The key development for precious metals investors this week happened neither in gold, silver, nor mining stocks – it came from the USDX.

The thing that happened was that the U.S. currency bounced off the combination of strong support levels, the late-2020 high, and the rising medium-term support line. In my previous analyses, I wrote the following:

While the USD has a slight cold and is sitting out this inning, the precious metals are enjoying some sun. But for how long before the tables turn?

While six Fed officials warned of forthcoming rate hikes and signaled that the March meeting could result in liftoff, the USD Index responded like they had announced another round of QE. What does it give? 

Well, with the U.S. dollar stuck in consolidation mode after its recent sprint higher, gold, silver, and mining stocks have enjoyed the pullback. However, since the charts provide the most accurate clues regarding the future price action, the technicals signal that the USD Index’s weakness should be short-lived.

For example, while unfulfilled prophecies of the dollar’s demise in 2021 have been resurrected in 2022, the USD Index rallied off of expected support. After declining intraday on Jan. 13, the dollar basket reversed higher and ended the day with a bullish hammer candle. Moreover, the USD Index closed above its rising support line (the dashed line below) and its September 2020 high. As a result, the dollar found support near the levels that I outlined on Jan. 13. I wrote:

At the beginning of 2021, I wrote that the year was likely to be bullish for the USD Index, and my forecast for gold (and the rest of the precious metals sector) was bearish – against that of almost every one of my colleagues.

The USD Index ended 2021 about 6% higher, gold was down about 3.5%, silver was down almost 12%, the GDX ETF was down by about 9.5%, and the GDXJ ETF (proxy for junior mining stocks, my primary tool for shorting the precious metals sector in 2021 – I wasn’t shorting gold at any point in 2021) was down by about 21%.

What about this year? It’s a tough call to say how the entire year will go, but it seems to me that the USD Index will move higher, and we’ll see both in the PMs: a massive decline, and then a huge rally. It’s very likely to be a year to remember for anyone interested in trading gold, silver, and/or mining stocks and/or investing in them.

The USD Index declined to fresh 2022 lows – well below the previous January lows, and also below the December and late-November lows.

We see that the USD Index just (in overnight trading, so the move is not even close to being confirmed) moved a little below USDX’s rising support line based on the previous June and October 2021 lows. At the same time, the USDX is slightly below its late-2020 top and slightly above its November 2021 top. 

In light of the situation on the long-term USDX chart, this combination of support levels is likely to trigger a rebound and the continuation of the medium-term rally.

Well, we saw exactly that – a rebound. Is this the end of the corrective downswing? That’s quite likely, and this scenario is supported not only by the short-term charts, but also by the USD Index’s long-term chart.

(Click on image to enlarge)

I previously described the above chart in the following way:

Moreover, if we zoom out and focus our attention on the USD Index’s weekly chart, an interesting pattern has developed. To explain, when the dollar basket’s weekly RSI (based on the weekly price changes) 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 [edit: previous] decline is not unexpected – it’s rather normal. 

I marked additional situations on the chart below with orange rectangles – these were the recent cases when the RSI based on the USD Index moved from very low levels to or above 70. In all three previous cases, there was some corrective downswing after the initial part of the decline, but once it was over – and the RSI declined somewhat – the big rally returned and the USD Index moved to new highs.

I marked those declines in the RSI with blue rectangles, and I did the same thing for the current decline. As you can see, the size of the move lower is currently analogous to previous short-term corrections that were then followed by higher prices. This means that it’s quite likely over or very close to being over, and the medium-term rally can return any day now.

Indeed, the previous declines in the USD Index and the RSI correspond to what we saw recently. It seems that the verse is complete and that history has rhymed once again.

What is also important is that gold is responding to the USD’s strength.

Just as the USD Index rallied recently, gold declined after failing to rally to new yearly highs. In today’s pre-market trading, the USD Index is up by about 0.2, and gold is down by about $9. So, the odds are that if the USD Index continues its short-term rally (which is very likely), gold will respond by declining. The outlook for gold is thus bearish.

Silver, just like gold, didn’t move to new 2022 highs either. It bounced off its 50-day moving average, which proved to be important resistance once again. It seems that the silver forecast is bearish as silver appears ready to fall, just like gold is, especially now that we see weakness in the S&P 500 futures so far in today’s pre-market trading.

As a reminder, silver and mining stocks (especially junior mining stocks) are trading more in tune with the general stock market than gold does, so if the main stock indices fall, they will likely be affected to the greatest extent. Since it seems that the Fed has already made a fundamental U-turn regarding QE and interest rates, the situation is not looking good for the stock market.

Just like gold and silver, mining stocks failed to move to new 2022 highs, despite the fact that the USD Index recently moved to new 2022 lows. They too reacted to the USD’s small (so far) rally. The implications are bearish, as the USD Index is likely to continue to rally, triggering more declines across the precious metals sector.