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Suspicious Strength in the Miners: More Signs Emerging


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Just like it was the case on Monday, gold and silver havent done much yesterday either, but we saw some interesting action in the miners they formed a bullish reversal after testing the rising support line. The performance of the USD Index provides us with clues as well. It declined and this should have triggered a move higher in the metals and miners. It didnt. What really happened?

Lets start with the miners.

Gold Miners Short-term Reversal

Gold Bugs Index

Just when it started to appear like the mining stocks are going to break below their January high and below the rising support line, they reversed their course. In mid-February, when gold stocks moved to their previous (early January) high and then moved back up, it was the local bottom and a start of the next quick upswing. The natural question is if we are about to see the same thing once again.

As always, there are no sure bets in any market, but it does appear likely based on the above chart alone. We see the sell signal from the daily Stochastic indicator, but we saw it also many times in the previous weeks, including the mid-February case, and miners moved higher nonetheless. Consequently, it doesnt seem that the daily version of this indicator alone can really be trusted. Naturally, this doesnt change the very important and bearish medium-term implications of the weekly Stochastics.

Theres one very important difference between now and the middle of February that needs to be taken into account and that practically nullifies the bullish implications of the above.

The Hidden Power of the USD Index

US Dollar Index - Cash Settle

The USD Index was rallying when miners moved lower in mid-February and it topped at that time, which triggered a rally in the precious metals sector. Right now, instead of rallying, the USD Index is after a decline and quite likely to form another local bottom soon. This is not what we saw in mid-February its the opposite thereof.

The intraday performance looks like the miners really wanted to move and break lower, but the declining USD Index simply didnt let them do so.

And the USDX itself? It may simply be verifying the breakout above the declining short-term support line that we marked with black. In early February it verified an analogous red line and bottomed right there.

Lets not miss the forest while discussing the trees.

US Dollar Index - Cash Settle

The USD Index is in a medium-term rally and the last couple of months have been a corrective stage of the move. Such corrections are normal in any bigger upswing, and their shape can tell us something about the strength thereof. The fact that the USDX moved higher on average even though it moved sideways from the short-term point of view (forming higher lows and higher highs), attests to the strength of the bulls. Please note that even the Feds recent dovish comments didnt trigger any sizable move lower.

Consequently, the big picture for the USD Index remains bullish, and the short-term picture shows that the USDX may reverse quite soon (the declining short-term support line is at about 95.5). Miners reaction to USDs action also suggests that the precious metals market doesnt really want to move higher anymore, but that its instead ready to resume its medium-term downtrend.

The Many Perspectives of the Gold-USD Correlation

We have recently received one subscribers input in the form of a shared article link that discusses the gold-USD correlation. The article aimed to say that gold is bucking is long-term correlation to the dollar and that therefore the gold-dollar link is breaking down as the title boldly claimed. Indeed, the fact is that both gold and USD Index are now higher than they were more than three months ago. In the part of implications for gold, the article summarizes that although its generally assumed that this is bullish for gold going forward, golds gains since that occurrence werent much better than random.

We would like to build on this contribution and provide our perspective. Well start by sharing a peek into our in-house developed, proprietary Correlation Matrix. Lets take a look at several timeframes that explore the gold-USD link as it stands on Feb 27th, 2019:

Correlation Matrix

There are several aspects to reading this tool properly. First, its that the shorter the perspective, the more varied readings we get. This concerns mainly the 10-day perspective where the values range of mildly negative to strongly negative can change significantly over a few days. This is also valid for the 30-day perspective to a certain extent.

Moving to the medium-term, both the 90-day and 250-day windows provide a more stable panel of readings that we can base our actions on more confidently. The negative value of the gold-USD correlation increases over time, which in other words means that a breakout in USD Index gets caught up to by such a decline in gold that corresponds more closely to the USD breakout over time. Even more briefly said, gold tends to catch up to the USD Index movements more closely over time. This is further supported by the gold-USD effect carryover into the long-term period.

Its also important to note that the correlation coefficient values evolve over time. It depends on the context of market situation both within gold and USD. Its however most relevant to judge the current situation through the optics of the current strength and direction of the correlation coefficient and look for support to our decisions in the medium-term universe as that is both stable and relevant enough to taking calculated decisions. It still says that gold is likely to catch up to the downside (and do so more as time passes by) to strengthening USD.

In other words, if it wasnt for the medium-term uptrend in the USD Index, the implications of the short-term correlation values might be viewed as neutral for gold, but in light of the big USD move that appear to be just around the corner, the short-term link is not as important as the medium-term one. And the latter suggest that gold is likely to catch up with the USDX, by moving substantially lower.

Summary

We have just shown you why it wouldn't be wise to take yesterday's show of strength in the miners at face value. The important distinction between their situation today and a similar one from the middle of February is the state of the USD Index. The USD Index remains in a medium-term uptrend while its short-term examination shows that it may actually reverse higher pretty soon. It seems that the precious metals market doesn't really want to move higher in earnest and is instead waiting for USD-induced cues as a catalyst for its next move. That is, for its medium-term decline resumption.

Naturally, the above is up-to-date at the moment of publishing it and the situation may and is likely to change in the future. If youd like to receive follow-ups to the above analysis (including the intraday ones, when things get hot), we invite you subscribe to our Gold & Silver Trading Alerts today.

Thank you.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager


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About the author


Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same. 

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation. 

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions. 

High quality of analytical tools available at http://www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital. 

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential. 

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society. He also holds a master's degree in Finance and Banking, and is currently writing his thesis after having finished his PhD studies in Economics. 

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