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Gold just doesn’t seem to care and is stubbornly ignoring its inverse relationship with the USDX. What accounts for gold’s current downward trend?

It’s really hard to get a more bearish combination of factors for gold than what we just saw.

A good way to start the discussion would be to reply to a question that I received about the USD Index recently.

Hi, I have been reading your articles about the USD bottoming and moving in a similar pattern to 2018. I am seeing a possible head and shoulder pattern on Jan 18th (left shoulder), Feb 5^th (the head), and Feb 17th (right shoulder). For all its problems, the euro seems to be going higher and higher. Just wondering what your thoughts are.

Figure 1

Indeed, the head-and-shoulders pattern formed as you described it (I added a dotted neckline to the formation on the above chart), but since it wasn’t as significant as the breakout above the declining medium-term resistance line, the implications of the latter overwhelmed the bearish implications of the H&S formation. The USD index invalidated the breakdown below the neck level of the formation, so what was previously a sell signal, has now turned into a buy signal. Consequently, we have yet another reason to expect higher values of the USD Index in the following weeks and months.

Figure 2

Based on the obvious similarity to early 2018, the verification of the breakdown is likely the final step before a major rally in the USDX. This will likely translate into lower precious metals and mining stock prices, especially if the general stock market declines as well.

Let’s use another question that I received to segue to the following part of the analysis.

What happens to gold if the dollar crashes, instead of going up?

That’s just what happened early during the day, yesterday (Feb. 25). Well, it was just intraday action rather than a big medium-term crash, however, it shows what could happen. Simply put, gold declined anyway. Why did it do so? Because it wanted to do so based on technical/emotional factors. Maybe that was just a temporary reversion in direction? No – when the USD Index came back up, gold declined even more, and we see the continuation of this pattern today as well.

What if the USD Index declines much more? The last time when gold was trading at these levels in 2020, the USD Index was trading at about 100. The latter declined about 10 index points and gold is at the same level. So, gold has already proven its ability to ignore the USD’s declines. There will be a time, when gold soars in response to even mild declines in the USDX, but this is likely to happen only after gold declines significantly – and it “wants” to rally.

Figure 3

In previous analyses, I commented on the above chart in the following way:

The move higher in gold was notable, but nothing game changing. The last time gold moved above the declining short-term resistance line, was when it actually topped. The invalidation of the breakdown marked the start of another very short-term decline. The small decline in today’s overnight trading might be the very beginning of this invalidation that leads to another slide.

That’s exactly what happened. The failed breakout led to another slide and gold is currently right after its breakdown to new 2021 lows. The road to ~$1,700 gold is now fully open. That’s when gold would be likely to take some sort of breather and gather strength (well, weakness, but “gathering weakness” just doesn’t sound right) for another wave down – likely to $1,500 or so.

Please note that gold didn’t close at new yearly lows yesterday. This observation is important in comparison with the fact that…

Figure 4

Mining stocks did.

Miners closed at new 2021 lows yesterday, even though gold didn’t, which once again proves their weakness and once again confirms the bearish outlook.

I previously wrote that gold’s ~$1,700 target is likely to be aligned with the GDX’s ~$31 target and this remains up-to-date. After that, I expect some kind of corrective upswing – perhaps to $33 or so, and then another – big – move lower. Please note that the corrective upswing would be yet another (and final) verification of the head and shoulders pattern, and its very bearish implications would take place only after this verification. That’s why I expect the decline to be particularly significant. You can read more about this broad H&S pattern over here.

Silver just went through a triangle-vertex-based reversal, and it seems to have indeed triggered a reversal.

Figure 5

Silver moved a bit higher on Wednesday (Feb. 24) and in yesterday’s early trading, but it didn’t exceed the recent high. This means that my previous comments on the above chart remain up-to-date:

The move lower is not yet super significant, but given the reversal point, it could just be the beginning. Remember the triangle-vertex-based reversal at the beginning of the year? Back then, practically nobody wanted to believe that silver and the precious metals market was topping at that time. It was the truth, though. Gold and mining stocks were never higher since that time and the same thing would have most likely happened to silver if it wasn’t the #silversqueeze popularity that gave it its most recent boost.

Now, there’s also another triangle-vertex-based-reversal in a few days, and since these reversals tend to work on a near-to basis, silver might top any day now, even if it hasn’t topped earlier today.

Based on what’s happening in the markets right now, it seems just as possible that silver and the rest of the precious metals market will form a temporary bottom within the next few days.

Figure 6

Moreover, please note that it’s the last delivery day for silver futures, and instead of a supply-crunch-based rally, we see a decline. Naturally, this is bearish.

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 targets for gold and mining stocks 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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As U.S. Treasury yields rise, gold, which is seen as an inflation hedge, is hurting. Despite the obvious warning signs, investors remain bullish.

After Monday’s (Feb. 22) supposedly “groundbreaking” rally, the situation in gold developed in tune with what I wrote yesterday. The rally stopped, and miners’ decline indicated that it was a counter-trend move.

Figure 1

Despite Monday’s (quite sharp for a daily move) upswing, the breakdown below the neck level of the broad head-and-shoulders remains intact. It wasn’t invalidated. In fact, based on Monday’s rally and yesterday’s (Feb. 23) decline, it was verified. One of the trading guidelines is to wait for the verification of the breakdown below the H&S pattern before entering a position.

What about gold stocks ratio with other stocks?

Figure 2

It’s exactly the same thing. The breakdown below the rising long-term support line remains intact. The recent upswing was just a quick comeback to the broken line that didn’t take it above it. Conversely, the HUI to S&P 500 ratio declined once again.

Consequently, bearish implications of the breakdowns remain up-to-date. Having said that, let’s consider the more fundamental side of things.

Swimming Against the Current

After trading lower for six consecutive days, gold managed to muster a three-day winning streak. However, with the waves chopping and the ripple gaining steam, every swim higher requires more energy and yield’s decelerating results.

For weeks, I’ve been warning that a declining copper/U.S. 10-Year Treasury yield ratio signaled a further downside for gold. And with the ratio declining by 2.88% last week, gold suffered a 2.51% drawdown.

Please see below:

Figure 3

Over the long-term, the ratio is a reliable predictor of the yellow metal’s future direction. And even though the weekly reading (3.04) hit its lowest level since May 2020, it still has plenty of room to move lower.

Figure 4

For context, I wrote previously:

To explain the chart above, the red line depicts the price of gold over the last ~21 years, while the green line depicts the copper/U.S. 10-Year Treasury yield ratio. As you can see, the two have a tight relationship: when the copper/U.S. 10-Year Treasury yield ratio is rising (meaning that copper prices are rising at a faster pace than the U.S. 10-Year Treasury yield), it usually results in higher gold prices. Conversely, when the copper/U.S. 10-Year Treasury yield ratio is falling (meaning that the U.S. 10-Year Treasury yield is rising at a faster pace than copper prices), it usually results in lower gold prices.

As the star of the ratio’s show, the U.S. 10-Year Treasury yield has risen by more than 47% year-to-date (YTD) and the benchmark has surged by more than 163% since its August trough.

Please see below:

Figure 5

On Jan. 15, I warned that the U.S. Federal Reserve (FED) had painted itself into a corner. With inflation running hot and Chairman Jerome Powell ignoring the obvious, I wrote that Powell’s own polices (and their impact on real and financial assets) actually eliminate his ability to determine when interest rates rise.

As a result, the central bank had two options:

1. If they let yields rise, the cost of borrowing rises, the cost of equity rises and the U.S. dollar is supported (all leading to shifts in the bond and stock markets and destroying the halcyon environment they worked so hard to create).
2. To stop yields from rising, the U.S. Federal Reserve (FED) has to increase its asset purchases (and buy more bonds in the open market). However, the added liquidity should have the same net-effect because it increases inflation expectations (which I mentioned yesterday, is a precursor to higher interest rates).

Opening door #2, Powell’s deny-and-suppress strategy is now playing out in real time. On Feb. 23 – testifying before the U.S. Senate Banking Committee – the FED Chairman told lawmakers that inflation isn’t an issue.

“We’ve been living in a world for a quarter of a century where the pressures were disinflationary,” he said.... “The economy is a long way from our employment and inflation goals.”

And whether he’s unaware or simply ill-informed, commodity prices are surging. Since the New Year, oil and lumber prices have risen by more than 24%, while corn and copper prices are up by more than 14%.

Please see below:

Figure 6

In addition, relative to finished goods, the entire basket of inputs is sounding the alarm.

Figure 7

To explain the chart above, the blue line is an index of the price businesses receive for their finished goods. Similarly, the green line is an index of the price businesses pay for raw materials. As you can see, the cost of doing business is rising at a torrent pace.

More importantly though, Powell’s assertion that inflation is an urban legend has been met with eye rolls from the bond market. To repeat what I wrote above: Powell’s own policies (and their impact on real and financial assets) actually eliminate his ability to determine when interest rates rise.

Case in point: the U.S. 10-year to 2-year government bond spread is now at its highest level since January 2017.

Please see below:

Figure 8

To explain the significance, the figure is calculated by subtracting the U.S. 2-Year Treasury yield from the U.S. 10-Year Treasury yield. When the green line is rising, it means that the U.S. 10-Year Treasury yield is increasing at a faster pace than the U.S. 2-Year Treasury yield. Conversely, when the green line is falling, it means that the U.S. 2-Year Treasury yield is increasing at a faster pace than the U.S. 10-Year Treasury yield.

And why does all of this matter?

Because the above visual is evidence that Powell has lost control of the bond market.

At the front-end of the curve, Powell can control the 2-year yield by decreasing the FED’s overnight lending rate (which was cut to zero at the outset of the coronavirus crisis). However, far from being monolithic, the 5-, 10-, and 30-year yields have the ability to chart their own paths.

And their current message to the Chairman? “We aren’t buying what you’re selling.” As such, the yield curve is likely to continue its steepening stampede.

Circling back to gold, all of the above supports a continued decline of the copper/U.S. 10-Year Treasury yield ratio. With yields essentially released from captivity, even copper’s 8.02% weekly surge wasn’t enough to buck the trend.

As a result, gold’s recent strength is likely a mirage. The yellow metal continues to bounce in fits and starts, thus, it’s only a matter of time before the downtrend continues. Furthermore, with the USD Index still sitting on the sidelines, a resurgent greenback would add even more concrete to gold’s wall of worry.

And speaking of gold’s wall of worry, the sentiment surrounding it is far from being negative.

Figure 9 - Source: Investing.com

The above chart shows the sentiment of Investing.com’s members. 64% of them are bullish on gold. As you can see above, there are also other popular markets listed: the S&P 500, Dow Jones, DAX, EUR/USD, GBP/USD, USD Index, and Crude oil. The sentiment for gold is the most bullish of all of them. Yes, the general stock market is climbing to new all-time highs every day now, and yet, people are even more bullish on gold than they are on stocks.

When gold slides, the sentiment is likely to get more bearish and particularly high “bearish” readings – say, over 80% would likely indicate a good buying opportunity. Naturally, this is not the only factor that one should be paying attention to.

The bottom line? As it stands today, being long the precious metals offers a poor risk-reward proposition. However, in time (perhaps over the next several months), the dynamic will reverse, and the precious metals market will shine 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 targets for gold and mining stocks 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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Gold moved higher yesterday (Feb. 23) and so did the rest of the precious metals sector. But as you will see below, this didn’t really change anything. And there’s one detail that actually perfectly fits this kind of movement. Let’s take look at the charts, starting with the key one – and no, it’s not the one featuring gold.

Figure 1

Despite yesterday’s (quite sharp for a daily move) upswing, the breakdown below the neck level of the broad head-and-shoulders remains intact. It wasn’t invalidated. Consequently, all its bearish implications remain up-to-date.

Having said that, let’s move to the detail that actually fits what happened yesterday (and so far today). Namely, silver is going through a triangle-vertex-based reversal at the moment.

Figure 2

Indeed, after moving slightly above yesterday’s intraday high in today’s overnight trading, silver moved back down. The move lower is not yet super significant, but given the reversal point, it could just be the beginning. Remember the triangle-vertex-based reversal at the beginning of the year? Back then, practically nobody wanted to believe that silver and the precious metals market was topping at that time. It was the truth, though. Gold and mining stocks were never higher since that time and the same thing would have most likely happened to silver if it wasn’t the #silversqueeze popularity that gave it its most recent boost.

Now, there’s also another triangle-vertex-based-reversal in a few days, and since these reversals tend to work on a near-to basis, silver might top any day now, even if it hasn’t topped earlier today.

Figure 3

The move higher in gold was notable, but nothing game changing. The last time gold moved above the declining short-term resistance line, was when it actually topped. The invalidation of the breakdown marked the start of another very short-term decline. The small decline in today’s overnight trading might be the very beginning of this invalidation that leads to another slide.

Also, you might be wondering if the decline in the USD Index made its outlook bearish.

Figure 4

In short, it didn’t. The decline is still a part of the verification of the breakout above the declining medium-term resistance line that I marked with blue (figure 4). Based on the obvious similarity to early 2018, the verification of the breakdown is likely the final step before a major rally in the USDX. This will likely translate into lower precious metals and mining stock prices, especially if the general stock market declines as well.

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 targets for gold and mining stocks 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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