“That’s all Folks!” - Porky Pig at the end of the Looney Tunes cartoon series
The above is what immediately came to my mind after seeing Friday’s price action in the precious metals sector. Why? Because of the reversals and tiny outperformance of silver.
And also because of USD's decisive daily rally. Let’s start with the latter.
After briefly moving below its rising support line, the USD Index soared back up and the situation is now much more bullish than it was a month ago, when the USD Index was breaking through the 96 level for the first time in many months.
The reason is that now the USD Index is already after a sizable consolidation. The RSI indicator reflects that as well—it’s no longer in the overbought territory.
And if the USD Index soars once again, precious metals are likely to slide. What we saw in gold, silver, and, in particular, mining stocks on Friday confirms that.
Gold moved to $1,815.70 on Friday, but it’s now once again below $1,800.
This means that the yellow metal moved above its rising support line on Friday, but it ended the day just slightly above it and based on Monday's pre-market decline, it’s once again back below this line. The breakout was invalidated.
On Thursday, after gold’s reversal, I wrote the following:
"Well, gold moved visibly higher from the recent lows, but:
- It hasn’t invalidated its previous breakdown below the rising red support line
- Even if the size of the very recent rally doubled, gold would not move up that significantly – perhaps to $1,815 or so.
There’s also a risk that gold might rally more visibly because of the similarity to what happened earlier this year."
Well, gold did exactly that. The yellow metal moved to late-November highs on Friday, to its 300-day moving average, and it all happened in tune with the previous patterns and with what I wrote previously.
There’s also another pattern that I marked on the above chart. After the previous sharp declines, gold corrected between 38.2% and 50% of the decline, and only after this consolidation did it move to new lows. We saw that in November 2020, January 2021, and July 2021. And it seems that it’s exactly what we saw right now.
On Thursday, I also wrote the following:
"But how much did the mining stocks rally in July?
"Please take a look at the areas marked with green rectangles. There was a tiny rally in July 2020, but it was nothing significant, unless one was engaged in day-trading or very short-term trading.
"So, will we see a rebound here? That’s probably going to be the case. Will it be significant? That depends.
"It might be quite visible in case of gold, but not necessarily in case of mining stocks.
"In fact, at the moment of writing these words, gold is trading very close to its December highs, while the GDXJ (in London trading) corrected about 23.6% of the entire December decline.
"Consequently, if I had a short position in gold, I would probably close it right now in order to re-enter it at higher prices, but since I don’t have one, but I have a short position in junior mining stocks, I’m choosing to keep it intact and wait out the possible correction."
Well, the corrective upswing in mining stocks wasn’t that significant as the one in gold. Miners moved just slightly above their December highs, but closed back below them, thus invalidating this breakout. Unlike gold, they were not even close to reaching their late-November highs.
Silver outperformed gold on Friday, but only slightly and only on an immediate-term basis. Overall, just like mining stocks, silver was rather weak during this corrective upswing—relative to gold that is.
Does this remind you of something? It should, as it has March 2020 written all over it.
Silver corrected after a sizable short-term decline and after reaching its previous lows. Will it now decline substantially? That’s likely, but this time the decline might not be as volatile. After all, it’s not the case that the lockdowns are being introduced for the first time and nobody knows what’s going to happen and how. People are not panicking in the way they panicked in 2020.
Then again, the markets (the main stock indices) are more overvalued, and more capital was used to pump it, so the declines are likely to be huge anyway—also in the PMs. They simply might not be as sharp as they were in 2020. What happened a couple of days back then, might take a couple of weeks this time, but it’s likely to happen, nonetheless.