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The Key Detail for Gold… Doesn’t Come from Gold

Przemyslaw Radomski, CFA,
0 Comments| April 3, 2020

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Two important things happened yesterday. And no, the ridiculous rally in crude oil wasn’t one of them. Yes, it was ridiculous, because it was clearly based on just one indication from Trump that was not backed by anything, and in the crude oil market, it is rather common to hear about the possibility to cut production, and then nothing happens.

Anyway, the particularly important things happening, were the rally in gold, and the rally in the USD Index.

Let’s start with the latter.

The USDX and Gold Rallies

The USD Index just posted a daily rally and it was a second daily rally in a row. This may not seem significant at first sight, but it is significant, because that was what confirmed that the downward correction was already over in case of both similar price moves: the 2008 and 2011 one. As we described these analogies on Tuesday, we don’t want to do so again today, but the key takeaway is that the USD Index is now very likely to continue its upward move, likely rallying to new 2020 highs shortly.

The good news is that since we know that the correction is most likely over, we can use Fibonacci extension tools based on the previous rally and the correction to estimate how high the USD Index is likely to move before this significant, yet short-term rally is over. Once the short-term rally is over, it would probably be followed by a more meaningful correction and then another wave up, but that’s not the key information from the precious metals investor’s and trader’s point of view, because PMs and miners are likely to bottom even before the USD Index tops.

So, how high would the USD Index be likely to rally in the near term?

Back in 2008, the USD Index topped after it slightly exceeded the level that one would get by doubling the size of the initial sharp upswing. The first, initial top formed slightly above the level that one would get by multiplying the size of the initial sharp correction by 2.618.

Based on these techniques and the analogy to 2008, the USD Index is likely to soar to about 113 before correcting in a more meaningful manner. This level is just above the rising, long-term resistance line that’s based on the 2009 and 2015 highs, which is at about 112, so conservatively we will view 112 as our upside target.

The USD Index is at about 100 at the moment of writing these words, so the upside potential is substantial.

And as we wrote in many flagship Gold & Silver Trading Alerts, big moves higher in the USD Index almost always translate into big declines in gold. One of the reasons that yesterday’s session was important, is because it provided us with a confirmation that this big move higher in the USD Index has just started.

The second reason why it was important, is more of a short-term nature. Gold rallied and it rallied back up above the previously broken lows. This is important, because it changes the way we are looking at the 2008 – 2020 analogy. It now (based on yesterday’s move) seems most likely that we have not yet completed the topping formation, but that we saw the initial fake move lower, after which gold could even move to new highs (not significantly, but still).

We previously wrote that it became less likely that gold would move higher once again, but that it could still happen. Based on what we saw yesterday, the odds for that significantly increased.

Furthermore, this means that our very short-term analogy in terms of time, would definitely need to be adjusted as it’s no longer likely that we will see a major bottom in the precious metals market on Tuesday or close to it. Instead, it might be the case that it will be when we’ll see the next local top.

Sounds disappointing? Why would it? We’re adjusting our analysis to the information the market gives us and we’re making sure that we are positioned correctly given all the clues, taking into account both what was available previously, and what is available now.

The key thing was that the precious metals sector was about to slide, and miners were likely to decline the most - and both forecasts remain intact. The only thing that changed, is the likely timing for this upcoming bottom. If we’re about to make a gazillion dollars (of course, we can’t promise any kind of performance, nor can anyone else) on that decline, does it really matter that we have to wait an extra week or two for that, especially while sitting on huge profits from the previous decline and the subsequent rebound? Exactly – we can definitely afford to wait it out. It doesn’t seem that we will have to wait for long, anyway.

Thank you for reading today's free analysis. We had taken profits from the previous long positions in mining stocks on March 25th, and we entered new short positions in the miners on March 26th. Even despite the recent move higher in the miners, it seems that we took profits from our previous long positions exactly on the day that the miners topped in terms of the closing prices, and that we entered the new short positions exactly on the day that the miners topped in intraday terms. This assumes using GDX as a proxy. If we use GDXJ, we entered the short position on the day when they made the second intraday top of their double-top formation.

Thank you again. In today’s Gold & Silver Trading Alert, we are letting our subscribers know how we aim to make the most of this complex situation (and it’s not just about waiting it out). We also provide details regarding our profitable short position in the mining stocks. We encourage you to sign up for our free gold newsletter – as soon as you do, you'll get 7 days of free access to our premium daily Gold & Silver Trading Alerts and you can read the full version of the above analysis right away. Sign up for our free gold newsletter today!

Thank you.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


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