During yesterday’s session, gold and gold stocks declined, while silver remained relatively flat, and the USD Index moved to new 2020 lows. That’s not normal. The PMs “should have” rallied since their “main adversary,” the USD Index, moved to new lows. Especially considering that PMs tend to react more profoundly to the USD’s breakouts and breakdowns than to other types of moves.

This is not normal – this is simply bearish, and a clear sign that the precious metals sector is not ready to move higher at this time. It’s the middle of December and I previously wrote that gold might be bottoming at this time, however, based on this clear (and quite extreme) weakness it doesn’t seem anything like that is likely to be taking place. Instead, this all looks like a big prelude to another substantial wave down.

Gold rallied in today’s (Dec. 15) pre-market trading – did it invalidate the above, or at least yesterday’s indications?

Looking at gold on its own doesn’t indicate any major changes. Gold continues to move back and forth after the first big daily decline, which happened once gold verified its breakdown below its September lows. This is a relatively normal course of action – nothing to call home about. Getting bullish based on today’s pre-market rally doesn’t seem justified and rather risky.

But things get much more interesting when we compare this action with the USDX movement.

What the USD Index is doing right now – at the moment of writing these words – is verifying the breakdown below the previous 2020 lows in terms of the daily closing prices.

This makes further declines more likely, but at the same time it shows that gold’s rally is not as strong as should be if this was a new medium-term uptrend in it. The USD Index just broke below new yearly lows and new monthly lows. Gold is very far from its yearly highs and it didn’t even manage to move back to its monthly highs. Instead, it corrected about half of the preceding December decline.

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Silver still has some way to go before bottoming. It has not rallied despite a lower USDX (gold and miners did not rally either) and a higher stock market. Silver has bright days ahead, but not until it passes this most recent downward shift in trend. And please remember, gold’s more volatile little brother is more prone to sudden price swings as traders like to pick up some cheap silver after a pullback.

While gold broke below its September low and now verified its breakout, silver just moved to its own September low and then bounced back. After moving higher, silver seems to have topped right at its 38.2% Fibonacci retracement based on the August – September decline and the declining resistance line.

What does this imply? Not much, actually – it means that the white metal is continuing to trade sideways after breaking below the rising, medium-term support line in mid-September.

Silver shrugged off the rally in the general stock market and the decline in the USD Index – it could have rallied on any of the above, and instead it just kept consolidating.

Consequently, silver seems to be preparing for a bigger mover lower.

It’s also important to note that silver is holding up much better than gold and – in particular – mining stocks. If this was the early stage of a rally, miners would have been strong, and silver would have been weak or average. What we see confirms the validity of the bearish case for the next few weeks or months.

Let’s take a look below for details.

The thing that I want to emphasize today is the aftermath of the clear September moves. It was then that the USD Index broke above its declining resistance line, and it was then that gold and silver broke below their rising support lines. Miners broke below their support line in August, but the final and decisive breakdown took place in September.

What happened since that time? The USD Index moved somewhat higher, but then ultimately moved to and stayed at new yearly lows. Gold, silver, and mining stocks should have rallied given the above. They have not.

Silver is more or less at the level just before it broke, gold is below it, and mining stocks are also below it – the most out of the entire trio.

So, it is not only the case that silver was strong and miners were weak in the last several days – it’s been the case over the past few months as well. The implications are bearish.

Moreover, please note that the general stock market moved higher since September, which didn’t trigger a sustainable rally in silver or mining stocks. In fact, the latter just verified their breakdown below their September and October lows. Again, the implications are bearish.

Additionally, the implications coming from silver’s long-term chart are also bearish for the next several weeks (perhaps even months) due to the size of the volume that accompanied the recent monthly rally.

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.

Moreover, please keep in mind that 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.

In fact, 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.

Based on the above chart, it seems that silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.

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In the previous analyses, I wrote that gold’s short-term potential should be understood as a “possibility” and not a “likelihood”. Yesterday’s price action across the board confirms that this continues to be a valid approach.

The PMs and miners moved lower as a response to a small move higher in the USD Index. This sounds quite normal, but please note that yesterday’s daily gain in the USD Index was almost exactly the same as what we had seen in the previous two trading days. And on those previous two trading days, gold had rallied.

This means that gold’s rally was likely just a technical phenomenon, nothing more. It needed to verify the breakdown below an important support line and that’s exactly what seems to have happened. During this move, silver was particularly strong, and miners were particularly weak, which is exactly what one should expect to see if a given rally is actually a correction within a bigger downtrend. The opposite – strong miners along with relatively weak or regular performance of silver – would have indicated a bigger rally. But that’s now what we saw recently.

On Tuesday (Dec 8), gold closed a little above the lowest daily close of September, but this breakout was invalidated on the very next day (Dec 9). The breakdown appears to have been confirmed which opens the way to additional declines, making the $1,700 a likely target for the next short-term decline.

Please note that at the moment of writing these words, the USD Index erased about half of its Wednesday rally – and gold is slightly down anyway, seemingly having completed its counter-trend rally. Still, if the USDX slides to about 90, gold might re-test the recent highs - but it definitely doesn’t have to.

Speaking of the USD Index, here’s what I wrote about it last Thursday (Dec 3):

The USD Index broke below its previous 2020 lows and this breakdown is almost confirmed. However, since today’s pre-market low (at the moment of writing these words) is 90.78, it seems that the target for the bottom – the 90 level – is at hand. Therefore – and due to also another factor that I’ll discuss shortly – the implications for gold as not as bullish as they might seem at the first sight.

Why would the bottom in the USD Index form at about 90? Because this would be yet another way in which the history could rhyme. In case of the USD Index, we have more of a 1:1 repeat of what we already saw a few years earlier.

Namely, it appears that the USD Index is repeating its 2017 – 2018 decline to some extent. The starting points of the declines (horizontal red line) as well as the final high of the biggest correction are quite similar. The difference is that the recent correction was smaller than it was in 2017. 

Since back in 2018, the USDX’s bottom was at about 1.618 Fibonacci extension of the size of the correction, we could expect something similar to happen this time. Applying the above to the current situation would give us the proximity of the 90 level as the downside target.

“So, shouldn’t gold soar in this case?” – would be a valid question to ask.

Well, if the early 2018 pattern was being repeated, then let’s check what happened to precious metals and gold stocks at that time.

In short, they moved just a little higher after the USDX’s breakdown. I marked the moment when the U.S. currency broke below its previous (2017) bottom with a vertical line, so that you can easily see what gold, silver, and GDX (proxy for mining stocks) were doing at that time. They were just before a major top. The bearish action that followed in the short term was particularly visible in the case of the miners.

Consequently, even if the USD Index is to decline further from here, then the implications are not particularly bullish for the precious metals market.

In fact, as the USD Index shows more weakness, gold might simply manage to rally back to its September lows ($1,851 in intraday terms, $1,866 in terms of the daily closing prices, or somewhere between them) and then slide once again. This would be in perfect tune with what happened in early 2018, and also what I discussed previously.

The above remains relevant, especially the part that I bolded. At that time, on December 3, the precious metals sector was indeed just before a top. The GDX ETF was just after a (Dec 2) daily close at $35.97, and yesterday’s (Dec 9) closing price is $35.40. In the meantime, there was a single-time spike.

If the above similarity to early 2018 continues, we can expect the precious metals sector to decline or at least not to rally significantly, despite another move lower in the USD Index.

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The question on everyone’s mind is: when is it a good time to buy some gold or silver after they bottom? The answer to that question is simple: when key triggers are met. Count-trend rallies in gold or silver don’t mean that they have enough energy and momentum to keep climbing. Miners also don’t have enough strength to lead the way in a fresh climb upwards for the PMs, so everything we see now only speaks of corrective action.

Gold moved higher yesterday (Dec 8), while silver and mining stocks went in the opposite direction. It seems that the latter moved in tune with the trend, while the move in the former was rather accidental.

Why? Because gold already invalidated yesterday’s daily rally at the moment of writing these words (in the overnight trading). Yes, the closing prices matter the most, but if gold was really after an important breakout, it wouldn’t have wiped out the previous day’s entire rally just several hours after the closing bell.

I previously wrote that it had been quite possible for gold to rally up to its September lows, and the low in gold futures in terms of the closing prices was $1,866.30. Monday’s closing price for gold futures had been exactly $1,866, and yesterday, gold closed at $1874.90. At the moment of writing these words, it’s trading at $1,864.60.

So, did anything particularly bullish happen on the gold market yesterday? Not really.

But can gold move even higher from here? As discouraging (or encouraging, depending on one’s perspective) as this answer may be, it’s a “yes”. The US Dollar Index is currently trading at about 90.8, and its downside target is at about 90, so there is room for another short-term slide. Such a slide would be likely to trigger a rally in the yellow metal. How high could the rally go during this final part of the counter-trend corrective upswing?

Perhaps to the mid-November high of about $1,900. Even though gold might theoretically rally all the way up to the early-November high, I don’t see this as being likely.

Meanwhile, silver formed a tiny reversal yesterday and it’s moving lower today.

Silver reversed after touching the declining resistance line, which is also the upper border of the triangle pattern. Did we just see a top in silver? That’s quite likely, but not certain. I wouldn’t be surprised if silver took one final attempt to break higher and rally and topped close to the early November high. After all, silver is known for its fake breakouts.

Moreover, please note that silver has a triangle-vertex-based reversal point in the final part of the month, which could imply that this is where silver forms a final, or temporary bottom. This could have implications also for the rest of the precious metals sector, as its parts tend to move together in the short and medium term.

Given the bearish post-Thanksgiving seasonality in the case of PMs and the tendency for them to form local bottoms in the middle or second half of December, it seems likely that the above is likely to be some kind of bottom.

Mining stocks moved 0.41% lower yesterday, despite a higher close in gold futures and the GLD ETF. The general stock market moved slightly higher yesterday, so it wasn’t the reason behind miners’ weakness. This lack of strength confirms the points that I made yesterday and further validates the bearish picture:

What we see in the PMs is just a correction, not the start of a new, powerful upleg. If it was, miners would have been leading the way higher. We currently see the opposite.

Over a week ago, I wrote that miners could move to the previous lows and by moving to them, they could verify them as resistance. The previous – October – low is at $36.01 in intraday terms and at $36.52 in terms of the daily closing prices. Yesterday, miners closed at $36.50. 

So, while gold closed at its September low (in terms of the daily closing prices), gold miners closed at their October low.

If the USD Index declines one more time before bottoming, and gold rallies, miners could also move temporarily higher. How high could they move? I think that the mid-November high of about $38 (intraday high: $38.35, daily close: $38.01) would provide the kind of strong resistance that miners might not be able to breach.

Still, this upside is based on two big IFs. 

The first “if” is if the USD Index declines to 90 or slightly lower – it’s extremely oversold, and the CoT reports confirm it. 

The second “if” is if the precious metals sector really reacts to USD’s decline with a visible rally. In the past few weeks, gold shrugged off quite a few USDX declines. And miners shrugged off even more positive news.

Consequently, it seems that trying to take a profit from the possible, but not very likely, immediate-term upswing is not the best idea from the risk to reward point of view.

Thank you for reading our free analysis today. Please note that the following 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
Founder, Editor-in-chief

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