Despite Signs To The Contrary, Gold At Or Near Top

The thing that most likely raised quite a few eyebrows this week was – in addition to gold’s recent move by itself – the fact that gold rallied mostly without the dollar’s help. Tuesday, January 5, I wrote that one swallow doesn’t make a summer and that a single session rarely changes much. We didn’t have to wait for long – the situation already appears to be getting back to normal.

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Figure 1 - COMEX Gold Futures

After the Jan. 4 rally, gold moved only insignificantly higher, and it’s even a bit lower in Wednesday, Jan. 6's pre-market trading.

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Figure 2 - USD Index

While the USD Index didn’t decline on Jan. 4, it did in the following days – yesterday and in today’s pre-market trading. So, the gold-USD link seems to be relatively normal after all; it doesn’t, by itself, indicate further relative strength in gold. There are three important things that one needs to note here.

The first one is what I already wrote previously – gold is not even above its Nov.. 2020 high, while the USDX is below its 2020 low, which means that gold is weak relative to the USD Index and Jan. 4's rally seems to have been an exception.

The second one is also something that I wrote about previously – gold is right at its triangle-vertex-based reversal and it might have just topped (given its tiny decline despite a decline in the USDX).

The third one is that the USD Index has quite a steep declining resistance line that’s based on the early-November and late-November highs. Each previous attempt to break above it that we saw in the last few weeks failed. But thanks to the steepness of the line, the USD Index is at this line even despite today’s decline.

All it takes for the USD Index to break above it is for it to do nothing. This should be relatively easy given how excessive the bearishness is in this market, how similar it is to what we saw in early 2018, what’s happening in the RSI, and even given the similarity between 2018 and now in the cryptocurrencies. You can see the details on the chart below.

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