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Trading Under USD’s Recuperative Pressure

October 13, 2020, 11:57 AM Przemysław Radomski , CFA

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In yesterday’s analysis, we explained why rising stock prices might not lead to significantly higher gold prices before the latter turned south again. The manner in which yesterday’s session was conducted seems to have confirmed it. Stocks (S&P 500) were up by 1.64%, with the second-highest daily close this index has made – ever. And did gold rally that strongly as well? Absolutely not. Gold futures were up, but only by a mere 0.14% ($2.70). Silver futures were up by only $0.16, and the mining stocks – GDX ETF – declined by 0.27%.

Just minutes before writing this, gold invalidated its breakout above the declining resistance line. Before the invalidation happened, we reported that – unless gold declined – it would be just the second day when gold closes above the declining resistance line, and for the breakout to be confirmed, we would need three of such closes.

But, since gold did decline, and invalidated the breakout, the implications are already bully bearish.

At the same time, let’s keep in mind that gold did not break above the 38.2% Fibonacci retracement level based on the recent decline. Gold is also verifying the previous (August and September) lows as resistance. So far, it managed to move just slightly above the lowest daily close from the Aug-Sep consolidation. The resistance holds on.

All in all, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Keep in mind that gold does not show any strength here, despite what one might think based on Friday’s upswing alone, especially in light of yesterday’s upswing on the stock market.

Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it will most probably slide in the upcoming weeks or months, even if that doesn’t happen right away.

Based on the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.

As far as the white metal is concerned, previously, we’ve indicated the following:

Silver is also after a major breakdown and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any major rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.

Once again, that’s precisely what happened on the market!

So, is the counter-trend rally over? That’s quite possible, particularly if we consider yesterday’s (less than clear, but still) reversal. But, given the possibility that the stock market moves higher, silver could move somewhat higher as well before it slides once again.

Back in early March, silver moved higher before indeed plunging, so the current move up doesn’t invalidate this similarity, especially given that the Covid-19 cases are rising in a quite similar way (most visibly in Europe).

On an intraday basis, technically, silver moved as high as it did on July 28th. The corrective rally is not as big as one might think if we focus on Friday's upswing alone. However, that’s not the critical matter here. The key point in case is that the breakdown below the rising support line was more than confirmed.

At the moment, one might ask how we can know if that really is just a dead-cat bounce and not the start of a new strong upleg in the precious metals sector. The answer would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very probable due to multiple factors, the clearest of them being the confirmed gold and silver breakdowns, and most importantly – the confirmed USDX breakout.

Meanwhile, the mining stocks had barely done anything yesterday.

To be more precise, this “nothing” is quite informative, as a small decline in miners is a big sign when contrasted with the sizable rally in stocks. It’s a bearish indication, given that miners failed to react to stocks’ positive lead.

Moreover, please note that the miners touched their 50-day moving average, without closing above it. In March, this level served as the initial resistance, which was then broken for three days, the final top before the massive slide. This moving average then served as resistance twice in March and in April. Being broken downwards in September, right now, we can clearly see the verification of this breakdown. Hence, the implications remain bearish for the next few weeks.

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

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