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.

Please see below:

(Click on image to enlarge)

The USD Index (USDX)

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 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.

Please see below:

(Click on image to enlarge)

Just as the USD Index took a breather before its massive rally in 2014, it seems that we saw the same recently. This means that predicting higher gold prices (or the ones of silver) here is likely not a good idea.

Continuing the theme, the eye in the sky doesn’t lie. And with the USDX’s long-term breakout clearly visible, the wind remains at the dollar’s back. Furthermore, dollar bears often miss the forest through the trees: with the USD Index’s long-term breakout gaining steam, the implications of the chart below are profound. And while very few analysts cite the material impact (when was the last time you saw the USDX chart starting in 1985 anywhere else?), the USD Index has been sending bullish signals for years.

Please see below:

The bottom line?

With my initial 2021 target of 94.5 already hit, the ~98 - 101 target is likely to be reached over the medium term (and perhaps quite soon), mind, though: we’re not bullish on the greenback because of the U.S.’ absolute outperformance. It’s because the region is fundamentally outperforming the Eurozone, the EUR/USD accounts for nearly 58% of the movement of the USD Index, and the relative performance is what really matters.

In conclusion, 2022 looks a lot like 2021: dollar bears are out in full force and the ‘death of the dollar’ narrative has resurfaced once again. However, with the greenback’s 2021 ascent catching many investors by surprise, another re-enactment will likely materialize in 2022. Moreover, since gold, silver, and mining stocks often move inversely to the U.S. dollar, their 2022 performances may surprise for all of the wrong reasons. As such, while the dollar’s despondence is bullish for the precious metals, a reversal of fortunes will likely occur over the medium term. Given yesterday’s reversal in the USD Index, it’s likely also from the short-term point of view – we could see the reversal and the return of the USD’s rally and PMs’ decline any day or hour now.