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It was no surprise that both gold and silver suffered a lot last week since they usually react with a weakening to the dollar's success. As predicted, at the sight of the Fed’s hawk spreading its wings, after Powell announced that the Fed would raise interest rates in March, the precious metals moved lower with their tails between their legs.

Okay, but the dollar’s rally has to end sometime, or at least slowdown, and that means an opportunity for gold and silver to win back. Indeed, this was the case just before last weekend. The dollar ran out of fuel for a while, but the precious metals got confused again and instead of making up for the losses, they generated more.

Why did this happen? A similar situation has already taken place this month. On January 13, I wrote: 

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:

Also, 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.

Another thing is that after a series of declines, the outlook for gold for the next few days was not too rosy. As rising expectations of US interest rate hikes pushed the dollar to a multi-month high, making gold less attractive to investors, the end of January was supposed to be the yellow metal's worst week since late November.

Meanwhile, gold prices did not change on Monday, breaking a weak trend in the international market. Perhaps my theory that gold's idleness and the way it resists is actually its strength is reaffirmed. Not only did gold not hit its annual lows when the dollar peaked, but it was able to hold a stable position once the bears visualized the crash. 

For context, I wrote on Jan. 27:

The U.S. currency just moved above its previous 2022 and 2021 highs, while gold is not at its 2021 lows.

Yet.

I wouldn’t view gold’s performance as true strength against the USD Index at this time just yet. Why? Because of the huge consolidation that gold has been trading in.

The strength that I want to see in gold is its ability not to fall or soar back up despite everything thrown against it, not because it’s stuck in a trading range.

In analogy, you’ve probably seen someone, who’s able to hold their ground, and not give up despite the world throwing every harm and obstacle at them. They show their character. They show their strength. Inaction could represent greater wisdom and/or love and focus on one’s goal that was associated with the lack of action. You probably know someone like that. You might be someone like that.

The above “inaction” is very different from “inaction” resulting from someone not knowing what to do, not having enough energy, or willpower.

However, wasn’t gold strong against the USD Index’s strength in 2021?

It was, but it was very weak compared to the ridiculous amounts of money that were printed in 2020 and 2021 and given the global pandemic. These are the circumstances, where gold “should be” soaring well above its 2011 highs, not invalidating the breakout above it. The latter, not the former, happened. Besides, the “strength” was present practically only in gold. Silver and miners remain well below their 2011 highs – they are not even close to them and didn’t move close to them at any point in 2020 or 2021.

In the coming days, the greenback will again be the most likely driver of gold prices. In addition, both the dollar and gold are expected to reflect the risk of the conflict between Russia and Ukraine, as I have already mentioned.

Having said that, let’s take a look at the markets from a more fundamental point of view.

USD: As Expected

After the USD Index surpassed its 2021 high on Jan. 27, my expectations for further dollar strength have materialized. Moreover, with the PMs often moving inversely to the U.S. dollar, they’ve struggled mightily in recent days. However, with a predictable cooling-off period commencing on Jan. 28, I noted that the dollar basket could pause and catch its breath. I wrote:

It’s crucial to avoid speculation and wait for confirmation of breakdowns and breakouts. In its absence, the price action often pulls you in the wrong direction. Remember the supposedly bearish move below 95 when the USD Index moved even below its rising support line? It’s been just 2 weeks since that development.

Fortunately, if you’ve been following my analyses, the recent price moves didn’t catch you by surprise. What’s next? While the USD Index still needs to confirm the recent breakout and some consolidation may ensue, the bullish medium-term thesis remains intact.

That's precisely what we saw on Jan. 28. However, the important development is that gold and silver did not exhibit strength. While the yellow metal could have recouped some losses while the USD Index paused, it declined by 0.47%. Similarly, silver underperformed and declined by 1.65%. As a result, the PMs' inability to muster relief rallies is profoundly bearish.  

Furthermore, I've warned on several occasions that the S&P 500 can influence mining stocks. However, while the S&P 500 and the NASDAQ Composite rallied by 2.43% and 3.13%, respectively, on Jan. 28, the GDX ETF declined by 1.28% and the GDXJ ETF fell by 0.88%. Moreover, the GDXJ ETF closed below its 2021 low. As such, the PMs' weakness is visible from many angles.