Friday’s session was particularly interesting when we compare what happened in gold to what happened in the USD Index.
Gold invalidated its important breakout above $2,000, thus flashing a medium-term sell signal. The USD Index, on the other hand, confirmed its breakout above its mid-2020 high by moving back to it and then rallying once again.
This major difference on the technical level tells us that the key driver behind rallies in both assets is starting to wane. The key driver was, of course, the fear and uncertainty regarding Russia’s invasion of Ukraine. I’ve been writing about both points for many days:
- Geopolitical events have only a temporary impact on gold prices .
- Based on the analogies to how gold performed after previous military interventions (Russia annexing Crimea, the U.S. invading Iraq, the U.S. invading Afghanistan), it was likely that the rally would be a short-term phenomenon that would be followed by a decline. In fact, based on the "oil factor," the situation might be particularly similar to the U.S.'s invasion of Iraq. Back then, mining stocks gave away their war-tension-based gains rather quickly.
What we saw on Friday appears to be an indication that history is rhyming.
Also, please note that if one looks at the correlation between the USD Index and gold (lower part of the chart), high values tend to coincide with tops in gold, especially when the latter is after a short-term rally. The correlation just moved to the level that it reached when gold topped in late 2021, so we have yet another factor pointing to lower gold prices in the coming weeks.
Before moving to the fundamental part of the analysis, I would to like quote what I wrote after gold invalidated its breakout above $2,000 for the first time, as it applies today as well:
"So much for gold’s move above $2,000. Congratulations on avoiding the mania – it was not easy. The volume readings show that many people were caught up in the “inevitable rally” in gold. You, however, kept focused on what’s most important in the medium term, and over this time frame, this approach is likely to prove most beneficial.
"As gold tried to rally to new all-time highs, I sent out an intraday Gold & Silver Trading Alert, and in it, I emphasized the likely temporary nature of this move. I wrote the following:
"Yes, the situation in Ukraine is critical.
"However, the two key drivers of gold price continue to point to lower gold prices, and at the same time we know that geopolitical-event-based rallies don’t last and very likely to be reversed.
"These two key drivers are:
"•real interest rates;
•the USD Index.
"The USD Index is already soaring, and real interest rates are likely to increase as the nominal interest rates are about to increase – and given the recent rally in prices they might increase more than most investors expect them to.
"Consequently, while – given today’s rally – it might seem like there’s no stopping gold, silver, and mining stocks, please keep the above in mind. This rally is likely to be reversed, and when it reverses, junior gold miners are likely to decline in an epic manner, leading to epic profits for those who didn’t succumb the mania during the parabolic upswing."