Strong words, aren’t they? And yet, we are not afraid to put them right in the title. The number of factors (and their importance) that point to a nearby reversal and continuation of the major decline is too significant to believe in the bullish case, even though gold, silver, and mining stocks moved higher in the last few days.
We emphasized it many times and we will continue to do so, as it’s very easy to forget about it when things get volatile on a day-to-day basis. The long-term signals are far more important than the short-term ones. In a fight, it’s not always the bigger guy (or gal) that has the advantage, but in certain circumstances it’s obvious that weight matters (please keep this picture in mind while reading about the possible counter-trend upswing in the short run – that’s the little guy while the big guy are the powerful long-term factors). That’s exactly the case with the weight and importance of long-term signals when comparing them to the short-term ones. Surely, we could get a 1-2% upswing, but so what, if a 15% decline is just around the corner? And in particular, if it could take place right away?
The most recent rally in gold and the rest of the PMs was most likely triggered by market’s (most likely incorrect, but understandable) reaction to the increased Brexit tensions. Quoting finance.yahoo.com:
BREXIT: On Thursday, discord over British Prime Minister Theresa May’s plan for Britain’s departure from the European Union next year shook major European stock indexes and the pound. She persuaded a majority in her Cabinet to back an agreement that would allow Britain to stay in a customs union while a trade treaty is negotiated, but the deal faces an uncertain fate in Parliament and two of her Cabinet ministers, including the Brexit minister, resigned in protest.
Gold soared on the Brexit vote, and now when it’s becoming less certain that the Brexit would have a major impact on the UK and if it takes place at all… Gold and the rest of the PMs rallies again? Pointless, right? Indeed, but on a very short-term note, markets viewed this as the increase in global uncertainty and the PMs reacted to it. It is not logical, but emotional and that’s exactly what one can expect from the market in the short run.
It’s important to keep in mind that geopolitical events tend to have only a temporary impact on the gold prices. This will most likely be the case also this time. Investors will realize that nothing really changed, and what changed was actually bearish for gold as the “status quo” option in which the UK stays in the EU became a bit more probable.
Having said that let’s take a look at the charts to check how much changed from the technical point of view.
The USD Index Changes
As far as the USD Index is concerned, nothing changed yesterday, and our previous comments remain up-to-date:
We recently saw an invalidation of the tiny breakout above the medium-term inverse head-and-shoulders pattern, which could trigger some short-term weakness. But, such weakness is not likely to be very significant.
The USD Index is following the reflective pattern, in which the 2018 rally is a reflection of the 2017-2018 decline. The current situation seems to be similar to what happened in early August 2017. Back then we saw a zigzag, so perhaps we’ll see some king of zigzag here as well. Back then the zigzag had higher highs and higher lows, which suggests that it now should have lower highs and lower lows. Then again, the symmetry is not direct as the medium-term highs are and lows are now higher (August 2018 high is higher than the November 2017 high), which could distort the direct zigzag analogy.
All in all, it seems that the USD Index could decline to the November low at most and quite likely not lower than to the 96 level. That’s where we have the neckline of the local inverse head-and-shoulders pattern and the 50% Fibonacci retracement level based on the previous medium-term decline. The downside seems quite limited. This means that the upside for the precious metals sector is likely limited as well.
