Gold And Silver: Is Recent Rally Cause For Concern?

Do gold’s most recent rally and the inflow of capital into silver change the fundamental outlook of the PMs? If so, what about equities?

In short, yes, the U.S. dollar is down, thereby boosting gold. Yes, the recent massive interest in silver has everyone talking about getting in on the action. However, one must remember that markets don’t move in a straight line and countertrend rallies are expected along the way. Keep your eye on the ball. Now, let’s examine what exactly is happening.

Gold moved higher once again yesterday (Feb. 9), but it reversed and declined before the closing bell. Miners declined as well. Does it mean that the next top is in or about to be in? That’s exactly what it means. Especially considering that gold’s reversal took place almost right at the triangle-vertex-based reversal and during USD’s breakout’s verification.

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Figure 1 - USD Index

I previously wrote that because assets don’t move in a straight line, it’s plausible that the USD Index retests its declining resistance line, while gold retests its rising support line. If this occurs, the USDX is likely to decline to the 90.6 range, while gold will receive a short-term boost. I emphasized that the outcome does not change their medium-term trends and the above confirmations signal that the USDX is heading north and gold is heading south.

The part that I put in bold is exactly what is being realized right now. The USDX is correcting after the breakout, likely verifying the previous resistance as support.

Unless the USDX breaks back below the declining medium-term support line in a meaningful way, the bullish implications for the following weeks will remain intact. At the moment of writing these words, the USD Index is practically right at the support line, which means that it’s quite likely to reverse shortly.

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Figure 2 - COMEX Gold Futures

Gold formed a reversal yesterday, but it ended the session slightly higher. The latter might seem bullish until one compares that to the size of the daily decline in the USD Index. The move lower in the latter was quite visible, so what we saw in gold should be viewed as USDX’s underperformance and thus a bearish sign.

Let’s keep in mind that gold was just at its triangle-vertex-based reversal (based on the declining black resistance line and the rising red support line), which perfectly fits the shape of yesterday’s session – the shooting star reversal candlestick. The implications are bearish.

Today, gold moved slightly higher, but the move was too small to change anything. Gold didn’t move above yesterday’s intraday high, which means that the short-term top might already be in.

What about silver, did the white metal change anything?

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Disclaimer: All essays, research, and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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Monica Kingsley 2 weeks ago Contributor's comment

Neither smallcaps, nor emerging markets are diverging from the S&P 500 - whatever the extended readings presented. In the current environment of presented and other imbalances easily amplified even further, we're not "living on a razor’s edge". While we will experience significant corrections in 2021, they are not knocking on the door. Higher stock prices await in 2021. The market breadth remains solid and tech isn't about to be a drag either. As I present in today's analysis (oil to gold), stocks remain in a solid bull run with no top in sight.