USDX: Gold Can’t Wait To Fall - Even Without USDX's Help

Miners: GDX and GDXJ ETFs

In yesterday’s analysis, I described the GDX’s previous performance in the following way:

Gold stocks’ intraday recovery that we saw yesterday may seem profound, but not if we consider what happened in the USD Index and the general stock market. The former declined substantially while the latter was close to its all-time highs. This is a combination of factors that “should have” made gold miners move to new highs – and a daily gain of less than half percent is a sign of weakness, not strength.

In today’s pre-market trading the S&P 500 futures moved to new highs, and gold miners showed gains in the London trading, but they are nothing to write home about – and more importantly, nothing that would change the bearish forecast for gold I described more broadly previously.

The bearish interpretation of the previous “strength” turned out to have been correct – the GDX ETF declined yesterday. The decline was even more visible and important in the case of the GDXJ ETF, where we have trading positions.

This ETF for junior gold and silver miners (gold miners have much bigger weight in it, though) moved and closed back below its March 2021 highs. Consequently, we have a situation in which:

  1. The USD Index is about to reverse and rally.
  2. Gold signals that it just can’t wait for the USD Index to rally, and it’s already declining (the pace at which it declines is likely to greatly increase once the USD Index takes off).
  3. Gold miners behave relatively normally, which in this case means that they are declining more than gold does (GLD just closed 1.14% below the highest daily close of April, while the GDX just closed 5.59% below the highest daily close of April). Besides, their recent move back to the May 2020 highs and the subsequent decline further increases the odds that the decline is going to shape the right shoulder of a huge head and shoulders formation with extremely bearish implications (once completed).
  4. GDXJ is underperforming GDX just as I’ve been expecting it to. While GDX declined by 5.59% so far (in terms of the closing prices), GDXJ declined by 5.67%. This might seem an unimportant level of underperformance, but the perspective changes once one realizes that GDXJ is more correlated with the general stock market than GDX is. Consequently, GDXJ should be showing strength here, and it isn’t. If stocks don’t decline, GDXJ is likely to underperform by just a bit, but when (not if) stocks slide, GDXJ is likely to plunge visibly more than GDX.
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Jared Green 1 month ago Member's comment

Inflation and dollar weakness should push gold prices up but I was shown a gold price forecast of 1400.

Przemyslaw Radomski, CFA 1 month ago Author's comment

Thanks for the comment. Inflation is one thing, bond yields is another. Thus, dollar doesn't have to decline now. In fact, the opposite seems more likely to me. I think that gold will move well beyond its 2020 highs, but not before declining (likely in the following few months).

Almoni33 1 month ago Member's comment

I am not sure you are right and gold will fall below the price of 1600 - nevertheless I will buy there with great joy

Almoni33 1 month ago Member's comment

Thank you for your article

Przemyslaw Radomski, CFA 1 month ago Author's comment

Thank you, I'm happy that you enjoyed reading it.

Almoni33 1 month ago Member's comment

Unlike dozens of authors on https://seekingalpha.com and others, you have shown not only charts but also target levels, which is especially significant. Yes I think you were wrong and we will not see gold at 1400 $ but more importantly you were not afraid to show your trade view

Przemyslaw Radomski, CFA 1 month ago Author's comment

I'm just not that good at "being afraid" :) Thank you. The next several months might be very interesting in the PMs, that's for sure. The long-term fundamentals are ridiculously bullish, and yet, it seems to me that the gold's going to initially (!) react to strength in the USDX and (eventually) declining stock market by declining significantly. We'll see. Have a great weekend!