USD’s optimistic words: implications for Gold

I previously wrote that given the dovish Jackson Hole surprise, the markets could rally briefly and then the decline could start / continue.

“If Powell is more dovish – emphasizing the need to stimulate growth etc. – we might get very short-term rally in gold (and a decline in the USD) that would be followed by declines in gold and a big rally in the USD Index anyway. Why? Because this is what the market is expecting to hear, anyway – attributing 73.5% chance to a September rate cut.”

This is the scenario that was realized. Powell said little, but the subtle hints that he made were taken as a sign that the door to lower rates is open, and markets reacted.

Echoes of 2011: Strength nears its end

And indeed, we saw a very short-term rally. The move was quite emotional, but… if you look at it from the broader point of view, you’ll notice that it was only the mining stock charts where we saw technical changes – and that those changes were still in tune with what happened in 2011.

What we see today are signs that the markets are already moving back down after this short-term rally.

The GDXJ is down, and the USD Index is up, and you can see both on the below chart.

The rising resistance line stopped the GDXJ’s rally, and this might have marked the end of its exceptional rally

At the same time, the USD Index confirmed that the 98 level is a solid base, from which it’s ready to move higher – likely much higher.

My yesterday’s comments on the time aspect of the current outperformance in mining stocks remain up-to-date – perhaps the history has just rhymed:

(…) it’s about the length of the period where mining stocks were “strong” vs. gold and USD index at their 2011 top.

For three weeks – 15 trading days – miners were moving higher despite the move up in the USD Index. That’s how long the irrational strength persisted. This was all erased in a single session, which was then followed by even more declines that erased weeks of gains in a matter of days.

What’s going on right now?

Right now, it’s more difficult to pinpoint the exact day when miners’ ‘strength’ started, as the USD Index is not in a clear uptrend (yet) – it’s moving back and forth with higher short-term lows.

It’s obvious that miners have been strong since Aug. 20, and to a smaller extent they were also strong relative to the USD Index since Aug. 8. Finally, while it’s less clear, it’s also true to say that the GDXJ has been strong since the beginning of the month (precisely: Aug. 5) as that’s when the GDXJ started to rally much more than it made sense given USD’s performance.

Guess what – Aug. 5 was 15 trading days ago.

This means that miners have not broken their link to 2011 – they are in perfect tune with it.

The history doesn’t have to repeat itself to the letter, but it does tend to rhyme. This means that miners can slide right away here, or it might take several more days before they slide. But either way, it looks like the end of this rally is at hand.

I also emphasized that the breakdown in the USD Index is already verified.

Gold futures moved above the rising resistance line yesterday – I mean the one based on intraday lows – and they moved back to it today. Will this breakout hold? In my view, it’s about to be invalidated, just like the move above the 78.6% Fibonacci retracement (just as all the other attempts to move above this retracement were invalidated).

Plus, the resistance line based on the daily closing prices held.

Dollar sentiment turns the corner

Also, I’d like to get back to the following paragraph that I wrote yesterday:

“USD’s comeback after declining to its previous lows also says that we should brace ourselves for a bigger rally in it. After all, the Fed just became dovish, Trump continues to pressure it and… the USD Index still held up well – and gold failed to rally above its resistance line.

It looks like all the positive surprises for the precious metals market are already behind us. The price got all the boosts, and its value is therefore high NOW. Again, it’s high now based on all this – those are not factors pointing to further increases. It’s all already priced in. The same goes for the rate cut.”

It seems that all the negative surprises for the USD are already behind us, and that the sentiment for the USD hit the absolute worst. This means that it’s very likely that things will get better for it. That’s exactly what the fundamentals – including tariffs – suggest.

And when that happens, gold, commodities and mining stock prices are likely to slide.

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