Gold’s Downtrend: Is This Just The Beginning?

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The discussion – above and below – can be viewed as something positive or negative for any investor, but while reading it, please keep in mind that our goal is the same as yours – we want to help investors make the most of their precious metals investments. Call us old-fashioned, but regardless of how unpleasant it may seem, we’ll continue to adhere to honesty, independence and common-sense in all our analyses

Ok, but why on Earth would the USD Index rally back up? The Fed is printing so much dollars – why would they be worth more?!

Because the currencies are valued with relation to each other and whether or not the USD Index moves higher or lower doesn’t depend only on what the Fed is doing.

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Figure 3

What other monetary authorities do matters as well and right now the ECB is outprinting the Fed (that’s what the decline in the green line above means), which means that the euro is likely to fall more than the U.S. dollar. Therefore, the EUR/USD currency exchange rate would be likely to decline and since this exchange rate is the biggest (over 50%) component of the USD Index, it makes perfect sense – from the fundamental point of view – to expect the USD Index to move higher.

Can gold rally despite higher USD Index values? Absolutely. However, it would first have to start to behave “normally” relative to the USD Index, and before that happens it would have to stop being extremely weak relative to it. And the fact that gold is at the same price level despite a 9-index-point decline in the USDX is extreme weakness.

To make the technical discussion easier, I’m attaching the previous chart once again.

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Figure 4

On Monday (Feb. 15), I wrote the following about the above chart:

The size and shape of the 2017-2018 analogue continues to mirror the current price action. However, today, it’s taken 118 less days for the USD Index to move from peak to trough. 

Also, it took 82 days for the USDX to bottom in 2017-2018 (the number of days between the initial bottom and the final bottom) and the number amounts to 21.19% of the overall duration. If we apply a similar timeframe to today’s move, it implies that a final bottom may have formed on Feb. 12. As a result, the USDX’s long-term upswing could begin as soon as this week. 

Also noteworthy, as the USDX approached its final bottom in 2017-2018, gold traded sideways. Today, however, gold is already in a downtrend. From a medium-term perspective, the yellow metal’s behavior is actually more bearish than it was in 2017-2018. 

Also supporting the historical analogue, the USD Index’s current breakout above its 50-day moving average is exactly what added gasoline to the USDX’s 2018 fire. Case in point? After the 2018 breakout, the USDX surged back to its previous high. Today, that level is roughly 94.5.

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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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