The USDX and the precious metals market are like reverse images. Thus, it’s possible to guess what gold and silver will do as the dollar gallops up.
Miners and silver declined in a truly epic manner, and yes, the same is likely to take place in the following months, as markets wake up to the reality, which is that the USD Index and real interest rates are going up.
Speaking of the USD Index, after invalidating the breakout below the multi-year head-and-shoulders pattern, the USDX was poised to soar, just like I’ve been expecting it to do for more than a year, and that’s exactly what it did.
The RSI is currently above 70, but since the USDX is in a medium-term rally and is already after a visible correction, it can rally further. Please note that we saw the same thing in 2008 and 2014. I marked the corrections with blue rectangles.
Still, the USD Index is now practically right at its next strong resistance – at about 104.
I previously wrote the following about this target:
It doesn’t mean that the USD Index’s rally is likely to end there. It’s not – but the USDX could take a breather when it reaches 104. Then, after many investors think that the top has been reached as the USDX corrects, the big rally is likely to continue.
The important detail here is that the consolidation close to the 104 level doesn’t have to be really significant (perhaps 1-2 index points of back-and-forth movement?) and it definitely doesn’t have to take long. The interest rates are going higher, and investors appear to have just woken up to this reality – it will take some time before everyone digests what’s going on. Before the late-reality-adopters join in, the USD Index could be trading much, much higher.
Back in 2014, when the USD Index approached its previous highs (close to 89), it consolidated so quickly that it’s almost not visible on the above chart – it took just a bit more than a week (from Dec. 8, 2014 – 89.56 to Dec. 16, 2014 – 87.83).
I previously wrote the following:
We could see something similar this time – and as the USD Index corrects for about a week, the same thing could take place in other markets as well: stocks and PMs. If junior miners were after a very sharp slide at that time, they would be likely to correct sharply as well.
I would like to add one important detail. Back in 2014, the USD Index didn’t correct after reaching its previous high. It corrected after moving above it. The higher of the highs was the March 2009 high, at 89.11.
The higher of the recent highs is at 103.96 right now, so if the analogy to 2014 is to remain intact, the USD Index could now top at close to 104.5 or even 105.
That’s exactly what happened recently. Yesterday, the USD Index moved to 104.96, which is in perfect tune with what I wrote above. Consequently, it seems that we could now see a move to about 103-103.5, after which USD’s rally could continue.
The opposite is likely to take place in the precious metals sector. Gold, silver, and mining stocks are likely to rally in the near term, and then – after topping at higher levels – their decline would continue.
(By Przemyslaw Radomski)