Where Is Gold’s Rally in Response to Yesterday’s USD Weakness?
Yesterday, the USD Index moved substantially lower while precious metals barely yawned. Why is gold not rallying? What does the gold-USD link tell us now, in combination with latest developments throughout the PMs sector? Let’s examine these and many more clues together.
Almost nothing happened yesterday in gold and silver, while miners moved a bit lower. The latter is a bearish indication, but not the most important one that we saw. The key issue is that what happened in the gold-USD link showed that gold was previously not showing strength with regard to the US currency. Yesterday’s action confirmed our yesterday’s thoughts on that matter. We explained the reasoning behind the lack of decline in gold in light of USD’s rally in the following way:
Let’s see what happened in the USD Index yesterday:
(Click on images to enlarge)
Quoting yesterday’s Gold & Silver Trading Alert:
The USD Index has indeed corrected after moving to the declining resistance line. The key thing about this decline is that it didn’t take gold todamoon. Gold and silver mostly ignored USD’s decline despite early gains and mining stocks even declined. If gold’s previous lack of decline despite USD’s strength was really a sign of strength, it would have rallied strongly yesterday. It didn’t and miners even declined, which shows that it was not the factor behind the recent gold-USD dynamics. This further increases the chance that gold’s decline was simply delayed.
Gold miners’ decline was important as it was the lowest closing price of the month and at the same time, it was the first daily close that was visibly below all the rising short-term support lines. The breakdown presented on the above gold stock chart is now much clearer than it was before and the implications of the above chart more bearish.
Everything that we wrote yesterday about gold’s and silver’s daily charts remains up-to-date, so instead of repeating it today, we will provide you with an update on two more long-term oriented factors.
Japanese Yen, Triangles and Technicals
Let’s take a closer look at the Japanese yen. It’s the second most heavily-weighted component within the USD Index. It’s worthy of our attention as precious metals tend to move in tune with it. Just take a look at the chart below:
Most prominent features are both the triangles (created by two support lines starting from the late 2008 bottom and the declining resistance line that’s based on the 2013 and 2015 tops) and the mentioned declining resistance line. Triangles help us with determining the time and direction of the next turning point, while the resistance line obviously serves as a resistance. Here, we see that after reaching the second triangle, the gold-yen ratio indeed turned down (just as it did after reaching the first triangle top). However, it later made a higher low and turned up. Now comes the declining resistance line – the ratio is so close to it currently that any room for further increases is minuscule. The odds favor a downside resolution, both in the ratio and in the price of gold. If not immediately, then shortly. Most factors (including gold’s, silver’s and miners’ triangle-based reversals) suggest the “immediately” scenario, though.
That was the gold-yen ratio. Next, we will visit the Japanese yen itself:
The weekly chart shows the yen to be after a verified breakdown below two rising support lines. These support lines have been drawn using either intraday or closing prices. The price is currently in the process of invalidation of the short-term breakout above both the rising support lines. Invalidation of a breakout is a strongly bearish development and as a result, we can expect the yen to head lower. Remembering the strength of the gold-yen link, it’s one more reason for PMs prices to decline in tandem.
Summing up, the recent rally and kind of resilience in the PMs complex may appear encouraging, but it doesn’t change the medium-term trend and outlook, which remain bearish. It seems that gold’s reaction to the strength in the USD Index is simply delayed.
The upside is quite limited, while the downside remains enormous. The reversals have been reached last week. As PMs, miners, and the USD Index move beyond their reversal dates, the chance for any meaningful upswing in the former before medium-term decline’s continuation, is declining with the time passing.
Naturally, the above is up-to-date at the moment of publishing it and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis (including the intraday ones, when things get hot), we invite you subscribe to our Gold & Silver Trading Alerts today.
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