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What Happens to Gold When USDX Rallies?

January 19, 2021, 6:13 AM Przemysław Radomski , CFA

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Let’s start with the two things that you might be wondering about. The first is gold’s reversal and the second is the USD’s small decline.

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In short, yesterday’s reversal in gold is inconsequential, because it took place on a day when there was no trading in the U.S. Consequently, the data from this single session is not a reliable indication of anything. Besides, gold remains below its September 2020 lows and below its most recent short-term high. In fact, it’s even below the upper border of the small declining flag pattern.

And what about the USD’s small decline?

As you might have already guessed, it didn’t change anything either.

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The USD Index is after a major breakout above the declining resistance lines and this breakout was confirmed. Consequently, the USD Index is likely to rally, but is it likely to rally shortly? The answer to this question is being clarified at the moment of writing these words, because the USD Index moved back to its rising short-term support line that’s based on the 2021 bottoms.

If the USD Index breaks below it, traders will view the 2021 rally as a zigzag corrective pattern and will probably sell the U.S. currency, causing it to decline, perhaps to the mid-January low or even triggering a re-test of the 2021 low.

If the USD Index performs well at this time and rallies back up after touching the support line, and then moves to new yearly highs, it will be then that traders realize that it was definitely not just a zigzag correction, but actually the major bottom. In the previous scenario, they would also realize that, but later, after an additional short-term decline.

The weak performance of mining stocks that we saw last week, and relatively strong performance of silver (up by 1.24%) compared to gold (up by 0.34%) in today’s pre-market trading suggest that PMs are very ready to slide right now. This – as markets are interconnected – might make the strength in the USD Index more likely than not. In this case, the second above-mentioned scenario would be realized, and the price moves that I’ve been describing for some time now, would gain momentum quickly.

In either case, it seems that the outlook for the precious metals market remains bearish for the short and medium-term. It is only the immediate and very short term that have any notable differences. Therefore, it seems to make sense to keep the short positions in the mining stocks intact.

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

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