• 278 days Will The ECB Continue To Hike Rates?
  • 278 days Forbes: Aramco Remains Largest Company In The Middle East
  • 280 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 680 days Could Crypto Overtake Traditional Investment?
  • 685 days Americans Still Quitting Jobs At Record Pace
  • 687 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 690 days Is The Dollar Too Strong?
  • 690 days Big Tech Disappoints Investors on Earnings Calls
  • 691 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 693 days China Is Quietly Trying To Distance Itself From Russia
  • 693 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 697 days Crypto Investors Won Big In 2021
  • 697 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 698 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 700 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 701 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 704 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 705 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 705 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 707 days Are NFTs About To Take Over Gaming?
Is It Time To Pay Attention To Gold Miners?

Is It Time To Pay Attention To Gold Miners?

The invasion of Ukraine by…

U.S Targets Russian Gold Stockpiles

U.S Targets Russian Gold Stockpiles

In its latest round of…

Przemyslaw Radomski

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do…

Contact Author

  1. Home
  2. Commodities
  3. Precious Metals

Gold And Silver Struggle As Sentiment Shifts

Gold and Silver

In yesterday’s analysis, we discussed how meaningful gold and silver’s pre-market decline was given a relatively small move in the USD Index. The implications were quite bearish for the PM market, especially that we had just seen a target being reached in gold stocks. And because mining stocks had just underperformed gold for the first time in weeks. Yet, before the day was over, the USD, gold and silver had all reversed and erased most of their daily moves. Does it make the outlook bullish again? Is gold still likely to reach $1,300 shortly?

No. The USD Index indeed reversed its course, but the precious metals’ initial reaction shows how vulnerable they are with regard to the rallies in the USD Index. This is not the kind of reaction that one wants to see when keeping a long position. It’s the one that is preferred while holding a short one.

Let’s take a look at the charts for details. This time, we’ll start with the USD Index (charts courtesy of http://stockcharts.com).

(Click to enlarge)

During a real, sizable upswing, gold usually reacts in a most profound way to the USD’s weakness in the initial part of the rally and the strength of the reaction diminishes as gold’s rally continues. A very weak reaction to the USD’s bullish signals is a sign that the rally is close to its end. Consequently, if gold was really to rally above $1,300, it should have rallied to $1,280 or so during the initial part of the rally as a response to USD Index’s decline.

Nothing like that happened.

(Click to enlarge)

Instead, we saw a breakdown below the medium-term support line that was based on major bottoms (late 2015 and late 2016 price extremes). Gold was likely to rally based on multiple factors – and it did - but, instead of invalidating the breakdown and rallying to $1,300 (which seemed quite realistic given the previous oversold situation in terms of the RSI indicator), gold just moved back to the rising support line and verified it as resistance. Related: 85 Year Old’s Are Still Working Because They Can’t Retire

In other words, we had many signs confirming a bullish forecast for gold, but perhaps what was likely to happen based on them has already happened. We saw a rally, but gold was not strong enough to even invalidate a breakdown, let alone rally back to the June highs.

On a short-term basis, we see that yesterday’s decline took place on volume that was higher than Monday’s move up, which is a bearish sign. That’s one of the reasons that confirms that taking profits off the table and closing our previous short-term long position in the precious metals market was indeed a good idea.

(Click to enlarge)

Silver moved back up after the overnight decline, but it closed the session below the previous day’s closing price. What’s really important is that silver closed the day below the previous lowest close of the year ($16.13). This means that – in analogy to gold – silver broke below an important support level (previous 2018 lows) and the recent rally was just a verification of the breakdown.

In general, it’s one of the best trading techiniques (here: for shorting) when a market is after a breakdown and then it confirms it by moving back to the previous support and verifies it as resistance. That’s what just happened in gold and what happened in silver.

Related: How Is The USD Standing Up Against The Competition?

Both precious metals had good technical reasons to rally back above the mentioned support/resistance levels – but they didn’t manage to do so. This indicates that the short-term outlook can no longer be described as bullish.

The most important confirmation, however, comes from the analysis of gold stocks and their ratio to gold.

Gold Stocks and their Ratio with Gold

(Click to enlarge)

The HUI Index just moved to its June high and – more importantly – to its rising medium-term resistance line, below which it broke a few weeks ago. From the technical point of view, the breakdown was simply verified – the above chart (on its own) has no bullish implications. It has bearish ones.

After the breakdown, the rising line became a natural price target for a short-term rally and it was just reached. Combined with the previously mentioned underperformance in the miners relative to gold it seems quite toppy.

But wait, there’s more.

(Click to enlarge)

Remember the key breakdown that we saw earlier this year? The gold stocks to gold ratio broke below the long-term support created by the late-2016 low, which was a very important sign pointing to a medium-term decline in the precious metals market.

This breakdown was just verified as the ratio just moved back to the late-2016 low, tried to move above it, and failed. The long-term signals, support lines, breakdowns etc. are more important than the short-term ones, so the above is an important issue.

The implications are bearish for the entire precious metals sector in general. The above indicates that the days of the gold stocks’ outperformance relative to gold are over and that we saw an important turnaround in the PM market in general.

Combining all the three mentioned mining-stock-based factors creates a quite strong bearish case for the PMs on its own and these are not the only bearish factors that are currently in play, not to mention the multiple medium-term factors pointing to lower PM values.

(Click to enlarge)

There’s also a subtle bearish sign from the Japanese yen.

(Click to enlarge)

The price of gold quite often moves in tune with the Japanese currency. The latter just broke below several support levels, which has very bearish implications going forward. Based on the closing prices, there was no breakdown below the rising medium-term support line, but there was a breakdown below the triangle marked in red. Therefore, the outlook and thus the implications for the PMs deteriorated to some extent.

Naturally, a breakdown below the medium-term line would have been an even more profound sign, but given today’s pre-market move lower in the yen, it seems that we might see it shortly anyway. The implications for the precious metals market are already bearish and it seems that they may become much more bearish shortly.

Summary

Summing up, due to several developments, the outlook for the precious metals market in the short term is no longer bullish, but bearish. The mining stocks’ underperformance on Monday, the HUI reaching its target, the HUI to gold ratio at a critical resistance, the relative strength of gold vs. the USD, the partial breakdown in the Japanese yen all point to lower precious metals prices.

By Przemyslaw Radomski via Sunshine Profits

More Top Reads From Safehaven.com:

Back to homepage

Leave a comment

Leave a comment