Forex Signals For Gold Investors

The USD Index is one of the main drivers of the gold price and it’s quite obvious – no asset can move independently from the currency that it’s priced in. If gold’s value (compared to the value of other things) doesn’t change, then if the value of the USD declines, the price of gold in terms of the USD has to move higher. It also works the other way around. Thanks to this mechanism, gold’s price would remain stable in terms of other currencies if the only factor that changed was the value of the USD. Naturally, it’s never the case that the USD is the only factor, but nonetheless it’s obvious that the price of gold and the value of the U.S. dollar have to move – on average – in opposite directions.

The proxy that we’re usually using in the case of the value of the U.S. dollar is the USD Index – the weighted average of USD’s exchange rates. The EUR/USD exchange rate has the greatest weight (over 50%) and the second biggest component is the exchange rate against the Japanese yen.

So, when predicting where gold is currently heading, it’s imperative to check what’s in store for the USD Index. While proceeding with the latter, it’s usually a good idea to check what’s happening to the EUR/USD exchange rate. That’s what we’re going to do in the following part of today’s article.

In short, the situation in the currency sector suggests that we’ll likely see a corrective short-term downswing in the USD Index. This is theoretically bullish for the precious metals sector, but the situation may not be as simple here.

Let’s start with the short-term charts.

USD’s Reversal

The USD Index rallied significantly in the second half of April and it broke through several important resistance levels. The key resistance that you can see on the above chart is the declining blue line. It’s noteworthy that the USDX initially moved lower immediately after breaking above it and it successfully tested this line as support. The rally then continued and we saw several closes above it, including the weekly one. The medium-term outlook improved greatly, but we wouldn’t rule out another verification of the mentioned blue line in the following weeks.

There are three things that make a short-term move lower likely – the RSI very close to the 70 level, the fact that USDX tried to break above the 2017 low, the January 2018 low and the 50% Fibonacci retracement, and failed, and the shape of the Friday’s session. Namely, we saw a clear reversal.

The EUR/USD moved higher right at its triangle-apex-based reversal, which also suggests that we’ll see a break in the current decline.

But, does it have to start right away? Not necessarily. The USD Index could form another reversal as that’s what it used to do quite a few times in the past. For instance, the early December 2016 reversal was not the final one – the USDX topped two days later. The early April 2016 reversal was also followed by 2 (in terms of daily closing prices) or 3 (in intraday terms) days of higher prices. In such case, we could even see a quick move to the 61.8% Fibonacci retracement, which is approximately at the 2018 high and November and October 2017 lows.

Plus, there were several reversals in December 2016 and October/November 2017 before the USD finally declined.

Consequently, it seems that there will be a short-term corrective upswing in the EUR/USD, which corresponds to a temporary move lower in the USD Index, which in turn could correspond to a corrective upswing in gold, silver and gold and silver stocks. Still, it is far from certain that it would happen right away. It seems quite likely that this week will see a reversal, but it’s not clear if it happens today or tomorrow.

Finally, let’s take a look at the big USDX picture.

USD Megaphone Is Over

About two months ago, on February 28^th, 2018, we wrote about the megaphone pattern in the USD Index. Namely, we wrote that it was being invalidated, but that the move higher that we saw at that time was not yet to be trusted:

The implications are already bullish, but they will be much more bullish when we also see a breakout above the previous February high and at least two weekly closes above it. Since the previous move above this line was followed by new lows in the USD (in the following week), we are still a bit skeptical toward yesterday’s move. Still, overall, it was a bullish development and based on the short-term breakouts that we discussed earlier, this invalidation has a much bigger chance of being a true one.

On the long-term chart you can see why we were very skeptical toward the possible long-term bearish implications of the previous breakdown below the mentioned declining support line. It’s because a much more important support was reached, and it held. Precisely, there was only a tiny breakdown below the combination of support levels and it was invalidated immediately.

The key mentioned support levels that held are the 2009 and 2010 tops along with 2 major retracements based on major extremes (marked with red and black on the above chart). The above combination is much stronger than the previously discussed declining line. The reason is that the mid-2015 and 2016 lows are less prominent than the 2009 and 2010 tops and the line based on the former is not strengthened by key Fibonacci retracements, while the latter is.

Consequently, the invalidation of breakdowns below the key, long-term support levels is far more important than the declining shorter-term line.

The above has been the reason for one to expect the move back above the declining resistance line. Yesterday’s session proved that the above expectation was correct. Moreover, thanks to the simultaneous breakout above the declining short-term resistance lines, the odds are that rallies will follow.

Also, the above chart explains the title of this section. The mentioned declining resistance line based on the 2015 and 2016 lows, along with the rising dashed line based on the 2015 and 2017 tops create an expanding triangle pattern that is sometimes referred to as a megaphone pattern.

This time, we can say with confidence that the megaphone pattern is no longer a threat to the bullish case for the USD in the medium term. The lower border of the pattern is currently at 90, while we just saw a weekly close over 1.3 index point higher. The invalidation of the breakdown below the declining support line is clearly visible from the long-term perspective. It doesn’t seem that there is a need for an additional confirmation before saying that the megaphone formation is no longer in place.

The implications for the USD Index are bullish for the medium term, but we could see some short-term weakness before the rally continues. Based on the specific signs that we saw, especially in the silver market, this doesn’t have to translate into higher precious metals values in the near term.

Summary

Summing up, the situation in the USD Index and the Euro Index suggests that we’ll see a correction, but the correction may start a bit later than some may think based on Friday’s USD reversal. It’s likely that we’ll see a corrective upswing in the PM sector shortly based on the cyclical turning points and the apex-based-reversal in the euro, but it doesn’t have to happen right away and it’s not likely to change the bigger trend. The medium-term outlook for the precious metals sector remains down.

As a reminder, we are not making the above bearish comments on gold because we have anything against investing in gold or silver, or those who aim to profit on the very long-term upswing in the precious metals sector. Conversely, we want our clients to make the most of the upcoming rally in the precious metals market. The way, however, to make the most of any rally is to enter the market close to the bottom and it doesn’t seem that we have seen the final bottom so far.

We are not gold promoters who want to make investors think that gold and silver can only go up. Such an approach might benefit those who sell bullion for a living, but it’s not the approach that benefits the investors. Since we work for investors, and their profits and happiness are our primary goal, we will be bearish if that’s what we think is the correct outlook – regardless of what gold promoters and sellers would want you to think.

Please note that the above is based on the data that was available when this essay was published, and we might change our views on the market in the following weeks. In order to stay updated on our thoughts regarding the precious metals market and our free articles we suggest that you sign up to our gold newsletter today – it’s free and if you don’t like it, you can unsubscribe anytime.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits - Gold Investment

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All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.