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If Correction is Over, It Can Mean One Thing for Gold

By Sunshine Profits (Przemyslaw Radomski, CFA)CommoditiesNov 28, 2022 11:22AM ET
www.investing.com/analysis/if-correction-is-over-it-can-mean-one-thing-for-the-gold-price-200632860
If Correction is Over, It Can Mean One Thing for Gold
By Sunshine Profits (Przemyslaw Radomski, CFA)   |  Nov 28, 2022 11:22AM ET
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Will the combination of recent behaviour exhibited by gold, the USDX and the S&P 500 result in a resumption of the downtrend in the gold market?

Magical 38.2%

In today’s analysis, I’ll cover other parts of the current puzzle: gold, the USD Index and the stock market. In particular, the situation appears very interesting in the latter, so I’ll start with it.

S&P 500 Daily Chart.
S&P 500 Daily Chart.

We just saw a small attempt to break above the 38.2% Fibonacci retracement, and I doubt that this breakout will be confirmed. The “why” behind it is currently the most interesting analogy that we see on this market.

Please take a look at the areas marked with red rectangles. In all those cases, the S&P 500 index rallied on big volume at first, and then the volume declined over the course of a few weeks. And as that happened, the price approached its top.

All three previous important tops that we saw this year were accompanied by this indication.

We also see it right now.

Even more interestingly, the volume levels that have just been seen are similar to the ones that accompanied previous tops.

Consequently, it seems that the end of the rally is near. This is likely to have very bearish implications for junior mining stocks.

Let’s check what’s up with gold.

Gold Daily Chart.
Gold Daily Chart.

The yellow metal corrected 38.2% of its previous medium-term decline, and it declined once again. The moves that are smaller than 38.2% of the preceding move are generally viewed as “weak corrections,” indicating a market where the previous trend is very strong.

What’s Next?

As the correction appears to be over, the medium-term downtrend is now likely to resume. The RSI indicator clearly supports this outcome, as it just moved back below 70. When we previously saw similar signals, the price of gold usually plunged.

There’s one more thing that makes me predict that the gold price top is already in.

It’s gold’s link with the US Dollar Index.

U.S. Dollar and Gold Daily Charts.
U.S. Dollar and Gold Daily Charts.

As you can see above, the USD Index just moved very close to its recent bottom. However, at the same time, gold and silver prices didn’t move back to their previous highs.

This kind of weak reaction to a factor that “should” move the market, indicates that the market really wants to move in the opposite direction.

In the current case, this indicates that gold wants to move lower.

Combining the above with the extremely negative correlation between gold and the USD Index (currently the 30-trading-day linear correlation coefficient is at -0.95, while -1 is the most negative that it could go), this indicates that when the USD Index rallies, gold would be likely to truly plunge – magnifying the U.S. dollar’s moves, but in the opposite direction.

All in all, the technical outlook for the precious metals sector appears to be very bearish for the coming weeks.

If Correction is Over, It Can Mean One Thing for Gold
 

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If Correction is Over, It Can Mean One Thing for Gold

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Comments (8)
Dwain Hobbs
Dwain Hobbs Dec 01, 2022 3:21AM ET
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He says down it goes up again , Perma bear Radomski must be suicidal now lol
Muzaffar
Muzaffar Nov 30, 2022 6:51AM ET
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For sure I can tell where the is likely to move
Jimmy Doodoo
JimmyD Nov 29, 2022 12:49AM ET
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"when the USD Index rallies, gold would be likely to truly plunge" - doesn't this usually happen all the time regardless?
Tom Scheuermann
Tom Scheuermann Nov 29, 2022 12:49AM ET
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no, not every time. sometimes they move together.
Bernd Langer
Bernd Langer Nov 28, 2022 11:08PM ET
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I wouldn’t bet on US dollar correlation. While it may work very well short term, this does not hold true over longer time frames. This can be seen very clearly in your last chart. In August 2021, Gold hit a low of 1675$ while the USD index stood around 92. Since then, the USD index has risen by a whopping 15 % to 106. Consequently, Gold today should trade at minus 15% or 1420$. But it isn’t. Go figure ...
Bernd Langer
Bernd Langer Nov 28, 2022 9:14PM ET
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Unfortunately, the comments columns in https://investing.com have become a heaven for spammers.
Erikas Ivan
Erikas Ivan Nov 28, 2022 7:54PM ET
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I appreciate your analysis and attention to detail Mr. Radomski, CFA, thank you for the heads up.
Tom Scheuermann
Tom Scheuermann Nov 28, 2022 7:54PM ET
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wow are you Radomski's mom or something?
Jack Drummond
Jack Drummond Nov 28, 2022 7:04PM ET
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Farrukh Dall
Farrukh Dall Nov 28, 2022 3:15PM ET
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excellent.
 
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