In yesterday's analysis, we emphasized the importance of the USD Index as one of the key drivers for the precious metals market. We wrote about the inverse head and shoulders formation in the USD Index and its implications.

The target based on the above chart was about 98.5.

And here's how the situation looks like at the moment of writing these words:

The USD Index has almost reached the inverse-H&S-based target that corresponds to the November 2019 high. This means that the greenback is likely to reverse its course shortly.

Now, the particularly interesting thing is how gold and silver reacted to the last few days of higher prices.

Meanwhile in the Metals

In the first days of February, the precious metals sector declined sharply, only to bounce back up in the following days. We wrote that choppy trading is to be expected, especially given the short-term coronavirus-scare-based bullish potential and the conflicting medium-term bearish factors. That's what we see.

The PMs moved higher yesterday, and in today's pre-market trading, they didn't decline even though the USD Index rose, which confirms what we wrote previously. Gold and silver are likely to move higher in the very short term.

As the USD Index declines, gold and silver are likely to rally, and since they managed to show resilience to the most recent daily rallies in the USDX (those of yesterday and today), they are quite likely to magnify USD's move to the downside.

Consequently, the outlook for the very short term remains bullish, while the outlook for the medium term is bearish.

Thank you for reading today's free analysis. If you'd like to get to know additional details, such as at what level could the USD Index bottom, triggering a top in the PMs, at what prices gold and silver are likely to top, and when is that likely to take place, we invite you to subscribe today.

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

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The precious metals market didn't do much yesterday, but - what may seem surprising - that's quite bullish. It's bullish, because the USD Index rallied to new yearly highs and this "should have" caused the PMs and miners to decline. It didn't, which suggests that the decline is not yet ripe for continuation.

In this case, the most likely scenario is that we'll see another rebound in gold, silver, and mining stocks as soon as the USD Index corrects. Then, PMs could form their final top, and the big decline could begin.

Alternatively, this cycle of back and forth movement could continue a bit longer. Gold could spike, but only if the coronavirus scare gets much worse, as we outlined yesterday. If that happens, silver and miners are not likely to be affected to the same extent as gold - just like what happened in 2014 during the ebola scare.

The above might be confusing so let's put it in other words, simplifying.

PMs showed resilience yesterday, suggesting that they are likely to rally once USDX corrects.

When the USDX corrects, PMs are likely to rally and silver might outperform gold at that time, as that might be the final part of PMs' rally.

What may or may not be related to the above is the peak interest in (fear of) the coronavirus. When people get extremely scared of the coronavirus, gold would be likely to rally higher and to outperform silver and mining stocks.

Our plan here is to take profits (...) <trading plan is reserved to subscribers> When we do, it will mean that gold is getting close to its local high.

Ok, so, when could the USD Index correct triggering another move up in the precious metals sector?

USD Index Has Momentum

Quite likely relatively soon. The USD Index broke above its declining resistance line and moved to a new yearly high yesterday. The momentum is strong so it could reach its November 2019 high as soon as today.

Now, based on the recent local high (the one that was just broken), we can estimate how high the USD Index is likely to move in the next few weeks. This can be done thanks to the Fibonacci extensions technique. In short, it means multiplying the size of the previous rally by 1.618.

In practice, we can do it by using the Fibonacci retracement tool, but drawing it in a way that anchors the start of the retracement at the initial bottom, and then placing the 61.8% Fibonacci retracement at the initial top. The 100% "retracement" now points to the target. Why would the "retracement" work in this way? Because 100% / 61.8% = 1.618 (approximately) That's one of the very specific properties of the Phi number. Others include that 1 / 0.618^2 = 2.618 (approximately) and many more.

But the math behind it is not that important - what is important is that it very often works.

In all cases that we marked on the above chart, this technique pointed to important short-term tops. Currently, it points to a top being likely at about 99.24. This is the 2019 high, which makes this level very likely to stop the USD Index... for some time. After all, the USD Index is in a powerful uptrend - it's likely to exceed its previous highs despite short-term pullbacks.

So why do you mention the November 2019 high, while it is THE 2019 high that's likely to be reached?

Because the USD Index might not rally to the 2019 high without an intermediate correction. Please note what happened in the cases that we applied the Fibonacci extension to. In all cases, except for the July rally, the USD Index first formed an initial high, corrected, and only then moved to the Fibonacci-extension-based target.

The November high is the next strong (from the short-term point of view) resistance and it's confirmed also by a short-term inverse head-and-shoulders pattern.

The target is based on the size of the head of the pattern and it quite clearly confirms the target based on the November 2019 high.

Summing up, the USD Index is likely to correct after reaching about 98.5 (the November 2019 high), which is likely to trigger a very short-term upswing in gold and silver. Then the greenback is likely to rally once again and PMs might fall (unless the coronavirus scare peaks, in which case gold could move higher once again for several days).

We hope you enjoyed reading today's free analysis. The full version thereof includes also our trading plan and the estimations regarding when the next rally and top in gold are likely to take place. If you'd like to read it, we invite you to subscribe today.

Thank you.

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

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Gold declined sharply yesterday, and it took the mining stocks with it. Silver was down but not significantly so.

The decline made the outlook less bullish, but not bearish just yet. Of course, that relates to the short-term only - the outlook never stopped being bearish in case of the medium term.

It could be the case that the second top in gold is already in. However, it doesn't necessarily mean that the decline will accelerate immediately. We could still get another move higher in the PMs, especially if the USD Index declines. During this time, silver would be likely to outperform, just like we had indicated previously.

Why could gold move higher once again? As that would be in tune with how it topped in October 2008, September 2011, and in the first months of 2018. These are the multi-top formations where the first top was formed on huge volume - we featured charts with them in Monday's flagship Gold & Silver Trading Alert.

Anatomy of Gold Tops

In all three cases, gold topped on huge volume, but the decline didn't proceed immediately. There was a delay in all cases and a re-test of the previous high. The delay took between several days and a few months.

Since a similar pattern followed the huge-volume tops, it seems that we might still see a re-test of the recent high in the near future. We already saw one re-test - gold moved close to $1,600 but failed to rally above it. In all three cases, the attempts to move higher were then followed by sharply lower prices. But, these sharply lower prices were then followed by rallies anyway. Sometimes (2008 and 2018), gold attempted to move to new highs, and sometimes (2011) all gold was able to do was to correct a bit more than half of the preceding decline. Either way, gold didn't slide immediately. This means that gold is likely to decline, but back and forth trading is likely to take place first. Gold could form lower highs and lower lows during this stage, but it's unlikely to just drop hundreds of dollars in a day. At least not shortly.

Gold is likely to decline by hundreds of dollars, but it will take months, not just a day. It could be the case that this move is already underway, but even if it is, choppy trading is much more likely than a decisive, enormous slide now.

Let's add the more up-to-date news to the mix of analogies. In Monday's gold analysis, we explained that the link between fear of the coronavirus and gold is similar to the fear of the ebola virus in 2014.

We also emphasized that based on the fear factor, gold is likely to rally particularly visibly when the fear reaches extreme levels. Based on the levels the fear of ebola reached and the increasing easiness of sharing information and emotions online, the fear of coronavirus has most likely not reached its peak.

However, gold's decline puts this assumption to the test.

Gold Performance in the Coronavirus Days

Gold declined about $40 from its recent high.

Nothing like that happened during the ebola-scare-peak upswing that we saw in October 2014. It didn't happen during the initial August 2014 rally either.

This may mean that the fear has already peaked.

It may also mean that what we saw was only the initial peak - similar to the August 2014 one.

(chart courtesy of Google Trends)

The above chart shows how intensely people were looking for information regarding the viruses online. One of the lesser known gold trading tips is to examine how gold-related search terms performed over time. In this case, we see that tt took some time before both: ebola and h1n1 (swine flu) virus scares were over. The coronavirus scare seems to have only begun.

This means that gold might do whatever it was doing before the coronavirus became the hot topic for some time, and then rally once again when the fear truly spikes.

In mid-2014, gold declined significantly, between both peaks of fear, and it wasn't a good idea to wait for the fear to peak as the downtrend was much stronger. Even though the interest in ebola spiked well above its previous high, gold topped well below the previous top.

Based on the virus fear analogy, we are likely to see a short-term rally in gold, but not necessarily right away, and with a top as high as gold's current price. Based on the first-top-on-huge-volume analogy, we are likely to see another very short-term move higher, but it might not be significant - gold might not return to its previous highs as it didn't manage to do so in 2011.

This suggests that, given the way gold reacted yesterday, it's better to stay out of the gold market for a while and prepare to enter a short position to profit on the upcoming big decline. Silver is a different story, though.

Thank you for reading. If you'd like to read the full version of the above analysis, and get details for silver, and mining stocks, we invite you to subscribe to our Gold & Silver Trading Alerts.

Thank you.

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

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