The U.S. Dollar Index confirmed the breakout above March highs, silver outperformed temporarily, miners underperformed and… Despite this bearish combination, precious metals didn’t decline. Why wasn’t that the case? Will they still slide or will they rally from here? Let’s take a closer look at the charts and find out.
In yesterday’s alert, we wrote the following:
We have indeed seen the confirmation of the breakout – the USD closed above the March highs for the third consecutive day and the implications are bullish for the USD and bearish for precious metals. However, the USD also reversed on an intra-day basis, indicating a good possibility for seeing lower prices later this week. Based on the confirmation of the breakout, the move lower is not likely to be significant though. It will be interesting to see how metals and miners perform in light of a move lower in the USD. So far the USD Index declined a bit (to 98.5) and gold didn’t rally – in fact, it moved about $2 lower.
All charts courtesy of Stockcharts.com
The implications are bullish for the USD as the next strong resistance is very close to the 100 level. Yesterday’s performance of precious metals was weak – gold, silver and miners declined despite a move lower in the USD in terms of closing prices. What’s even more important, the intra-day decline in the USD didn’t trigger a rally in PMs. This suggests that precious metals and mining stocks may be preparing for a move lower, not higher in the coming days and weeks.
The rally to 100 or so is in tune with the likely medium-term price path based on the analogy to 1997 – 1999. Back in 1999, The USD’s rally didn’t end or pause for longer until the dollar moved above the rising red line. After this breakout, the USD Index rallied some more and then declined, moving back below the line by more or less as much as it had rallied above it earlier. Applying this analogy to the current situation provides us with the 100 level (approximately) as the short-term target and then 97.50 – 98 as the target for the subsequent correction. This provides us with bearish implications for the precious metals sector.