Briefly: In our opinion no speculative positions are currently justified from the risk/reward perspective.
In short, not really, because this signal – even though it’s bearish – is not enough to make the situation very bearish on its own.
As usual, let’s start today’s analysis with the USD Index.
Not much changed from the short-term perspective, as the USD Index simply corrected some of its Friday’s rally and we didn’t see a breakout or breakdown from the flag pattern. Consequently, comments from yesterday remain up-to-date:
The USD Index moved visibly higher on Friday, breaking out of the triangle pattern. The implications are bullish but not strongly bullish, as the pattern started to resemble more of a flag than a triangle. Since the flag pattern was not broken, many traders probably thought that the situation hadn’t changed. This could explain the lack of response in the precious metals market. If we saw a strong breakout and metals didn’t react, then it would definitely be a sign of strength, but at this time, it could be the case that the market participants are still not viewing the dollar’s move as a something real.
The downside is limited in case of a breakdown, and the upside is visibly higher in case of a breakout. If we see a move similar to the one that preceded the recent consolidation, then we could see a move close to the 89 level that would materialize in the first part of December. This scenario seems quite likely also given the resistance line that would be reached (it would simply “fit”) and the cyclical turning point – we are likely to see at least a local top close to it.
We could see a small move lower before the rally starts, though. This means that the above doesn’t invalidate our previous outlook and price targets for the precious metals sector.
The above long-term chart should help in keeping things in perspective. As you can see, the next resistance level is very close – slightly above the 89 level. However, what’s also important is that if the USD Index moves even higher (for instance based on the expectation that the Fed will be hiking interest rates soon), it won’t be likely to move much higher, as the next significant resistance is just below the 90 level and it’s the 38.2% Fibonacci retracement level based on the entire 2002 – 2008 decline. Until the USD Index reaches at least the 89 level, the precious metals market will be likely to move lower based on the dollar’s future strength. However, if USD manages to rally to 89.8 or so and at that time gold is at one of the strong support levels, then we might consider speculative long positions in the precious metals sector. Would this be the final bottom for the precious metals market? It’s too early to say at this time – we will be looking for confirmations in other markets and ratios and report accordingly.