History Rhymes: Does USDX’s Uprising Mean Gold’s Climax?

The yellow metal’s behavior looks more bearish now than it did in 2017-2018. The USDX has a lot of bullets in its chamber, and gold can be riddled with them.

Plenty of warning signs on the near-term horizon: The USDX is after a long-tern breakout, traders are reducing net-short positions, and the slightest shift in U.S. dollar sentiment can lead the rest of the herd to follow. If a USDX resurgence is combined with an equity shock, then the precious metals are in for trouble.

Last Friday (Mar. 12), we focused quite a bit on the moves in the gold miners and how their related ETFs (GDX and GDXJ) are faring and which will suffer most during the next phase of the decline. We also touched on this subject last Wednesday as well. It was important to shed light on the miners because they’ve been leading the charge in the corrective upswing. I also wanted to explain the Eurozone’s impact on the precious metals and how crucial it is to examine the bigger picture and how the pieces are all connected. Today, let’s shift our attention over to the currency perspective, namely the USDX.

The price shape and time analogies are truly remarkable right now. It’s quite often the case that history rhymes, but it’s rare for it to rhyme so closely and clearly to what we now see in the case of the USD Index. And the implications for precious metals investors are profound.

On Mar. 8, I warned that with the USD Index confronting its mid-2020 lows (resistance), a short-term dip could occur in the coming days. But after declining by 0.34% last week, the negativity could be short-lived.

Case in point: the 2017-2018 analogue is already in full swing, and while short-term dips were part of the historical journey, the USDX could be about to exit its consolidation phase.

Please see below:

Chart, line chartDescription automatically generated

You can also see the similarity between two periods and the technical patterns that they included in the chart below:

ChartDescription automatically generated

Even while looking at the price moves for just a second, the size and shape of the 2017-2018 analogue clearly mirrors the 2020-current price action. Although this time, it took less than 118 days for the USD Index to move from peak to trough.

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Mar1kle 1 month ago Member's comment

I don't think the USD's bottom is in with this cycle. I Think that we should use price and time when comparing thses two cycles. USD's 2017/18 down and base cycle was much longer than your currently defined 2019/2020 cycle. USD in 2017/18 took her time retesting the steep downward channel she broke in Oct 2018, before basing and finally moving up and out in April 2018. 50 MA was falsely breached in Oct 2017. Don't think the break of this MA confirms a bottom. If we are comparing I see the Oct 17 countertrend rally being similar to the Feb 2021 swing up. We shall see.

Przemyslaw Radomski, CFA 1 month ago Author's comment

The base was longer in 2017-2018, but so was the preceding decline - they were proportional. But as you wrote, we'll see.