Signs point to gold's May rally running out of steam as the US dollar index (USDX) reaches its short-term bottom. But how much stamina is left in the yellow metal?
Another day, another higher close in the Junior Gold Miners ETF (NYSE:GDXJ). And another day where profits on our long positions in the latter increased. There is a sign that the rally in the precious metals sector is close to being over.
That sign is the situation in the USD Index and the shape of the gold-USD link.
Starting with the gold-USD link, please note that while gold ended yesterday's session higher, it was only ~$6 higher. Given that the USD Index declined by over one index point, gold would be "normal" to rally much more.
That's a sign that gold is getting "exhausted," which is another way of saying that the buying power for this particular rally appears to be drying up. Of course, one swallow doesn't make a summer, but it's pretty notable given the size of the USD's decline.
USD's decline took it below its recent lows, and since it's also slightly down in today's pre-market trading, it can now decline further in the near term. Further here shouldn't be viewed as "by a lot." In fact, there is a combination of rising support lines just above where the USD Index is trading right now.
The dashed lines: blue and red are likely to stop this correction. Of course, it's not 100% certain, but the fundamental situation continues to favor higher USD values (rising real interest rates), so significant changes don't appear likely. The possibility is there, especially if the geopolitical situation changes, but it's simply not likely.
Besides, the RSI just moved below 50. While this doesn't mean anything based on the "classic" interpretation of this indicator's signals, I would emphasize that practically whenever we saw something like that in the past year, the USD Index was about to bottom.
So, on the one hand, gold no longer "wants" to react to the USD's weakness, and on the other hand, the short-term bottom in the USD Index appears to be at hand.
Gold itself still didn’t correct as much as it did after previous cases when the RSI touched the 30 level. I marked the smallest rallies that followed this signal with blue dashed lines in the past.
Gold’s rally might be nearing its end if history is about to rhyme, but it’s not yet there.
And what about the junior mining stocks?
Well, their rebound simply continues. The GDXJ ETF ended yesterday’s session 0.92% higher (GDX (NYSE:GDX) was up by 0.59%, silver was up by 0.23%, and gold by 0.31%). They are up by almost $4 (about 10%) from May 12, when we switched from short to long positions in the USDX – more than any of the above-mentioned markets.
The USD’s decline appears to be close to its end, and the same goes for the end of the short-term rally in gold, which means that the same fate likely awaits the junior miners – their rally too is about to end, in my view.
The target area that I placed on the above chart remains up-to-date. Yesterday’s weakness in gold relative to the USD Index tells me that it’s more likely that the rally will end in the lower part of the target area – probably close to its early-May low.