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Technical look at Gold, USD, 10year

Bijgewerkt: apr 11

Please read the Disclaimer before reading this article.


In this article, I want to have a quick technical look at some key markets.

No fundamentals in this article (or maybe a bit), just technicals.


US Dollar


I’ve been (big picture) bearish on the USD and was watching it closely the last few weeks. I wrote in previous articles and on twitter that the RSI shouldn’t get overbought. If it did, we should start to lean to the bullish side. We came awfully close but in my opinion, I wouldn’t say the RSI got overbought. The vertical red lines indicate previous times when the RSI of the USD became overbought. You can see that the rally was only beginning in those instances.


If the dollar can still get overbought in the next few days/weeks, the intermediate term picture changes. The following chart shows how relative growth expectations are an important driver of the USD. (Remember the dollar smile, I wrote about it here.)

The current situation looks a lot like early 2018 from this point of view.

The only difference is the price action. The USD signaled an overbought signal at the end of April 2018, after which the USD moved much higher. Thus, keep a close eye on the USD, it shouldn’t get overbought, if it does, be ready.

Source: Martin Enlund, Dollar-o-meter, There's some 2018 in the air


To say that the only difference is the price action is a bit too quick. There is another big difference. As I have stated on several occasions, it is my view that the USD is in a multi-year down cycle.

I won’t go into all the fundamental reasons for it in this article. As you may already now, I’m not a big fan of narratives, I prefer to use models and leading indicators.

Below you can see my big picture leading indicator for the USD.

As you can see, it’s rather negative. (that’s probably an understatement looking at the fact that the leading indicator goes vertically down…)


The overbought RSI signals of July 2014, October 2016, and April 2018, all occurred when the model was showing we should expect dollar strength. Now it is signaling we should expect extreme weakness in the coming quarters and years.

So even when we would get an overbought RSI and the USD moves higher because of relative growth expectations, this will not change my big picture view on the USD.

(Please note that I’m not expecting the USD to ‘collapse’. The model might be going straight down, but I’m not at all expecting that the USD will go vertically down as well. What I’m expecting is that for the next few years, the trend in the USD will be structurally lower.)


Interest rates


Interest rates have risen sharply. On January 6th, I warned about this when I wrote: “10 year yields only broke out today. Gold bulls need to be careful because in the past, when they broke out, they moved quickly.”


The weekly RSI for the 10 year yield is now extremely overbought. The last two times it was this overbought was in May 1987 and in May 1994. (see vertical red lines on following chart)


If we take a closer look at these two instances, we can see that a multi week consolidation followed. However, the move higher in rates was not over. After this consolidation, rates went higher. This fits with my fundamental view that both growth and inflation will come in extremely strong over the next few months. I wrote about it here.

I thus think that we can consolidate for some time, but rates will go higher afterwards.


Gold

Gold bulls have had a very tough time. Once the all-important 1780 level failed, gold moved sharply lower.


The chart speaks for itself. I can’t stress enough how important this level was.

If you want to know why, please see this thread on twitter: Link


Gold mining shares

Gold mining shares are showing some very interesting technical patterns.

On November 2nd 2020, I wrote: “For GDX, I have drawn its horizontal resistance level and for the HUI, I have drawn the slightly decreasing resistance level.

If GDXJ has a slightly decreasing resistance level, and not the horizontal one that we have been analyzing up until now, the target would be 46.”


(The chart below is from 4 months ago.)


Now, 4 months later, we have reached these targets.

The following charts show GDX. As you can see, it perfectly back-tested its horizontal support level which was former resistance.


Next we have GDXJ. It perfectly back-tested its slightly decreasing former resistance level.


Same for HUI…


So gold failed, but the mining shares are still holding up. What’s going on?

Well, I don’t really care. I’ll just get back in when gold gets back above 1780. This will indicate that it was a false breakdown. I don’t mind missing the first 10-20% move in the mining shares. Two reasons for this: 1) I can still ride the rest of the move with much higher conviction, and 2) there are a lot of other assets that are performing extremely well and in which I currently have more interest. (For those interested, I’m long FCX)


Finally, I noticed something interesting on the chart of GDX. After GDX broke out of its multi-year base in April last year, it formed a head and shoulders pattern on the breakout level.

This pattern failed and we rose sharply.


You could argue that we are now building a similar pattern on a much bigger scale.

What if yields pause here and both gold and the mining shares can see a decent rally. After this, wen yields start to rise again, gold will correct and GDX will move lower to its support zone. At that time, it will look like a huge head and shoulders top on a multi-year support level. That might be the perfect time to go long.

(Please note that this is just pure speculation but I think that it’s an interesting pattern that could develop if interest rates can take a breather.)


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