Gold Price Forecast - Bearish Based i.a. On USD’s Breakout

In my previous analyses, I emphasized that gold’s strength is most likely a momentary one, especially if we consider the USDX. Attesting to that are the invalidated gold breakout and today’s U.S. currency action.

Let’s begin with the latter.

Looking at the index from a very short-term perspective (the chart above is based on 4-hour candlesticks), it is evident that the USD Index just broke above its short-term resistance line and verified the breakout. The verification took the form of a quick move back to the previously broken line and a subsequent sharp upswing.

This is the final short-term confirmation that the USDX can potentially move higher.

Predicated on the strong negative correlations between gold and the USDX (second row in the table below), the above will most likely lead to lower gold prices.

Correlation does not imply causation. However, in the link between gold and USDX, it’s pretty straightforward that the U.S. currency’s strength affects the gold price, not the other way around. After all, gold is priced in U.S. dollars, at least in the current monetary system.

The small breakout in gold (above the declining resistance line) was invalidated, which means that the yellow metal price will most likely go lower.

While breakouts and breakdowns require confirmations to be necessary, invalidations don’t. Therefore, what happened in gold is already bearish in the near future.

Silver is also moving lower in today’s pre-market trading. While these moves are not huge yet, the decline is likely to accelerate based on the following two reasons:

1. The breakdown below the rising medium-term support line was already confirmed.

2. A considerable amount of time has already passed, and the flag-shaped consolidation that started in late September might already be over.

All in all, it seems that the outlook for the precious metals market remains bearish.

Summary

The days of USDX trading below its declining resistance line appear to be over, and that won't leave the precious metals sector unmoved. After gold broke below its medium-term rising support line, and it verified this breakdown.

The following days are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months. But what’s profitable is rarely the thing that feels good initially. As silver often moves in close relation to the yellow metal, forecasting gold’s rally without a bigger decline first is thus likely to be misleading. The times when gold is lastingly trading well above the 2011 highs are coming, but they are unlikely to be seen without being preceded by a sharp drop first.

Naturally, the above is up-to-date at the moment of publishing and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis, we invite you to sign up to our gold newsletter. You’ll receive our articles for free and if you don’t like them, you can unsubscribe in just a few seconds. Sign up today.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits - Effective Investments through Diligence and Care

* * * * *

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 subject to change without notice. Opinions and analyses are 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 deemed 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.