We summarized yesterday's analysis, by writing that it seemed that the USD Index had yet to decline and thus that the rally in the precious metals sector was not over yet. We emphasized that miners led the way yesterday, but silver was likely to take up the baton shortly.
In short, that's exactly what happened. The USD Index declined after its daily reversal and it seems to be just a start of the decline. It's not yet a sure bet that the USD is going to slide, though. Why?
USD Index Hanging in the Balance
The breakout was vulnerable to invalidation as it was relatively small. Indeed, it was invalidated but only in terms of the intraday price moves. When we look at the resistance line that's based on the closing prices, we see no invalidation. This means that the outlook has just deteriorated, but that it could still get worse in the near term.
To be clear, we continue to think that the USD Index is headed much higher in the following months and perhaps years, but this doesn't mean that it will rally in a straight line.
The vertical dashed lines and the Fibonacci retracements on the above chart show what happened when the USDX entered such corrective downswings in the recent past. In one case, the USDX declined to new lows, in two cases (January 2019 and October 2019) it moved very close to its previous lows, in two other cases, it corrected about half of the preceding rally (October 2018 and July 2019), and in one case (April 2019), it moved to the 38.2% Fibonacci retracement before rallying once again.
If history is to rhyme, as it usually does, then the USD Index is likely to decline to at least 97.24. The 97 level seems to be a quite likely downside target as this support is additionally strengthened by the October low and the rising medium-term support line.
Gold's and silver's reaction to the USD movement has been quite specific before and during corrections in the latter.
In almost all above-mentioned cases, gold and silver declined (usually relatively sharply) prior to USD's declines. The July 2019 case may seem to be an exception, but it really isn't one. Back then, the USD formed two tops and the first top was indeed immediately preceded by a quick dip in both precious metals. The true exception is what happened in December 2019 - in this case, gold and silver paused a bit before rallying again. We saw that once again this week. Gold, silver, and mining stocks declined quickly, but then they came back up with vengeance as the USDX started to correct, just as we had indicated yesterday:
All in all, in most cases the quick decline in metals right at the USD top was normal. While in most cases, it is the USD Index that can tell us something about gold and silver, this time it might be the other way around first. The PMs might have declined indicating that this was indeed the final part of the USD's rally, which in turn could imply a quick comeback of the PMs along with a short-term correction in the USDX.
On a very short-term note, here's how the situation looks.
The USD Index is very close to its rising support line but hasn't broken below it just yet. This means that theoretically, the USD could (and should as the trend is unbroken) rally after touching the support line.
However, we also know that it's about time for the USD Index to correct more visibly (no market can move up or down in a straight line). Then, we saw two daily reversals, and as well how the USDX performed initially after this week's interest rate decision. Consequently, we think that a breakdown here is likely and that it would likely be followed by lower USD values and higher precious metals values. In fact, it seems that gold and silver might rally even more than we had previously thought and that our long positions will become more profitable before we close them - thus, we are adjusting them accordingly.
We hope you enjoyed today's free analysis. For more details regarding gold, silver, and mining stocks, as well as the actionable details of our trading positions (especially the profit-take levels), we invite you to subscribe to our Gold & Silver Trading Alerts, on which the above free analysis is based.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager