EC …And That’s What A Reversal In Gold Looks Like

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The next major turnaround that all PM charts emphasize is in late June – perhaps this is where we should expect the final bottom for this prolonged decline in the precious metal sector.

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The USD Index is about to reach its triple-vertex-based reversal as well. The reversal is either today or tomorrow – both days would fit. Either way, it seems that we will see higher USDX values before the end of the week. Naturally, this is likely to translate into lower PM values.

Speaking of gold and the USD Index…

Gold and USD Link Revisited

Let’s examine the relationship between gold and USD Index from a different angle - their correlation. There are periods when both are moving in the same direction and there are times when the direction differs. The same can be said about the strength of the link, i.e. how closely, with what strength, these movements translate into one another. We look at the correlation of gold price movement with the USD Index in the context of the gold bear market, starting from the 2011 top.

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A positive correlation means that both are moving in the same direction. The red line represents the extremes of the tightness of mutual movements - we have one instance almost touching it in Dec 2013, one in Feb 2015, one in Aug 2016 and finally now. Only the first one (end of 2013) resulted in gold price upswing (that was eventually reversed though) - the other two marked a sharp or prolonged top followed by declines. Currently, the top in positive correlation looks to be in but the price has not yet followed it down. Should it be a cause for concern? Not really, as it is not necessarily a precise timing tool – it works best in catching the direction of the next move right. Take a look at the similar situation in Q3 2016 when we first got a gold price upswing and only then the fall.

Today’s situation, therefore, favors resolution with a gold price decline, too. We see additional support for the bearish resolution in overbought RSI at almost 70 – again, this has marked good shorting opportunities in the past.

What about local tops in correlation coefficient? Could we get a clearer answer from them? Yes. Anytime the correlation turned briefly positive or even only approached zero, it meant good shorting opportunities (the top of Sep 2011, Feb 2013, Aug 2014 and slightly prematurely Aug 2017). This also points to a likely decline.

Another Look at Gold and Gold-Miners-to-Gold Ratio

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Overlaying gold and its ratio to the miners will provide us with a valuable and visually rich perspective. Namely, we will see the closeness of interdependency, its sensitivity and how well gold price approximates its leading indicator (the gold miners’-to-gold ratio). In short, the ratio’s feeble performance since the Aug 2018 lows shows a non-confirmation of the gold price upswing from these lows. Just look at how well tuned these two were during the decline to the late 2015 lows and also during the significant 2016 countertrend gold price upswing. Comparing to the 2016 rally, this shows how different the 2018 rally really is. The ratio simply suggests that the link between now and 2016 is either weak or doesn’t exist at all. This is not bearish on its own, but it emphasizes that the outlook is not bullish.

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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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