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przemyslaw-radomski

Gold Investment Update: History Rhymes – Does USDX’s Uprising Mean Gold’s Climax?

March 15, 2021, 11:45 AM Przemysław Radomski , CFA

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The yellow metal’s behavior looks more bearish now than it did in 2017-2018. The USDX has a lot of bullets in its chamber, and gold can be riddled with them.

Plenty of warning signs on the near-term horizon: The USDX is after a long-tern breakout, traders are reducing net-short positions, and the slightest shift in U.S. dollar sentiment can lead the rest of the herd to follow. If a USDX resurgence is combined with an equity shock, then the precious metals are in for trouble.

Last Friday (Mar. 12), we focused quite a bit on the moves in the gold miners and how their related ETFs (GDX and GDXJ) are faring and which will suffer most during the next phase of the decline. We also touched on this subject last Wednesday as well. It was important to shed light on the miners because they’ve been leading the charge in the corrective upswing. I also wanted to explain the Eurozone’s impact on the precious metals and how crucial it is to examine the bigger picture and how the pieces are all connected. Today, let’s shift our attention over to the currency perspective, namely the USDX.

The price shape and time analogies are truly remarkable right now. It’s quite often the case that history rhymes, but it’s rare for it to rhyme so closely and clearly to what we now see in the case of the USD Index. And the implications for precious metals investors are profound.

On Mar. 8, I warned that with the USD Index confronting its mid-2020 lows (resistance), a short-term dip could occur in the coming days. But after declining by 0.34% last week, the negativity could be short lived.

Case in point: the 2017-2018 analogue is already in full swing, and while short-term dips were part of the historical journey, the USDX could be about to exit its consolidation phase.

Please see below:

Chart, line chartDescription automatically generated

You can also see the similarity between two periods and the technical patterns that they included in the chart below:

ChartDescription automatically generated

Even while looking at the price moves for just a second, the size and shape of the 2017-2018 analogue clearly mirrors the 2020-current price action. Although this time, it took less than 118 days for the USD Index to move from peak to trough.

In 2017-2018, it also took 82 days for the USDX to form a final bottom (the number of days between the initial bottom and the final bottom) and the duration amounts to 21.19% of the overall timeframe. If we applied a similar timeframe to today’s move, then the USD Index should have bottomed on Feb. 12. It actually bottomed (finally) on Feb. 25, which was just 8 trading days away from the former date. Taking into account the sizes of the moves that preceded the previous declines (they took approximately one year to complete), this is extremely close and an excellent confirmation that the self-similar pattern remains intact.

In addition, as the USDX approached its final bottom in 2017-2018, gold traded sideways. Today, however, gold has been in a downward spiral. From a medium-term perspective, the yellow metal’s behavior is actually more bearish than it was in 2017-2018.

Finally, the USD Index’s breakout above its 50-day moving average (which it still holds today) is exactly what added gasoline to the USDX’s 2018 fire. Case in point: after the 2018 breakout, the USDX surged back to its previous high. Today, that level is roughly 94.5.

Moreover, gold’s trepidation alongside the USD Index strength on Mar. 12 adds even more validity to the 2017-2018 analogy.

I wrote on Mar. 10:

It’s not true that there were no pullbacks during the 2018 rally. There were, but they were simply too small to be visible from the long-term point of view.

The first notable pullback took place in early May 2018, and it contributed to a corrective upswing in the precious metals market. To be precise, the USD Index declined after rallying for 56 trading days, but gold rallied earlier – 51 trading days after the USD Index’s final bottom. The USDX’s immediate-top formed 16 trading days after its final bottom, and gold’s bottom formed 10 trading days after the USD’s final bottom.

Comparing this to the size of the previous decline in terms of the trading days, it was:

  • 51 – 56 trading days / 283 trading days = 18.02% - 19.79%
  • 10 – 16 trading days / 283 trading days = 3.53% - 5.65%

More importantly though, when the USD Index turned a short-term decline into consolidation in mid-2018, gold’s hesitant reaction highlighted the yellow metal’s anxiety. And what followed? Well, gold’s next move was significantly lower, while the USD Index’s next move was significantly higher. This means that it was likely a good idea that we took profits from our long positions recently when the GDX moved to $32.96 (opening at $30.80 - $31).

Please see below:

ChartDescription automatically generated

In addition, if we analyze the pairs’ very recent price action, it’s a splitting image.

On Friday (Mar. 12), the USD Index rallied by 0.28%, while gold was (roughly) directionless despite the intraday volatility. And just like in 2017-2018, the yellow metal’s behavior signals a forthcoming climax. As a result, gold and the USD Index are behaving exactly as they did before going their separate ways in 2017-2018. And this means a bearish gold price prediction for the following weeks (not necessarily hours, though).

Please see below:

Chart, histogramDescription automatically generated

To explain, I wrote on Mar. 10:

Let’s examine the current situation: the preceding decline lasted for 200 trading days and there were 41 – 42 trading days between the final USDX bottom and the short-term reversals in gold and USDX. Comparing this to the final USDX bottom, we get 7 – 8 trading days.

Applying the previous percentages to the length of the most recent medium-term decline in the USD Index provides us with the following:

  • 18.02% - 19.79% x 200 trading days = ~36 - ~40 trading days
  • 3.53% - 5.65% x 200 trading days = ~7 - ~11 trading days

The above estimation of about 36 – 40 trading days almost perfectly fits the current 41 – 42-day delay, and the estimation of about 7 – 11 trading days almost perfectly fits the current delay of 7 – 8 trading days.

In other words, the analogy to the 2018 performance does not only remain intact – it actually perfectly confirms the validity of the current corrective upswing. Once again, it’s very likely just a pullback, not a big trend reversal.

The bottom line?

Given the size of the 2018 upswing, 94.5 on the USD Index is likely the first, of many, potential upside targets.

Adding to the list of upside catalysts, the USD Index still has plenty of other bullets in its chamber. For instance, we’re also in the early innings of a shift in U.S. dollar sentiment. With short interest hitting an all-time high in late-2020, it was a complete fire sale. Today, however, short interest may have peaked.

Please see the below chart based on the CoT report:

ChartDescription automatically generated

Please consider how big rallies followed the moments when the net speculative position as % of total open interest started to rally back up after being oversold for months. The situation here is still more extreme than it was in early 2018 and 2014, suggesting that the upcoming rally might be bigger than the ones that we saw then.

As further evidence, speculative futures traders (non-commercial) actually reduced their net-short positions by 1,216 contracts last week (the net of the two values in the red box below). As a result, the slightest shift in sentiment could lead the rest of the herd to follow.

TableDescription automatically generated

Finally, let’s not forget that the USD Index is after a long-term, more-than-confirmed breakout. This means that the long-term trend for the U.S. dollar is up.

ChartDescription automatically generated

In conclusion, the USD Index is likely shifting from consolidation to ascension. With the size, scope and duration of the recent price action mirroring 2017-2018, it’s only a matter of time before the USD Index’s medium-term breakout gives way to a material breakthrough. What’s more, the USD Index is finally reacting to the rise in U.S. Treasury yields. Initially ignoring the late-2020 surge, a bottom, and subsequent rally in the U.S. 10-Year Treasury yield has lifted the USD Index 80% of the time since 2003. And with the relationship seemingly restored in 2021, the combination is profoundly bearish for the PMs, especially given today’s triangle-vertex-based reversal in gold.

LETTERS TO THE EDITOR

Q: I was just about to join your Gold service, when I noticed the option to receive ALL trading advice, stocks, oil, etc. But I am confused by something. At the moment, PR seems to think that we may possibly have seen the top in U.S. stocks, and even if not, that a top is not far away (correct me if I have misinterpreted his advice).

But when I look at your stock advice section, Matthew Levy seems to be of the opposite opinion.

How is this intra-company variance possible – your senior (PR) adviser giving out (what I interpret to be) advice that contrasts with another member of your team?

I will definitely join the Gold service, but I'd just like to understand the nature of the other advice before deciding if I want access to it or not.

Many thanks

A: Thank you for the question – this is an important subject to explain. Before replying more precisely, I would like to stress that we don’t provide investment advice, only our general opinions on the markets.

Having said that, I would like to stress that I’m not imposing my views about any market to any other analyst that is providing their analyses on SunshineProfits.com, nor am I consulting my analyses (and require approval) from other analysts. To be 100% clear, every now and then, we’re discussing some issues with each other, but with mutual respect, we then describe the situation exactly as each of us sees it, which may or may not be in tune what others think.

This means that at times two people providing analyses might have opposing views on the same market.

For now, there is only one person specializing in directional trades in the case of any single market, but this will not be the case in the future – there will be more authors for a single market that might have different views, different strategies, different philosophies and approaches. This is not a “bug” but a “feature”. If everything was “set” by one person (for example, by me), there would be little-to-no benefit from having access to the thoughts and views offered by other authors, as there would be no real additional value from reading the same views.

Besides, based on my knowledge and market research, people usually want to read diverse opinions on the internet before making up their mind about something. Therefore, that’s exactly what we want to provide them with through our service. Why can’t people get diverse opinions without having to leave the platform?

I’m not afraid that my views get challenged, as it’s not my goal to prove that I’m always going to be correct (which is obviously not possible), nor am I interested in “flexing” power. My goal is to provide the best service to people who join our platform. I think the way to achieve this is through allowing authors to be independent and true to their views.

What I do mind is that the points taken in analyses be well researched, that the analyses are professional, ethical, and are created with great care regarding readers. Moreover, the authors need to adhere to my and this company’s WHY, which is: “to discover and share knowledge with people, so that they can improve their lives”. The analyses can’t be used to promote personal agendas or try to indoctrinate people with regards to an author’s political (or other) views (in fact, there was even a case where an author was forbidden to publish their analyses with us due to this very reason). The analysts are also forbidden to take any remuneration from any companies or ETFs that they might describe in their analyses in order to avoid both real and potential conflicts of interest. However, having opposite views to other authors on the platform is not and will not be forbidden, even if one would have opinions about the market that oppose the ones of the Editor-in-chief. I – PR – will be carefully reviewing the work, approach, and professional background of those that want to join our platform.

Also, Matthew Levy, CFA spotted many profitable trades in the specific (sector-based, including emerging markets) ETFs, which I wasn’t paying attention to, as that’s not my specialty (the precious metals sector is). If you’re considering broadening the scope of available services, and you’re interested in the stock market, I suggest that you give Matthew Levy’s Stock Trading Alerts a try.

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 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.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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