Gold Miners Message for the Precious Metals Rally

By: P_Radomski_CFA

The Fed kept rates unchanged and while it was not immediately preceded by major price moves in the PMs, the no-change decision was followed by bullish price action in the following hours. This action extends into today’s pre-market trading.

Most interestingly, however, the USD Index repeated its daily reversal confirming that lower values are to be expected. This confirms our yesterday’s analysis.

The News in the USD Index

This means that the breakout in the greenback is likely to be invalidated shortly, and once that happens, the PMs are likely to move higher once again.

The breakout itself was neither huge, nor decisive, but it did take place. The USDX rallied above the rising red resistance line and reversed before the end of the day. Still, even taking into account the late decline, it ended the session higher – above the resistance line.

The important thing about this breakout is that – since it was relatively small – it would need to be confirmed for it to really matter. Based on the sizes of the previous rallies in the USD Index and the times when it corrected (blue lines on the above chart) it seems that the USD Index is about to start a corrective decline. Even the start of the decline would likely cause the USD to invalidate its breakdown, thus giving way to a much bigger decline.

To be clear, we continue to think that the USD Index is headed much higher in the following months and perhaps years, but this doesn’t mean that it will rally in a straight line.

The vertical dashed line on the above chart shows what happened when the USDX entered such corrective downswings in the recent past. In almost all cases, gold and silver declined (usually relatively sharply) prior to USD’s declines. The July 2019 case may seem to be an exception, but it really isn’t one. Back then, the USD formed two tops and the first top was indeed immediately preceded by a quick dip in both precious metals. The true exception is what happened in December 2019 – in this case, gold and silver paused a bit before rallying again.

All in all, in most cases the quick decline in metals right at the USD top was normal. While in most cases, it is the USD Index that can tell us something about gold and silver, this time it might be the other way around first. The PMs might have declined indicating that this was indeed the final part of the USD’s rally, which in turn could imply a quick comeback of the PMs along with a short-term correction in the USDX.

Meanwhile in Precious Metals

Miners soared back with vengeance, while gold and silver moved up just a little. This move might be accidental – after all, it was just one session – but it could indicate that the precious metals market will be making another short-term run up instead of being done with the previous one. Theoretically it shouldn’t matter because after all, PMs are likely to move higher in the short run, but it does matter in relative terms. It means that silver’s outperformance is still ahead of us.

The GDX ETF confirms the bullish outlook for the next several days.

In yesterday’s analysis, we wrote that the GDX ETF reached its rising support line without breaking below it, and that it was likely to trigger another rally, just like it did in mid-December and in early January. That’s exactly what happened.

Summary

Summing up, it seems that the USD Index has yet to decline and thus that the rally in the precious metals sector is not over yet. Miners led the way yesterday, but silver is likely to take up the baton shortly.

The way in which the markets react to news in the first 24 hours is likely to be the way that they move in the next several days as they continue to discount new information. Yesterday’s and today’s (so far) price moves suggest that PMs are likely to move higher in the next several days.

Naturally, the medium-term outlook for the precious metals market remains very bearish and once the short-term correction is over, the declines are likely to resume.

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Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

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Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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