs, and in 2018 they topped a bit above them, so the proximity to the previous is far from being a precise sell signal. It does indicate, that the stock market is likely vulnerable to sell signals coming from other markets and that this emotional rally could end sooner rather than later.

Do you remember what happened in February when the S&P 500 lost its upward momentum? They plunged, and that was when tops in mining stocks and silver formed. Gold made another attempt to move higher but ultimately declined profoundly in the following days.

As you can see on the above chart, the S&P 500 futures are already very close to the previous 2020 high. A move to this level, or - even better - a small breakout that is then invalidated, could be the perfect trigger for all above-mentioned moves. This could be what triggers a move higher in the USD Index, as investors turn to cash, which in turn could trigger a decline in gold, just like what we saw in 2011.

And if gold was to decline significantly here, then miners would be likely to truly plunge.

The price targets for the precious metals market changed based on new information and gold's breakout to new highs. You will find details in today's Gold & Silver Trading Alert. We invite you to subscribe and read today's issue right away.

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

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Everything good comes to its end sooner or later, and the higher one rises, the deeper one falls. These could very well apply to the current situation around PMs.

Speaking of indications pointing to the situation being excessive, let's take a look at the USD Index.

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 the same right now.

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.

We even saw a confirmation from USD's short-term chart.

The U.S. currency is finally after a decisive short-term breakout. In fact, it's already after two short-term breakouts. Looking at the short-term picture only, the USD's sideways trading could be both: a double-bottom pattern, or a flag consolidation pattern. The former would be bullish, and the latter would be bearish. Based on the previous long-term chart, the bullish interpretation is stronger.

Back in March, the short-term breakout in the USD Index was the thing that triggered the powerful rally in it, as well as a powerful plunge in the precious metals market. It's generally a good gold trading tip to monitor the USD Index's performance.

Consequently, based on this analogy, the implications for the near term are bearish for the PMs. Especially, when we consider the fact that Gold Miners Bullish Percent Index showed the highest possible overbought reading recently.

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.

On Friday, gold stocks declined significantly, and they moved visibly below their July 27 high, even though gold ended its Friday's session almost $100 higher. Mining stocks' underperformance is quite extreme, especially that it's connected with silver's very strong short-term performance. This is what we usually see when the precious metals market is topping.

Please note that the miners topped almost right at the vertex of the huge rising wedge pattern. Quoting our previous analysis:

(...) huge rising wedge pattern is about to form a vertex today or tomorrow. The same rule that applies to triangles has implications also here. The vertex is quite likely to mark a reversal date. Given the overbought status of the RSI (given today's upswing, it's almost certain to move above 70 once again) as well as miners recent unwillingness to track gold during its continuous rally, it's highly likely in my view that this will be a top.

The downside target for the mining stocks is very far from the current price. However, if the stock market declines significantly once again, miners can indeed fall far, even if gold declines by "only" a couple of hundreds of dollars.

We marked also an interim price target that's based on a few other techniques, with a red ellipse - at about $31 - $32. One of the techniques is the 50% Fibonacci retracement level based on the March - August rally, and the other two are the February high, and the May and June lows. That's also where - approximately - we have the 200-day moving average. The latter is not particularly strong in case of the GDX ETF, so we wouldn't say that it creates any significant support on its own, but it serves as a good confirmation of the other techniques.

And they're pointing one way...

The price targets for the precious metals market changed based on new information and gold's breakout to new highs. You will find details in today's Gold & Silver Trading Alert. We invite you to subscribe and read today's issue right away.

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

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