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USDX: Trick or Treat, Looks Like an Early Halloween

June 1, 2021, 9:22 AM Przemysław Radomski , CFA

Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

Welcome to this week's flagship Gold & Silver Trading Alert. As we’ve promised you previously, in our flagship Alerts, we will be providing you with much more comprehensive and complex analyses (approximately once per week), which will usually take place on Monday.

Predicated on last week’s price moves, our most recently featured outlook remains the same as the price moves align with our expectations. On that account, there are parts of the previous analysis that didn’t change at all in the earlier days, which will be written in italics.

Let’s start with a quick discussion of the fundamental drivers that could affect the precious metals in the coming weeks.

On Friday (May 28), the White House presented U.S. President Joe Biden’s budget for the 2022 fiscal year that starts on October 1, 2021. Biden trumped Trump and proposed $6 trillion, more than one trillion more than Trump’s proposal for $4.8 trillion of spending in the previous fiscal year. What’s more, POTUS wants to raise government outlays up to $8.2 trillion by 2031.

According to the White House, the proposed fiscal agenda will further increase the total federal debt-to-GDP ratio, from the current 129.1% to 136.9%by 2031. Meanwhile, the federal debt held by the public is estimated to rise from the current 100.7% to 108.5%of the GDP. The current level of the US public debt compared to the size of the economy is presented in the chart below.

What does the budget for the next fiscal year mean for gold prices?

In the short term, it doesn’t have to be good news for gold. This is because big deficits and federal debt could exert upward pressure on the Treasury yields, resulting in higher interest rates, which would suppress the gold prices. However, the Fed is ready to intervene if the interest rates increase too much. Hence, the continuation of the US’s irresponsible fiscal policy could add to the positive momentum in the gold space, especially while taking into consideration that all these new social and infrastructure programs arrive during a period of economic expansion and inflationary pressure. So, the era of big government (with bigger government expenditures and fiscal deficits) and higher inflation is back. It could be, thus, an era of shining gold.

Short-Term Outlook for Gold

As mentioned, though, the short-term outlook is much less sanguine. While the Personal Consumption Expenditures (PCE) Index (released on May 28) undershot the Commodity Producer Price Index (PPI), the 3.60% year-over-year (YoY) increase was the highest since 2008.

Please see below:

To explain, the green line above tracks the YoY percentage change in the Commodity PPI, while the red line above tracks the YoY percentage change in the headline PCE Index (which includes the inflationary effects of food and energy). If you analyze the gap on the right side of the chart, you can see that the headline PCE Index still has some room to run.

To that point, while bond investors largely ignored the strong print, the gap between the U.S. 10-Year Treasury yield and the headline PCE Index is now at its highest level since the mid-1980s.

Please see below:

What’s more, during an FOMC press conference in 2018, Jerome Powell, Chairman of the U.S. Federal Reserve (FED) was asked:

“Do you still think core PCE is a good measure of whether the economy is overheating? What do you think of other measures like setting a target for economic growth and relying more on that?”

His response:

Well, I think we look at both but core PCE is a... is a good indicator.” He added: “what's happened over really 50 years is that inflation has become much less reactive to changes in growth. There was a time when inflation reacted really quickly to changes in growth and changes in unemployment and that time is behind us.”

Thus, while Powell is unlikely to change his tune after one strong print, it’s important to remember that the core PCE Index increased by 3.10% YoY– the highest YoY percentage increase since 1992. More importantly, though, notice the relationship between the core PCE Index and the U.S. federal funds rate?

To explain, the red line above tracks the YoY percentage change in the core PCE Index (which excludes the inflationary effects of food and energy), while the green line above tracks the U.S. federal funds rate. Excluding the mid-to-late 1970s, the gap between the core PCE Index and the U.S. federal funds rate has never been wider. And while Powell continues to support the “transitory” narrative, a continuation of the trend will certainly turn up the heat.

If that wasn’t enough, the U.S. 10-Year Treasury yield still demonstrates its largest-ever divergence from the U.S. 10-Year breakeven inflation rate. In addition, despite the U.S. 10-Year real yield rising by eight basis points (0.08%) since May 10, gold has ignored the development. However, with the yellow metal’s recent strength underpinned by record imbalances across the U.S. Treasury market, shouldn’t we expect a reversion to the mean?

To explain, I wrote on May 11:

The green line above tracks the U.S. 10-Year Treasury yield, while the red line above tracks the U.S. 10-Year breakeven inflation rate. If you analyze the left side of the chart, you can see that when the bond market finally snapped in 2013, the U.S. 10-Year Treasury yield’s surge was fast and furious. More importantly, though, if you analyze the right side of the chart, you can see that today’s gap makes 2013 look like an appetizer. As a result, with material divergences often reversing in violent fashion, it’s only a matter of time until the next earthquake erupts.

Moreover, once the event unfolds, the impact will severely shake the foundation of the PMs. Case in point: with gold moving inversely of the U.S. 10-Year real yield, major explosions in the bond market often leaves the yellow metal buried under the rubble.

Please see below:

To explain, the gold line above tracks the London Bullion Market Association (LBMA) Gold Price, while the red line above tracks the inverted U.S. 10-Year real yield. For context, inverted means that the latter’s scale is flipped upside down and that a rising red line represents a falling U.S. 10-Year real yield, while a falling red line represents a rising U.S. 10-Year real yield.

If you analyze the left side of the chart, you can see that when the U.S. 10-Year Treasury yield began its move to reconnect with the U.S. 10-Year breakeven inflation rate in 2013 (taper tantrum), the U.S. 10-Year real yield surged (depicted by the red line moving sharply lower). More importantly, though, amidst the chaos, notice how gold plunged by more than $500 in less than six months? Thus, while the yellow metal may seem like it’s on solid footing, once another tremor from the bond market strikes, gold will suffer from severe aftershock.

Also, slaughtering historical norms, the U.S. 10-Year Treasury yield has completely decoupled from the Philadelphia FED’s nonmanufacturing Prices Paid Index (PPI).

To explain, I wrote on May 26:

The green line above tracks the Philadelphia FED’s nonmanufacturing PPI, while the red line above tracks the month-over-month (MoM) percentage change in the U.S. 10-Year Treasury yield. If you analyze their behavior, you can see that the pair often follow in each other’s footsteps. However, if you focus your attention on the right side of the chart, you can see that an unprecedented gap is visible. And while it’s rather optimistic to expect, reconnecting with the green line implies a ~60% surge in the U.S. 10-Year Treasury yield by the end of June. To that point, with smaller jumps in the Philadelphia FED’s nonmanufacturing PPI resulting in material follow-through by the U.S. 10-Year Treasury yield, readings below 39 (and often below 35) resulted in the Treasury benchmark jumping by more than 10% MoM in 2012, 2013, 2015, 2016, 2018, 2020 and in 2021. Again, the current reading is 49.1.

Over the medium-to-long term, the copper/U.S. 10-Year Treasury yield ratio is also a leading indicator of gold’s future behavior.

I wrote previously:

When the copper/U.S. 10-Year Treasury yield ratio is rising (meaning that copper prices are rising at a faster pace than the U.S. 10-Year Treasury yield), it usually results in higher gold prices. Conversely, when the copper/U.S. 10-Year Treasury yield ratio is falling (meaning that the U.S. 10-Year Treasury yield is rising at a faster pace than copper prices), it usually results in lower gold prices.

If you analyze the chart below, you can see the close connection:

And in trying to accomplish something that hasn’t been sustained in more than 20 years, gold has also diverged from the copper/U.S. 10-Year Treasury yield ratio. Furthermore, while both variables moved higher last week, reconnecting with the red line below implies a gold price of roughly $1,690.

Please see below:

Finally, I mentioned previously that with China’s manufacturing PMI (new orders) beginning to roll over, copper’s recent momentum could be ripe for a reversal. And while continued commodities speculation (which remains inflationary) propelled copper 4.39% higher last week, further weakness in the bronze metal could usher the copper/U.S. 10-Year Treasury yield ratio even lower over the medium term.

To explain, the blue line above tracks the year-over-year (YoY) percentage change in copper, while the gray line above tracks China’s manufacturing PMI (new orders). If you analyze the right side of the chart, you can see that investors have priced in the highest Chinese demand in more than 10 years. Conversely, with the gray line signaling extreme overconfidence, a reconnection could weigh heavily on gold in the coming weeks.

The bottom line?

With the copper/U.S. 10-Year Treasury yield ratio highly correlated with the yellow metal, copper’s rocket ship helped propel gold higher in April. However, with momentum sputtering and the enterprise coming back down to earth, gold’s divergent behavior will likely culminate with a hard landing.

On the flip side, if we extend our time horizon, there are plenty of fundamental reasons why gold is likely to soar in the coming years. However, even the most profound bull markets don’t move up in a straight line, and corrections are inevitable.

As it relates to the precious metals, a significant correction (medium-term downtrend) is already underway. However, the pain is not over, and a severe climax likely awaits.

For context, potential triggers are not always noticeable, and the PMs may collapse on their own or as a result of some random trigger that normally wouldn’t cause any major action. However, a trigger will speed things up, and that’s where the S&P 500 comes in:

Stock Market Signals

With the NASDAQ Composite suffering from severe underperformance, the implications of its failed attempt at breaking to new highs and its ominous shooting star remain intact. For context, a shooting star candle signals a bearish reversal when formed during an uptrend.

Please see below:

As for the S&P 500, the U.S. equity benchmark’s RSI (Relative Strength Index) is mirroring the behavior we witnessed before the swift drawdown in 2020. If you analyze the first red box below (at the top of the chart), you can see that the S&P 500’s RSI moved above 70, then below and back above once again before plunging. And while the current reading is still hovering below 70, the second move higher doesn’t have to eclipse 70 to elicit bearish signals. For example, in 2018, the indicator recorded a similar rise, declined, then failed to recapture 70 once again and suffered a monumental plunge.

On top of that, the 2018-2020 analogue is even more valid now than it was previously. With the S&P 500’s trough-to-peak rally from 2018-2020 mirroring the length of its current revival, a significant reversal could be forthcoming.

Please see below:

To explain, I wrote on May 11:

The markets are self-similar (which is another way of saying that they have a fractal nature), which generally means that while the history tends to rhyme, it also tends to rhyme in similar shapes of alike or various sizes.

For example, the rally from 2018–2020 seems very similar to the rally from 2020 to the present. Both rallies started after a sharp decline, and the first notable correction took the form of back-and-forth trading around the previous high. I marked those situations with big rectangles.

Then the rally continued with relatively small week-to-week volatility. I created rising support lines based on the final low of the broad short-term consolidation and the first notable short-term bottom.

This line was broken, and some back-and-forth trading followed, but it was only about half of the previous correction in terms of price and time.

Then, we saw a sharp rally that then leveled off. And that was the top. The thing that confirmed the top was the visible breakdown below the rising support line right after stocks invalidated a tiny breakout to new highs. That’s what happened in February 2020, and that’s what happened this month.

“Time is more important than price; when the time comes, the price will reverse”. Both rallies took an almost identical amount of time: 60 weeks vs. 59 weeks. This is particularly bearish when one takes into account the fact that back in 2020 the rally ended when the weekly RSI moved back below 70 – and we saw the same thing again over the last two weeks.

Likewise, with the NASDAQ Composite looking increasingly fragile and several speculative IPOs and SPACs already being sent to slaughter, the medium-term outlook for the S&P 500 remains profoundly bearish. For context, the six largest companies in the NASDAQ Composite (Apple, Microsoft, Amazon, Tesla, Facebook and Alphabet) are also the six largest companies in the S&P 500. Thus, the latter is unlikely to escape a technology tirade.

More importantly, though, the S&P 500’s medium-term outlook puts the precious metals in a precarious position. I’ve mentioned on several occasions that the PMs tend to bottom approximately three months after the general stock market tops. And while the exact date of the S&P 500’s precipice remains unclear, the PMs should suffer three months (or so) of bearish price action once the S&P 500 meets its maker.

Furthermore, the U.S. equity benchmark is now entering a much tougher macroeconomic environment. With the Bank of Canada (BOC) and the Bank of England (BOE) already reducing their asset purchases, the U.S. Federal Reserve (FED) is likely next in line. And with liquidity the main driver of the S&P 500’s strong performance, investors are unlikely to celebrate the dry season.

Keep in mind though: a decline in stocks is not required for the PMs to decline. But a break in the former could easily trigger a sell-off in the latter, and if history decides to rhyme again, silver and the miners will be the hardest hit.

The USD Index (USDX)

With the ghosts of 2015 attempting to scare the U.S. Federal Reserve (FED) into tapering its asset purchases, the latest reverse repo nightmare could be gold, silver and mining stocks version of the boogeyman. Case in point: with the liquidity fright helping the USD Index sleep better at night, the greenback should benefit from the FED’s latest house of horrors: And with the central bank’s daily reverse repos hitting an all-time high of $485 billion on May 27 (with another $479 billion sold on May 28), Halloween may come early this year.

Please see below:

To explain, the green line above tracks the daily reverse repo transactions executed by the FED, while the red line above tracks the federal funds rate. If you focus your attention on the red line, you can see that after the $400 billion level was breached in December 2015, the FED’s rate-hike cycle began. Thus, with current inflation dwarfing 2015 levels and U.S. banks practically throwing cash at the FED, is this time really different?

Likewise, with reduced liquidity poised to bolster the USD Index, not only are the fundamentals trending up but also the technicals. The USD Index jumped above its declining resistance line based on May’s highs, as well as the declining resistance line that started with the late-March high. This is important not only (and not primarily) because of the double-breakout. It’s important and particularly bullish, as it emphasizes that the third – and quite likely the final – short-term bottom in a row is already in.

In addition, the USD Index might be in the early innings of forming an inverted head & shoulders pattern. For context, an inverted H&S pattern is a bullish development that if formed, could usher the USD Index well above 94.5 (to about 97-98). However, completing the right shoulder requires an upward breach of 93 (the blue line), so at this point, it’s more of an indication than a confirmation.

Please see below:

For more context, I wrote previously:

This week’s move lower is a continuation, and most likely the final part, of a specific multi-bottom pattern that the USD Index exhibited recently.

I marked those situations with green. The thing is that the U.S. currency first declined practically without any corrections, but at some point it started to move back and forth while making new lows. The third distinctive bottom was the final one. Interestingly, the continuous decline took place for about a month, and the back-and-forth declines took another month (approximately). In July 2020, the USDX fell like a rock, and in August it moved back and forth while still declining. In November 2020, the USDX fell like a rock (there was one exception), and in December it moved back and forth while still declining.

Ever since the final days of March, we’ve seen the same thing all over again. The USD Index fell like a rock in April, and in May we’ve seen back-and-forth movement with lower lows and lower highs.

What we see right now is the third of the distinctive lows that previously marked the end of the declines.

And what did gold do when the USD Index rallied then?

In August, gold topped without waiting for USD’s final bottom – which is natural, given how extremely overbought it was in the short term.

In early January, gold topped (which was much more similar to the current situation given the preceding price action) when the USDX formed its third, final distinctive bottom.

I received a few questions recently asking what would need to happen for me to change my mind on the precious metals sector’s outlook. There are multiple reasons, and it’s impossible to list all of them. However, one of the reasons that would make me strongly consider that the outlook has indeed changed (at least for the short term) would be a confirmed breakdown in the USD Index below the 2021 lows to which gold would actually react.

As further evidence, the Euro Index might be in the midst of forming a bearish H&S pattern. If you analyze the right side of the chart below, you can see that the symmetrical pattern has the current rally mirroring the summer of 2020. And while we’re still in the early innings of forming the right shoulder, three peaks were recorded during the second half of 2020 before the Euro Index eventually rolled over. Likewise, with a symmetrical setup that seems to already be in motion, the Euro Index may be heading down a similar path of historical ruin. In the second half of 2020, the decline was not that big, but it’s no wonder that this was the case as that was only the left shoulder of the pattern. Completion of the right shoulder, however, would imply another move lower, at least equal to the size of the head – to about the June 2020 lows or lower. Furthermore, last week’s decline actually ushered the Euro Index back below the dashed resistance line of its monthly channel. And with its recent triple top mirroring the price action we witnessed in mid-to-late 2020 – before the Euro Index plunged – it won’t take long for confidence to turn into fear.

Please see below:

More importantly, though, the completion of the masterpiece could have a profound impact on gold, silver and mining stocks. To explain, gold continues to underperform the euro. If you analyze the bottom half of the chart above, you can see that material upswings in the Euro Index have resulted in diminishing marginal returns for the yellow metal. Thus, the relative weakness is an ominous sign, and if the Euro Index reverses, it could weigh heavily on the precious metals over the medium term.

If that wasn’t enough, with the USD Index hopping in the time machine and setting the dial to 2016, a bullish pattern is slowly emerging. To explain, I wrote on May 11:

While the self-similarity to 2018 in the USD Index is not as clear as it used to be (it did guide the USDX for many weeks, though), there is also another self-similar pattern that seems more applicable now. One of my subscribers noticed that and decided to share it with us (thanks, Maciej!).

Here’s the quote, the chart, and my reply:

“Thank you very much for your comprehensive daily Gold Trading Reports that I am gladly admitting I enjoy a lot. While I was analyzing recent USD performance, (DX) I have spotted one pattern that I would like to validate with you if you see any relevance of it. I have noticed the DX Index performing exactly in the same manner in a time frame between Jan. 1, 2021 and now as the one that started in May 2016 and continued towards Aug. 16. The interesting part is not only that the patterns are almost identical, but also their temporary peeks and bottoms are spotting in the same points. Additionally, 50 daily MA line is almost copied in. Also, 200 MA location versus 50 MA is almost identical too. If the patterns continue to copy themselves in the way they did during the last 4 months, we can expect USD to go sideways in May (and dropping to the area of 90,500 within the next 3 days) and then start growing in June… which in general would be in line with your analysis too.

Please note the below indices comparison (the lower represents the period between May-Dec 2016 and higher Jan – May 2021). I am very much interested in your opinion.

Thank you in advance.”

And here’s what I wrote in reply:

“Thanks, I think that’s an excellent observation! I read it only today (Monday), so I see that the bearish note for the immediate term was already realized more or less in tune with the self-similar pattern. The USDX moved a bit lower, but it doesn’t change that much. The key detail here would be that the USDX is unlikely to decline much lower, and instead, it’s likely to start a massive rally in the next several months - that would be in perfect tune with my other charts/points.

I wouldn’t bet on the patterns being identical in the very near term, though, just like the late June 2016 and early March 2021 weren’t that similar.

As soon as the USD Index rallies back above the rising support line, the analogy to 2016 will be quite clear once again –the implications will be even more bullish for the USDX and bearish for the precious metals market for the next several months.”

Please note that back in 2016, there were several re-tests of the rising support line and tiny breakdowns below it before the USD Index rallied. Consequently, the current short-term move lower is not really concerning, and forecasting gold at much higher levels because of it might be misleading. I wouldn’t bet on the silver bullish forecast either. The white metal might outperform at the very end of the rally, but it has already done so recently on a very short-term basis, so we don’t have to see this signal. And given the current situation in the general stock market – which might have already topped – silver and mining stocks might not be able to show strength relative to gold at all.

On top of that, the USD Index’s long-term breakout remains intact. And when analyzing from a bird’s-eye view, the greenback’s recent weakness is largely inconsequential.

Please see below:

Moreover, please note that the correlation between the USD Index and gold is now strongly negative (-0.90 over the last 30 days) and it’s been the case for several weeks now. The same thing happened in early January 2021 and in late July – August 2020; these were major tops in gold.

The bottom line?

After regaining its composure, ~94.5 is likely the USD Index’s first stop. In the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

Keep in mind though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates and the latter move on a relative basis.

In conclusion, ghouls, goblins and ghosts are popping up everywhere, and while the USD Index has been under investors’ negative spell, the curse may have just been broken. Moreover, with plenty of skeletons in the financial markets’ closet and liquidity slowly being drained from the system, the narrative of excessive money printing has become an old wives’ tale. More importantly, though, with the greenback finding technical support at roughly the same time, we could be witnessing a paradigm shift in U.S. dollar sentiment. The bottom line? With gold, silver and mining stocks benefiting from the USD Index’s recent struggles, a coven is gathering, and it will likely torch the precious metals over the medium term.

As a secondary catalyst, a material drawdown of the NASDAQ 100 could eventually rattle U.S. equities. And with the NASDAQ 100/S&P 500 ratio already beginning to roll over, a reversion to the mean could light plenty of fireworks across Wall Street.

To that point, given the USDX’s strong negative correlation with the NASDAQ 100, a material reset could propel the greenback back to its March highs. Moreover, following a short-term consolidation, the USDX could even exceed those previous highs.

Furthermore, relative outprinting by the European Central Bank (ECB) remains of critical importance. Last week, the FED/ECB ratio decreased by 0.60%, while the EUR/USD increased by 0.08%. However, given that the ratio has declined by nearly 19% since May, the EUR/USD still has some catching up to do.

Please see below:

The key takeaway?

With the ECB injecting more liquidity to support an underperforming Eurozone economy, the FED/ECB ratio, as well as EUR/USD, should move lower over the medium term. More importantly, though, because the EUR/USD accounts for nearly 58% of the movement of the USD Index, EUR/USD pain will be the USDX’s gain.

In addition, the top in the FED/ECB total assets ratio preceded the slide in the EUR/USD less than a decade ago, and it seems to be preceding the next slide as well. If the USD Index was to repeat its 2014-2015 rally from the recent lows, it would rally to 114. This level is much more realistic than most market participants would agree on.

Very Long-Term Indications for Gold

With the month of May now on the books, the MACD indicator is still flashing red. And despite gold’s recent strength and all of the attention that has come with it, the MACD indicator has barely flinched. Furthermore, while a slight pause in the MACD indicator’s downtrend is clearly visible, an identical development also occurred in mid-2012. And what happened then? Well, if you analyze the chart below, you can see that gold’s joy quickly turned to sadness, and the yellow metal suffered a profound decline.

To explain, I wrote previously:

While short-term price movements often garner the most attention, it’s important to remember that gold’s long-term downtrend remains intact. Case in point: despite the yellow metal’s recent rally making plenty of noise, the MACD indicator has been completely silent. Still, showing a clear sell-signal on the right side of the chart below (at the bottom), the yellow metal’s superficial strength is reminiscent of the second half of 2012.

If you analyze the middle-right area of the chart below, you can see that the MACD indicator sounded the alarm in 2012. And while investors ignored the warning and gold moved higher, a profound plunge followed in 2013. Moreover, while the MACD indicator’s sell-signal was visible throughout gold’s entire journey – despite several ebbs and flows in the price action – the narrowing distance between the black and red lines actually preceded gold’s plunge. Thus, with gold’s swan song beginning to play at nearly the same level in 2013, the yellow metal’s recent strength is likely only the intermission.

The above-mentioned narrowing distance between the MACD lines can be seen clearly seen through the blue bars hovering around the 0 level on the indicator part of the chart. We now see the current blue bar move toward 0. We saw the same thing in the second half of 2012, which is when gold rallied for the last time before the huge slide.

Remember the huge gap between the U.S. 10-Year Treasury yield and the U.S. 10-Year breakeven inflation rate? The situation in the very long-term MACD indicator is yet another confirmation that what we saw recently is similar to what we saw before the huge 2012 – 2013 slide. We get the same confirmation from the gold to bonds ratio, and I’ll move to that a bit later.

Based on gold’s previous performance after the major sell signals from the MACD indicator, one could now expect gold to bottom in the ~$1,200 to ~1,350 range. Given the price moves that we witnessed in 1988, 2008 and 2011, historical precedent implies gold forming a bottom in this range. However, due to the competing impact of several different variables, it’s possible that the yellow metal could receive the key support at a higher level.

Considering the reliability of the MACD indicator as a sell signal for major declines, the reading also implies that gold’s downtrend could last longer and be more severe than originally thought. As a result, $1,500 remains the most likely outcome, with $1,350 still in the cards.

As further evidence, if you focus your attention on the monthly price action in 2008, you can see that gold is behaving exactly as it did before it suffered a significant decline.

Please see below:

To explain, after making a new all-time high in 2008 (that was a breakout above the 1980 tops), gold declined back to its rising support line before recording a short-term corrective upswing. This upswing ended approximately at gold’s previous monthly closing price. I marked it with a horizontal, blue, dashed line.

Similarly, if you analyze the right side of the chart, you can see that an identical pattern has emerged. With gold’s corrective upswing following a reconnection with its rising support line, history implies that a sharp decline should occur in the coming months and that the reversal is at hand or already behind us. After all, the thing that triggered the decline almost a year ago was the fact that gold made a new all-time high. Moreover, the recent high was very close to the previous high in terms of the monthly closing prices (Dec. 2020 - $1,895.10 vs. the recent intraday high of $1,915.60).

In addition, gold’s rally in mid-2012 occurred on quite average volume. And with the current upswing showcasing a similar lack of conviction, it signals that investors are unwilling to go all-in on the yellow metal. Furthermore, if we zoom in on the weekly chart, gold’s recent strength is even more deceiving.

To explain, I wrote previously:

If you analyze the long-term chart below, you can see that gold has invalidated the breakout above its 2011 high. More importantly, though, with its rising support line (on the right side of the chart) also coinciding with the 61.8% Fibonacci retracement level and the 2019 and 2020 lows, ~$1,450 to $1,500 is the most prudent medium-term price target.

Conversely, if the 2008 analogue repeats – and a crisis of confidence erupts across U.S. equities – the PMs could move substantially lower. When combining an equity shock with an USD Index’s resurgence, the yellow metal could bottom at roughly $1,400 (or even ~$1,350). Similarly, while the MACD indicator (on gold’s 40-year chart near the top of today’s edition) signals a bottom in the ~$1,200 to ~1,350 range, to be perfectly clear, ~$1,450 to $1,500 is the most likely outcome.

If you analyze the red arrow in the lower part of the above chart (the weekly MACD sell signal), today’s pattern is similar not only to what we saw in 2011, but also to what we witnessed in 2008. Thus, if similar events unfold – with the S&P 500 falling and the USD Index rising (both seem likely for the following months, even if these moves don’t start right away) – the yellow metal could plunge to below $1,350 or so. The green dashed line shows what would have happened to the gold price if it had not declined as much as it did in 2008.

In addition, relative to 2011-2013, today’s price action is also a splitting image. For starters, gold invalidated the breakout above its 2011 highs. Invalidations of breakouts are sell signals, and it’s tough to imagine a more profound breakout that could have failed.

Furthermore, if you analyze the right side of the chart above (the bottom section), you can see that the MACD indicator has sprouted a tiny weekly buy signal. However, it’s important to remember that the same signal emerged in mid-2008 – which confirmed the previous rally but had no bullish implications for the future. Case in point: following the reading in 2008, gold’s volatility increased, and the yellow metal suffered several declines before finding a lasting bottom in 2009. Thus, the recent reading is nothing to write home about. I marked both cases with red, dashed lines.

If that wasn’t enough, the gold/ Dow Jones Corporate Bond Index (Total Return) ratio recorded two meaningful developments:

  1. The ratio invalidated the breakdown below its rising support line (the red line on the right side of the chart below).
  2. The ratio moved above its 50-week moving average (the blue line below).

However, it’s important to remember that the ratio did the exact same thing in 2012-2013 before moving substantially lower.

Please see below:

To explain, if you analyze the middle of the chart above, you can see that the ratio recorded a countered rally, jumped back above its rising support line and 50-week moving average and then… collapsed. And with a similar pattern forming on the right side of the chart, the ratio is looking more and more like a widow-maker. Furthermore, when factoring in mining stocks’ bearish H&S patterns, the fundamental headwinds confronting gold and the strong likelihood of a medium-term swoon in the stock market, you can already hear the yellow metal’s death knell tolling in the distance.

Gold’s Short-and-Medium-Term Outlook

While gold managed to close above $1,900 on May 28, the yellow metal is now confronting its triangle-vertex-based reversal point. And with the pattern’s reliability likely to cast a shadow over gold’s performance in June, not only is the yellow metal’s RSI well above 70 (extremely overbought), but it’s also, most importantly, in near-perfect tune with how the final pre-slide tops formed in 2008 and 2012. Needless to say, the implications are very bearish.

Please see below:

Furthermore, gold seems to be insisting on repeating – to some extent – its 2012 performance, and – to some extent – its 2008 performance. Either way, it seems that gold is about to slide, especially that it just moved higher right before its triangle-vertex-based reversal (based on the declining blue line and the rising black line).

To explain, I wrote previously:

The sizes of the current rally (taking the second March bottom as the starting point) and the rally that ended at the beginning of this year are practically identical at the moment. The current move is only a little bigger.

Just as the rallies from early 2012 and late 2012 (marked with blue) were almost identical, the same could happen now.

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012.

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended on huge volume, which is exactly what we saw also on May 19 this year. Consequently, forecasting much higher gold prices here doesn’t seem to be justified based on the historical analogies.

The thing I would like to emphasize here is that gold didn’t form the final top at the huge-volume reversal on Sep. 13, 2012. It moved back and forth for a while and moved a bit above that high-volume top, and only then the final top took place (in early October 2012).

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Also, please note that while it might seem bullish that gold managed to rally above its declining black resistance line recently (the one based on the 2020 top and the 2021 top), please note that the same happened in 2012 – I marked the analogous line with red. The breakout didn’t prevent gold from sliding. When the price reached the line, we saw a short-term bounce, but nothing more than that – the gold price fell through it in the following weeks.

What would change my mind with regard to gold itself? Perhaps if it broke above its January 2021 highs and confirmed this breakout. This would be an important technical indication on its own, but it would also be something very different from what happened in 2008 and 2012. If that happened along with strength in mining stocks, it would be very bullish. Still, if the above happened, and miners didn’t react at all or they declined, it would not be bullish despite the gains in the gold price itself.

In September and in October 2008, gold reversed on huge volume in mid-September, and it was approximately the end of the rally. The final top, however, formed after some back-and-forth trading and a move slightly above the previous high.

Consequently, the fact that gold moved a bit above its own high-volume reversal (May 19, 2021) is not an invalidation of the analogy, but rather its continuation.

There’s one more thing I would like to add, and it’s that back in 2012, gold corrected to approximately the 61.8% Fibonacci retracement level – furthermore, the same happened in 2008 as you can see in the below chart. Consequently, the fact that gold moved above its 50% Fibonacci retracement doesn’t break the analogy either. And even if gold moves to $1,940 or so, it will not break it. It’s not likely that it is going to move that high, as in both cases –in 2008 and 2012 – gold moved only somewhat above its high-volume reversal before forming the final top. So, as this year’s huge-volume reversal took place close to the 50% retracement and not the 61.8% retracement, it seems that we’ll likely see a temporary move above it, which will create the final top. And that’s exactly what we see happening so far this week.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Back in 2008, gold corrected to 61.8% Fibonacci retracement, but it stopped rallying approximately when the USD Index started to rally, and the general stock market accelerated its decline. This time the rally was not as volatile, so the lower – 50% Fibonacci retracement level will hold the rally in check.

Taking into consideration that the general stock market has probably just topped, and the USD Index is about to rally, then gold is likely to slide for the final time in the following weeks/months. Both above-mentioned markets support this bearish scenario and so do the self-similar patterns in terms of gold price itself.

Let’s consider the analogy to 2008 across the board.

Please note (in the lower part of the above chart) that back then, the final huge slide in the mining stocks started when the GDX ETF moved back to its previous highs, while the USD Index moved a bit below its rising support line based on the previous tops. That’s exactly what happened recently as well. The final bottom in the GDX ETF formed about 3 months later at about 1/3 of its starting price.

The recent high was $40.13 and 1/3 thereof would be $13.38. While I don’t want to say that we will definitely see the GDX ETF as low as that, it’s not something that would be out of the ordinary, given the analogy to 2008. Now you see why the large bottoming target on the GDX ETF chart with the lower border in the $15s might actually be conservative… As always, I’ll keep you – my subscribers – updated.

“Ok, but what price level would be likely to trigger a bigger rebound during the next big slide?”

Well, the 76.4% Fibonacci retracement level (it’s visible as the 23.6% Fibonacci retracement level on the above chart as inverting the scale is used as a workaround) also coincides with gold’s April 2020 low. Taken together, an interim bottom could form in the ~$1,575 to $1,600 range.

For context, back in early March, the yellow metal continued to decline after reaching the 61.8% Fibonacci retracement (visible as 38.2% Fibonacci retracement) level, while, in contrast, the miners began to consolidate. Gold finally bottomed slightly below the retracement – at its previous lows. This time around, we might witness a similar event. And while the story plays out, the miners’ relative strength should signal the end of the slide (perhaps with gold close to 1,600), while gold will likely garner support sometime thereafter (at $1,575 – $1,580 or so).

Remember though: this is only an interim target. Over the medium term, the yellow metal will likely form a lasting bottom in the ~$1,450 to $1,500 range.

The Gold Miners

While gold shined bright over the five-day stretch, the HUI Index actually suffered a weekly decline. And with relative weakness an extremely ominous sign, the yellow metal’s brave face masks severe anxiety that’s lingering beneath the surface.

I wrote about it yesterday (May 31):

That development is what happened in gold and how the flagship proxy for gold stocks – the HUI Index – reacted to this change.

The thing is that gold rallied by almost $30 last week ($28.60) and at the same time, the HUI Index… Declined by 1.37. In other words, gold stocks completely ignored gold’s gains. If it was the case that the general stock market was particularly weak last week, then this kind of performance would still be relatively normal, not necessarily bearish. However, that’s not what happened in stocks. What happened was that the S&P 500 Index ended the week 48.25 (1.16%) higher. Given this, and gold’s rally, gold stocks definitely “should” be rallying. And they didn’t. That shows exceptional weakness on the weekly basis and is a very bearish sign for the following weeks.

Back in 2008, in late September and early October gold was still moving to new intraday highs, but the HUI Index was first ignoring that and then it declined despite that, but it was also the case that the general stock market declined then. If stocks hadn’t declined back then so profoundly, gold stocks’ underperformance of gold would likely be present, but more moderate. In fact, that’s exactly what happened in 2012.

The HUI Index topped on September 21, 2012 and that was just the initial high in gold. At that time the S&P 500 was moving back and forth with lower highs – so a bit more bearish than the current back and forth movement in this stock index. What happened in the end? Gold moved to new highs and formed the final top at that time (October 5, 2012). It was when the S&P 500 almost (!) moved to new highs, and despite both, the HUI Index didn’t move to new highs at that time. 

The similarity to how the final counter-trend rally ended in 2012 (and to smaller extent in 2008) ended is uncanny. The implications are very bearish for the following weeks.

Case in point: not only are gold’s medium-and-long-term charts eliciting weakness, but the gold miners are also running low on optimism. If you analyze the chart below, you can see that the HUI Index back-and-forth price action mirrors its behavior from 2008 and 2012, and its bearish head & shoulders pattern is also gaining similarity. In addition, the BUGS (after all, HUI is called the Gold Bugs Index) stochastic oscillator continues to follow the 2012 analogue (depicted at the bottom part of the chart below), which signals further weakness ahead.

Please see below:

To explain, I wrote previously:

The HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% of its downswing in 2012 before eventually rolling over. And with investors rejecting the HUI’s recent attempt to break above the 61.8% level, the house of cards is slowly coming down.

The bottom line?

If the HUI Index hasn’t already peaked, history implies that a top is increasingly imminent. As a result, in my opinion, now is the time to enter short positions and not exit them.

Now, in both (2008 and 2012) cases, the final top – the right shoulder – formed close to the price where the left shoulder topped. And in early 2020, the left shoulder topped at 303.02.

That’s why I previously wrote that “it wouldn’t be surprising to see a move to about 300 in the HUI Index”. And that’s exactly what we saw (a move above 320 is still close to 300 from the long-term point of view). To clarify, one head-and-shoulders pattern – with a rising neckline – was already completed, and one head-and-shoulders pattern – with a horizontal neckline – is being completed, but we’ll have the confirmation once miners break to new yearly lows.

In addition, the recent rally is not a game-changer, but rather a part of a long-term pattern that’s not visible when one focuses on the short term only.

The thing is that the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. During the walk, this might result in getting lost, and the implications are no different in the investment landscape.

From the day-to-day perspective, a weekly – let alone monthly – rally seems like a huge deal. However, once one zooms out and looks at the situation from a broad perspective, it’s clear that:

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” (-Ecclesiastes 1:9)

The rally is very likely the right shoulder of a broad head and shoulders formation. “Very likely” and not “certainly”, because the HUI Index needs to break to new yearly lows in order to complete the pattern – for now, it’s just potential. However, given the situation in the USD Index (i.a. the positions of futures traders as seen in the CoT report, and the technical situation in it), it seems very likely that this formation will indeed be completed. Especially when (not if) the general stock market tumbles.

In addition, three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the decline exceeded the size of the head of the pattern.

Can we see gold stocks as low as we saw them last year? Yes.

Can we see gold stocks even lower than at their 2020 lows? Again, yes.

Of course, it’s far from being a sure bet, but the above chart shows that it’s not irrational to expect these kind of price levels before the final bottom is reached. This means that a $24 target on the GDX ETF is likely conservative.

In addition, mining stocks are currently flirting with two bearish scenarios:

  1. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their early 2020 high.
  2. If things develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

I know, I know, this seems too unreal to be true… But wasn’t the same said about silver moving below its 2015 bottom in 2020? And yet, it happened.

Keep in mind though: scenario #2 most likely requires equities to participate. In 2008 and 2020, the sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500. However, with the words ‘all-time high’ becoming commonplace across U.S. equities, the likelihood of a three-peat remains relatively high.

As for the GDX ETF, following the same script as the HUI Index, investors rejected the senior miners attempt to break above the 61.8% level (marked by the horizontal blue line).

Please see below:

To explain, the GDX ETF first tried to rally to new highs, then it failed to hold them. Wednesday’s reversal took place on big volume (important bearish confirmation), and the “shadow reversal” took place on relatively low volume. The low volume doesn’t confirm the reversal, but it more or less invalidates the seemingly bullish fact that miners closed yesterday’s session higher.

Moreover, please note that the volume was similarly low to what we saw on January 7, 2021, when the 4-day top was ending. Yesterday was the fourth day of what appears to be a broad top.

Let’s also keep in mind that the RSI indicator just moved back below 70 after being above it. This happens rarely, and when it happened previously (in the past 1.5 years), it meant that a huge price decline was about to follow.

Furthermore, while history might not repeat itself, though it does rhyme, those who insist on ignoring it are doomed to repeat it. And there’s practically only one situation from more than the past four decades that is similar to what we see right now.

It’s the early 2000s when the tech stock bubble burst. It’s practically the only time when the tech stocks were after a similarly huge rally. It’s also the only time when the weekly MACD soared to so high levels (we already saw the critical sell signal from it). It’s also the only comparable case with regard to the breakout above the rising blue trend channel. The previous move above it was immediately followed by a pullback to the 200-week moving average, and then the final – most volatile – part of the rally started. It ended on significant volume when the MACD flashed the sell signal. Again, we’re already after this point.

The recent attempt to break to new highs that failed seems to have been the final cherry on the bearish cake.

Why should I – the precious metals investor care?

Because of what happened in the XAU Index (a proxy for gold stocks and silver stocks) shortly after the tech stock bubble burst last time.

What happened was that the mining stocks declined for about three months after the NASDAQ topped, and then they formed their final bottom that started the truly epic rally. And just like it was the case over 20 years ago, mining stocks topped several months before the tech stocks.

Mistaking the current situation for the true bottom is something that is likely to make a huge difference in one’s bottom line. After all, the ability to buy something about twice as cheap is practically equal to selling the same thing at twice the price. Or it’s like making money on the same epic upswing twice instead of “just” once.

And why am I writing about “half” and “twice”? Because… I’m being slightly conservative, and I assume that the history is about to rhyme once again as it very often does (despite seemingly different circumstances in the world). The XAU Index declined from its 1999 high of 92.72 to 41.61 – it erased 55.12% of its price.

The most recent medium-term high in the GDX ETF (another proxy for mining stocks) was at about $45. Half of that is $22.5, so a move to this level would be quite in tune with what we saw recently.

And the thing is that based on this week’s slide in the NASDAQ that followed the weekly reversal and the invalidation, it seems that this slide lower has already begun.

“Wait, you said something about three months?”

Yes, that’s approximately how long we had to wait for the final buying opportunity in the mining stocks to present itself based on the stock market top.

The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. Consequently, we might see the next major bottom – and the epic buying opportunity in the mining stocks – about three months after the general stock market tops. The NASDAQ might have already topped, so we’re waiting for the S&P 500 to confirm the change in the trend.

The bottom line?

New lows are likely to complete the GDX ETF’s bearish H&S pattern and set the stage for an even larger medium-term decline. And if the projection proves prescient, medium-term support (or perhaps even the long-term one) will likely emerge at roughly $21.

But why ~$21?

  1. The target aligns perfectly with the signals from the GDX ETF’s 2020 rising wedge pattern. You can see it in the left part of the above chart. The size of the move that follows a breakout or breakdown from the pattern (breakdown in this case) is likely to be equal (or greater than) the height of the wedge. That’s what the red dashed line marks.
  2. The broad head-and-shoulders pattern with the horizontal neckline at about $31 points to the $21 level as the likely target.

In addition, when observing through the lens of the GDXJ ETF, the junior miners are eliciting the same bearish signals. Despite inching slightly above the neckline of its bearish head & shoulders pattern, the GDXJ ETF couldn’t hold the key level (the thick black line). As a result, the bearish implications remain glaringly intact.

Please see below:

Even more ominous, the GDXJ ETF remains a significant underperformer of the GDX ETF. Despite sanguine sentiment and a strong stock market creating the perfect backdrop for the junior miners, the GDXJ ETF hasn’t lived up to the hype. To that point, while the ratio moved slightly higher last week – meaning that the GDXJ ETF outperformed the GDX ETF – it’s important to remember that small fakeouts in the juniors to seniors ratio often occur right before medium-term tops. Why? Because juniors tend to catch up with seniors, somewhat similarly to silver.

Consequently, my previous comments on the GDXJ to GDX ratio remain up-to-date:

GDXJ is underperforming GDX just as I’ve been expecting it to. Once one realizes that GDXJ is more correlated with the general stock market than GDX is, GDXJ should be showing strength here, and it isn’t. If stocks don’t decline, GDXJ is likely to underperform by just a bit, but when (not if) stocks slide, GDXJ is likely to plunge visibly more than GDX.

Expanding on that point, the GDXJ/GDX ratio has been declining since the beginning of the year, which is remarkable because the general stock market hasn’t plunged yet. And once the general stock market suffers a material decline, the GDXJ ETF’s underperformance will likely be heard loud and clear.

Please see below:

What about juniors? Why haven’t they been soaring relative to senior mining stocks? What makes them so special (and weak) right now? In my opinion, it’s the fact that we now – unlike at any other time in the past – have an asset class that seems similarly appealing to the investment public. Not to everyone, but to some. And this “some” is enough for juniors to underperform.

Instead of speculating on an individual junior miner making a killing after striking gold or silver in some extremely rich deposit, it’s now easier than ever to get the same kind of thrill by buying… an altcoin (like Dogecoin or something else). In fact, people themselves can engage in “mining” these coins. And just like bitcoin seems similar to gold to many (especially the younger generation) investors, altcoins might serve as the “junior mining stocks” of the electronic future. At least they might be perceived as such by some.

Consequently, a part of the demand for juniors was not based on the “sympathy” toward the precious metals market, but rather on the emotional thrill (striking gold) combined with the anti-establishment tendencies (gold and silver are the anti- metals, but cryptocurrencies are anti-establishment in their own way). And since everyone and their brother seem to be talking about how much this or that altcoin has gained recently, it’s easy to see why some people jumped on that bandwagon instead of investing in junior miners.

This tendency is not likely to go away in the near term, so it seems that we have yet another reason to think that the GDXJ ETF is going to move much lower in the following months – declining more than the GDX ETF. The above + gold’s decline + stocks’ decline is truly an extremely bearish combination, in my view.

So, how low could the GDXJ ETF go?

Well, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range. Conversely, if stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

Likewise, I warned last week that the HUI Index/S&P 500 ratio’s invalidation of the breakdown below its rising support line (which became resistance) didn’t outweigh the myriad of other indicators – both technical and fundamental – that signaled further weakness. In other words, I noted that the ratio should move back below its rising support/resistance line shortly.

And after moving increasingly closer last week, the ratio is only one slip away from entering the bearish zone once again.

Please see below:

For more context, I wrote previously:

When the ratio presented on the above chart above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index.

The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline, the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market):

  1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
  2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
  3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: if the stock market plunges, all bets are off. Why so? Well, because when the S&P 500 plunged in March 2020, the GDX ETF moved from $29.67 to below $17 in less than two weeks. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

As another reliable indicator (in addition to the myriads of signals coming not only from mining stocks, but from gold, silver, USD Index, stocks, their ratios, and many fundamental observations) the Gold Miners Bullish Percent Index ($BPGDM) isn’t at levels that trigger a major reversal. The Index is now at 70. However, far from a medium-term bottom, the latest reading is still more than 60 points above the 2016 and 2020 lows.

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, with the sentiment still relatively elevated, it will take more negativity for the index to find the true bottom.

The excessive bullishness was present at the 2016 top as well, and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide, and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of 2020. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top and right before the big decline. Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place.

But has it already run its course?

Well, in 2016 and early 2020, the HUI Index continued to move lower until it declined below the 61.8% Fibonacci retracement level. The emphasis goes on “below” as this retracement might not trigger the final bottom. Case in point: back in 2020, the HUI Index undershot the 61.8% Fibonacci retracement level and gave back nearly all of its prior rally. And using the 2016 and 2020 analogues as anchors, this time around, the HUI Index is likely to decline below 231. In addition, if the current decline is more similar to the 2020 one, the HUI Index could move to 150 or so, especially if it coincides with a significant drawdown of U.S. equities.

With all of that said: how will we know when a medium-term buying opportunity presents itself?

I view price target levels as guidelines and the same goes for the Gold Miners Bullish Percent Index (below 10), but the final confirmation will likely be gold’s strength against the ongoing USDX rally. At many vital bottoms in gold, that’s exactly what happened, including the March bottom.


While silver’s recent outperformance may seem appetizing, the white metal is known to overpromise and underdeliver. Case in point: after recording several false breakouts, every prior display of strength ended with extreme disappointment. And while bearish medium-term implications should take precedence over short-term spurts, the white metal is once again seducing investors like it did in late 2019/early 2020.

Please see below:

To explain, if you analyze the left side of the chart above, you can see that silver moved back and forth before breaking toward its September highs. However, after failing to complete the milestone, the white metal eventually collapsed. As a result, with the pattern on the right side of the chart eerily similar, investors’ optimism has occurred at what’s likely the worst possible time.

To that point, with its current behavior also mirroring 2008 – where silver fell below and then rallied back above its 50-day MA before plunging – the white metal remains on a journey of self-destruction.

If we zoom in on the white metal’s price action in 2008, you can see that an immaterial bounce also occurred right before silver fell off a cliff.

The final corrective upswing of early 2020 took place in very late February and early March, while the two – normal – tops that created the red-line rectangle formed more or less at the turn of the year and in late February. This year, it’s all taking place at almost exactly the same time of the year.

Let’s be realistic - so far, the analogy (to what happened in 2019 and 2020) might seem too unclear to be viewed as a reliable base for making a silver forecast.

But what if… What if there was a very similar pattern in the past that also preceded a massive decline? This would greatly increase the reliability of the above self-similarity.

There was indeed such a pattern!

That’s what silver did in 2008 before it declined.

The August 2007 – March 2008 rally (please note the interim top in November 2007 that was followed by a zigzag decline, more or less in the middle of the rally) is similar to the March 2020 – August 2021 rally (please note the interim top in June 2020 that was followed by a zigzag pattern, more or less in the middle of the rally).

Afterwards, we saw a double top in both cases that was followed by a sizable slide. Then silver formed a specific U-shaped broad top, where the final top was below the initial one (exception: in this case the forum-based rally took silver slightly above the previous high, but due to the specific / random nature of the move, it “doesn’t count” as something that invalidates the analogy).

After the top, silver declined, and the final corrective upswing took place approximately between the 50- and 200-day moving averages.

Please note that in both previous (2008 and 2020) cases silver then truly plunged, and it kept on declining until it moved below the 2.618 Fibonacci extension based on the initial downswing. The above charts illustrate that by showing the first decline at the 38.2% retracement (1 / 0.382 = approximately 2.618). Applying the same to the current situation (the initial decline took silver from below $30 to below $24) provides us with the minimum decline target at about $13.50. Will silver really decline as low? In my view, it’s imperative to watch other markets for indications as they might have more reliable targets (for instance gold), but I wouldn’t say that this target (or lower price levels) is out of the question. Of course, that’s just on a temporary basis – silver will likely soar in the following months and years (after this decline).

Highlighting the effect of WallStreetBets’ #SilverSqueeze, the SLV ETF’s volume spikes in 2020/2021 were nearly identical to the surges that we witnessed ~10 years ago. If you analyze the chart below, you can see that the massive inflows at the end of 2012 were not the beginning of a medium-term upswing. In fact, they coincided with silver’s final bounce before the white metal suffered a major decline.

Please see below:

If you analyze the volume spikes at the bottom of the chart, 2021 and 2011 are a splitting image. To explain, in 2011, an initial abnormal spike in volume was followed by a second parabolic surge. However, not long after, silver’s bear market began.

SLV-volume-wise, there's only one similar situation from the past - the 2011 top. This is a very bearish analogy as higher prices of the white metal were not seen since that time, but the analogy gets even more bearish. The reason is the "initial warning" volume spike in this ETF. It took place a few months before SLV formed its final top, and we saw the same thing also a few months ago, when silver formed its initial 2020 top.

The history may not repeat itself to the letter, but it tends to be quite similar. And the more two situations are alike, the more likely it is for the follow-up action to be similar as well. And in this case, the implications for the silver price forecast are clearly bearish.

Based on the above chart, it seems that silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.

Similarly, silver’s inverse price action also has bearish implications. Nearly identical to the inverted formation that emerged from 2006 to 2009, today’s chart looks eerily similar to its predecessor.

While it’s more of a wild card, the above pattern shows that silver’s 2020 top plots are nearly identical to the inverse of the 2006-2009 performance. I copied the 2006 – 2009 performance right below the regular price movement and inverted it. I also copied this inverted pattern to the last few years.

The similarity is quite significant. And whenever a given pattern has been repeated, the odds are that it could also repeat in the not-too-distant future. Of course, there is no guarantee for that, but once the same market has reacted in a certain way to a specific greed/fear combination, it can just as well do it again. And these similarity-based techniques work quite often. So, while it’s not strong enough to be viewed as a price-path-discovery technique on its own, it should make one consider some scenarios more closely. In particular, this means that the declines in the prices of silver, gold, and mining stocks could be bigger and take longer than it seems based on other charts and techniques.

The above is also in tune with the implications of the sell signal from the MACD indicator on the monthly gold chart.

The only thing that comes to my mind which could – realistically – trigger such a prolonged decline would be a major drop in the general stock market. Given what I wrote above, the latter is quite possible, so I’ll be on the lookout for confirmations and invalidations of this scenario.

If history rhymes, silver could be in for a profound decline over the next few months (beyond my initial target). Moreover, the development would increase the duration of the precious metals’ bear market (also beyond my initial forecast).

After all, gold did invalidate its long-term breakout above the 2011 highs, and the way gold reacted to a small upswing in the USD Index was truly profound…

Turning to cross-asset correlations, gold, silver and the HUI Index’s 30-day correlations remain stable. With the PMs exhibiting negative relationships with the U.S. dollar, their short-term behavior is similar to what we should expect over the medium term. More importantly, though, with the USD Index beginning to resemble a caged animal, once the greenback is released back into the wild, the PMs are likely to be its first meal.

For more context, I wrote previously:

Since gold, silver, and mining stocks have been strongly negatively correlated with the USD Index in the medium term, it seems likely that they will be negatively affected by the upcoming sizable USDX upswing.

Until we see the day where gold reverses or soars despite the U.S. currency’s rally.

If that happens with gold at about $1,700, we’ll have a very good chance that this was the final bottom. If it doesn’t happen at that time, or gold continues to slide despite USD’s pause or decline, we’ll know that gold has further to fall.

Naturally, we’ll keep you – our subscribers – informed.

To move forward, how does the GDX downside target compare to gold’s downside target? If, at the same time, gold moves to about $1,700 and miners are already after a ridiculously big drop (to $31-$32 in the GDX ETF, or lower), the binding profit-take exit price of your GDX ETF will become $32.02 (those with higher risk tolerance might lower it to $31.15 or so, but moving it lower seems just too risky).

At this time, the final GDX target (the one that would correspond to gold at $1,500 or so) is still unclear. The $17 - $23 area seems probable, especially if the general stock market slides once again. It’s too early to say with any significant level of certainty. Gold is providing us with a clearer final target, so that’s what we’ll focus on. And most importantly – we’ll focus on gold’s performance relative to the USD Index.

Overview of the Upcoming Part of the Decline

  1. It seems likely to me that the current corrective upswing is very close to being over, given gold’s similarity to what happened in 2012, USD’s similarity to 2016 and the situation in the general stock market.
  2. After miners slide once again in a meaningful and volatile way, but silver doesn’t (and it just declines moderately), I plan to switch from short positions in miners to short positions in silver (this could take another 1-2 weeks to materialize). I plan to exit those short positions when gold shows substantial strength relative to the USD Index, while the latter is still rallying. This might take place with gold close to $1,450 - $1,500 and the entire decline (from above $1,700 to about $1,475) would be likely to take place within 1-12 weeks, and I would expect silver to fall hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold – after gold has already declined substantially) is likely to be the best entry point for long-term investments, in my view. This might happen with gold close to $1,475, but it’s too early to say with certainty at this time. In other words, the entire decline could take between 1 and 12 weeks, with silver declines occurring particularly fast in the final 1-2 weeks.
  3. If gold declines even below $1,500 (say, to ~$1350 or so), then it could take another 10 weeks or so for it to bottom, but this is not what I view as a very likely outcome.
  4. As a confirmation for the above, I will use the (upcoming or perhaps we have already seen it?) top in the general stock market as the starting point for the three-month countdown. The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector would be likely to bottom about three months after the general stock market tops. If the general stock market puts the final top in the first half of May (which seems quite likely given NASDAQ’s top in late April), then we might expect the precious metals sector to bottom sometime in August.
  5. The above is based on the information available today, and it might change in the following days/weeks.

Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.

Letters to the Editor

Q: Do you think the slide will happen soon or drag out till the fall? Are 1550-1675 still your slide spots?

A: I think that the decline will start soon. And yes, I continue to think that the first (but likely not the final stop) for gold will be at about $1,600. If my outlook changes, you will find the updates in the above “Overview of the Upcoming Part of the Decline” section.


I want to understand and see what will happen if your current thesis works, but for now, the stronger the rally in gold, the higher the highs before we see the corrections you are forecasting.

What would you do? Would you sell your current short trades, go long and short it once it gets to the new top? Would you be losing money if you didn't do something like this?

Let's assume we are talking about $400 above the price ($1700) when we decided to go short on gold. In this hypothetical case, what would you do?

A: Well, to clarify, I never suggested shorting gold for this particular trade – this short trade is only in the junior mining stocks. As for the action in case of gold’s continuous move higher, it would depend on what other markets would do at that time. If they pointed to higher prices for a week (or for a few of them), I might indeed close the short positions, go long, and then re-open the short positions at higher price levels. I’m not “married” to the short positions here – I simply think that this corrective upswing (while bigger than I had originally expected) is done or almost done. Based on the previous week, gold miners just proved that they can ignore a ~$30 rally in gold, which suggests the next big move is going to be to the downside, and when gold declines, miners would likely respond strongly. This would be in perfect tune with what happened in 2012, 2013 and 2008.


Also, we received quite a few questions about the Basel III coming into effect on 30 June 2021, and we’ll provide more details on it in tomorrow’s analysis.


To summarize, even though it doesn’t seem to be the case based on this month’s price change in gold, it seems that the yellow metal’s days are numbered. This is based not only on the excessively oversold USD Index and its 2016 self-similar pattern but also on what’s happening in the stock market, silver’s recent outperformance and price levels reached throughout the precious metals sector. From the long-term point of view, the current situation seems similar to what we saw in the second half of 2012, while from the short-term point of view it seems similar to what we saw at the beginning of 2021. While the very near term remains unclear, the outlook for the next several months remains very bearish.

After the sell-off (that takes gold to about $1,350 - $1,500), we expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money last March and this March, and it seems that we’re about to make much more on the upcoming decline, but you have to be healthy to enjoy the results.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $24.12; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged) and GDXD (3x leveraged – which is not suggested for most traders/investors due to the significant leverage). The binding profit-take level for the JDST: $39.87; stop-loss for the JDST: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the GDXD: $94.87; stop-loss for the GDXD: none (the volatility is too big to justify a SL order in case of this particular trade).

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):

Silver futures upside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,512.

Gold futures upside profit-take exit price: $1,512.

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash

Insurance capital (core part of the portfolio; our opinion): Full position

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).

Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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