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Impending USD Bottom Means Gold’s Plummet is Close at Hand

January 7, 2021, 8:32 AM Przemysław Radomski , CFA

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Gold prices eased on Thursday (Jan. 7), the first time they did so after experiencing a strong start to the year, and the dollar remains firm for the moment. In the first days of January 2021, gold was likely to top at its triangle-vertex-based reversal, similarly to what it did in November, and that’s exactly what happened.

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Figure 1 - COMEX Gold Futures

The daily slide was not as big as the one we saw in early November, but the rally in the USD Index was also not as big as the one in early November.

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Figure 2 - USD Index

In fact, the USD Index closed yesterday’s (Jan. 6) session just slightly higher in terms of the futures prices, and it actually closed slightly lower in ETF terms (UUP ETF in this case).

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Figure 3 - SPDR Gold Shares (GLD) and Invesco DB US Dollar Index Bullish Fund (UUP)

Comparing both ETFs with identical opening and closing hours, we see how closely gold was reacting to moves in the U.S. currency, but at the same time how it was magnifying the USD’s rallies (by declining more) and how it was mostly ignoring the USD’s declines (by rallying less).

Ultimately, the UUP ETF ended yesterday’s session slightly below the Jan. 5 closing price, and the GLD ETF didn’t end above its Jan. 5 closing price. Conversely, it didn’t even manage to erase half of the intraday decline before the closing bell.

The above tells us that if the USD Index rallies more visibly here and breaks above the declining resistance line in a decisive manner, gold would be likely to truly plunge.

And that’s exactly what’s likely to happen! The USD Index is extremely oversold and just a little strength here will allow it to break above the steep resistance line.

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Figure 4 -USD Index (ICE), USD, GOLD, GDX, and SPX Comparison

With the situation looking just like it did in early 2018, it seems that the USD index is bottoming, and the precious metals sector is topping.

The USD Index is slightly below the Fibonacci-extension-based target based on the size of the most recent corrective upswing and the declining dashed resistance line. The same situation in 2018 (also please note that cryptocurrencies are in a price bubble now just like they were in early 2018) meant that the final bottom was already in. The situation in the RSI indicator is similar as well.

Let’s get back to gold.

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Figure 5 - COMEX Gold Futures

Please note that after topping at its triangle-vertex-based reversal, gold then declined but stopped at its rising support line.

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Figure 6 - COMEX Silver Futures

Silver did pretty much the same thing.

They both stopped where they were likely to stop, which is quite normal. The USD Index didn’t rally yet in a particularly visible way and the UUP ETF even declined somewhat yesterday. But the day when the PMs are going to get a significant push lower is coming. It’s likely very, very close. And then, once gold and silver break below their rising support lines, we’ll see significantly lower prices.

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Figure 7 - VanEck Vectors Gold Miners ETF (GDX) and Slow Stochastic Oscillator (Slow STO) comparison

Mining stocks moved somewhat lower yesterday, but the decline was relatively small at first sight. Are miners showing strength here?

Let’s take one more look at the GDX while comparing it with the GLD ETF so that they both have the same opening and closing hours.

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Figure 8 - GDX and GLD ETFs comparison

As you can see, both ETFs have actually moved to their mid-December highs and then moved back up yesterday. The GDX corrected a bit more of the daily decline, but nothing more.

What seems like a show of strength is more of an intraday price noise. If this persists and miners hold up well despite gold’s declines, it might be a bullish indication, but it’s way too early to draw bullish conclusions from miners’ performance.

The spike in volume in the GDX ETF that we saw recently continues to emphasize the similarity between the recent top, the November top, and the late-July top. The implications remain bearish.

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Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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