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Gold Turns Blind Eye To Dollar's Decline

By Sunshine Profits (Przemyslaw Radomski, CFA)CommoditiesJan 13, 2022 09:53AM ET
www.investing.com/analysis/gold-turns-blind-eye-to-dollars-decline-200614646
Gold Turns Blind Eye To Dollar's Decline
By Sunshine Profits (Przemyslaw Radomski, CFA)   |  Jan 13, 2022 09:53AM ET
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“It’s my party, and I’ll fall if I want to,” sang gold and kept its word. Although the dollar weakened, gold seemed reluctant to take advantage of it.

Now that was a big decline in the dollar Index. What made gold yawn, and why is it declining today? Because it doesn’t want to rally.

I’ve been writing this over and over again, and yet I’ll write it once more. Markets don’t move in a straight line up or down, and periodic corrections are natural. However, the way markets interact during those corrections tells us a lot about what’s likely to take place next, at least in the case of some markets.

The USD Index declined quite visibly yesterday and in today’s overnight trading.

The key questions are: so what, and if that was completely unexpected.

Starting with the latter, it wasn’t unexpected. It’s something in tune with gold’s long-term chart.

When the weekly RSI (based on the weekly price changes) for the USD Index hit 70, I wrote the following:

Please note that the recent medium-term rally has been calmer than any major upswing witnessed over the last 20 years, where the USD Index’s RSI has hit 70. I marked the recent rally in the RSI with an orange rectangle, and I did the same with the second-least and third-least volatile of the medium-term upswings.

The sharp rallies in 2008 and 2014 were of much larger magnitudes. And in those historical analogies, the USD Index continued its surge for some time without suffering any material corrections. As a result, the short-term outlook is more of a coin flip. Consequently, the current decline is not unexpected; it’s rather normal.

I marked additional situations on the above chart with orange rectangles–these were the recent cases when the RSI based on the USD Index moved from very low levels to or above 70.

There was some corrective downswing in all three previous cases after the initial part of the decline, but once it was over–and the RSI declined somewhat–the big rally returned, and the USD Index moved to new highs.

I marked those declines in the RSI with blue rectangles, and I did the same thing for the current decline. As you can see, the size of the move lower is currently analogous to previous short-term corrections that were then followed by higher prices. This means that it’s quite likely over or very close to being over, and the medium-term rally can return any day now.

Moving back to USD’s short-term chart, we see that the USD Index just (in overnight trading, so the move is not even close to being confirmed) moved a little below USDX’s rising support line based on the previous June and October 2021 lows. At the same time, the USDX is slightly below its late-2020 top and slightly above its November 2021 top.

In light of the situation on the long-term USDX chart (as discussed above), this combination of support levels is likely to trigger a rebound and the continuation of the medium-term rally.

At the beginning of 2021, I wrote that the year was likely to be bullish for the USD Index, and my forecast for gold (and the rest of the precious metals sector) was bullish – against that of almost every one of my colleagues.

The USD Index ended 2021 about 6% higher, gold was down about 3.5%, silver was down almost 12%, the GDX ETF(NYSE:GDX) was down by about 9.5%, and the Junior Gold Miners ETF (NYSE:GDXJ) (a proxy for junior mining stocks, my primary tool for shorting the precious metals sector in 2021–I wasn’t shorting gold at any point in 2021) was down by about 21%.

What about this year? It’s a tough call to say how the entire year will go, but it seems to me that the USD Index will move higher, and we’ll see both in the PMs: a massive decline and then a huge rally. It’s very likely to be a year to remember for anyone interested in trading gold, silver, and/or mining stocks and/or investing in them.

Let’s get back to the current situation.

The USD Index declined to fresh 2022 lows – well below the previous January lows and also below the December and late-November lows. How did gold respond?

Gold Daily Chart.
Gold Daily Chart.

Gold rallied – but just by a mere $8.80. While gold got close to its early-January high, it didn’t manage to move above it. 2022 is still a down year for gold. Also, gold is clearly below its November 2021 highs, when it was trading close to $1,900.

Is gold showing strength here?

Absolutely not.

Gold is showing the opposite of strength. It’s weak and unwilling to react to the USD’s weakness. That’s exactly what I want to see as a bearish indication if I plan on entering a short position in the precious metals sector or when I’m timing an exit of a long position, or as a confirmation of a bearish narrative in general.

So, yes, of course, I want to say that yesterday’s rally in gold was a bearish development. That’s the case because gold should have rallied so much more, given what happened in the USD Index. Today’s overnight action makes the bearish case even clearer. The USDX is down a bit, but gold is down too, anyway. It simply doesn’t want to rally. Gold wants to decline instead.

Mining stocks and silver behaved similarly to gold yesterday – they didn’t move to, let alone above, their previous 2022 highs. Consequently, they confirm the indications for the gold vs. USD dynamic – they don’t point to something else.

Summing up, the outlook for silver, gold, and mining remains bearish for the medium term, and this week’s rally seems to be nothing more than a counter-trend breather.

Gold Turns Blind Eye To Dollar's Decline
 

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Gold Turns Blind Eye To Dollar's Decline

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Comments (12)
Dwain Hobbs
Dwain Hobbs Jan 14, 2022 8:20AM ET
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Radomski is the most successful person when it comes to lousy biased unidirectional meaningless analysis !
Krisztina Krisztina
Krisztina Krisztina Jan 14, 2022 5:55AM ET
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Gold seems to be shaking off Treasury yield +2.21% up today...
Rameez Ali
Rameez Ali Jan 14, 2022 4:24AM ET
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gold:"this is my party", well said
Bernd Langer
Bernd Langer Jan 13, 2022 10:44PM ET
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Radomski again fails miserably to observe the breakdown of the USD index from its recent uptrend although his own graph so obviously shows it! Instead, he is telling us that the DXY is “breaking out” from the 2020 and 2021 levels. More likely than not the USD index will fall below 90 while Gold will soon conquer 1900$ in 2022 ...
Suyog Subhash
Suyog Subhash Jan 13, 2022 7:34PM ET
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nice i think gold will make 1780 /1750 suppourt zone soon now this time if break then 1600 to focus upside 1833/56 level breakout levels with full volume then 1900+ or near1950 possiblebut my view for 1 st half of year 1600/1900
Ken KK
KEN_K Jan 13, 2022 7:25PM ET
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Pecker head if you're short...your face is going to get ripped off.
Casino Crypt
CasinoCrypt Jan 13, 2022 6:00PM ET
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Not sure if we are looking into this too deeply and loosing the plot. How do Central banks provide support if they dont want to print money ? They sell Gold . Gold is being used for what it was designed for . To generate dollars when the macro outlook is dire in real terms. Huge stimulus is still needed and this will come from selling gold and crypto by the central banks.
Tom Sc
Tom Sc Jan 13, 2022 6:00PM ET
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CBs do not sell gold to generate dollars except under extreme circumstances like Venezuela or Iran where their money has been decimated, nor do any hold crypto.
simone scelsa
simone scelsa Jan 13, 2022 6:00PM ET
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CB/Governments would need gold to go way higher before considering it as an alternative to QE. If gold was, let's say, at $5000, I would see a push to reduce gold reserves to finance deficit, with gold at 1800 there is no incentive.
Stan Smith
Stan Smith Jan 13, 2022 2:00PM ET
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Lots of negative Gold sentiment right now. Probably a good time to buy!
Tom Sc
Tom Sc Jan 13, 2022 1:36PM ET
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there is no sense on reading this guy because, like in the past, he could be wrong for months and even years and keep doubling down because he cant say he was wrong. I prefer the technician that acknowledges TA is about probability, not certainty, and one that can admit he got it wrong and pivot because they wont lead you off the edge of a cliff like this guy will if he is wrong.
Not buying
Not buying Jan 13, 2022 11:14AM ET
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funny how you had this piece ready to go at the slightest drop.
Randy Lahey
Randy Lahey Jan 13, 2022 11:14AM ET
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Good point, this clearly was a mostly preprepared article.
Sonia Jain
Sonia Jain Jan 13, 2022 10:36AM ET
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Always a treat to read ur insights 🤩
Aulia Syafurudin
Aulia Syafurudin Jan 13, 2022 10:23AM ET
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still consist in bearish for gold, that what a good analyst even if wrong
 
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