Be Realistic

We’ve had a hell of a rally in Gold, Silver and miners, so I wanted to post an update without having to be constrained to Twitter’s character limits.

 

Let’s start with the Dollar, as that is what everyone has had their eyes on and has no doubt, been dictating all moves in the markets for some time now. After the Fed announcement where they raised rates 75bps (as expected), DXY attempted to rally back to highs near 114, but fell short. As I pointed out on twitter and in my previous article on Nov 6, the canary in the coal mine here for DXY was the failure at RSI 60 as price peaked at a lower high. Sure enough, within a few days we had a bearish cross over on the moving averages and the trendline break was soon to follow. DXY attempted to regain the trendline on Wed the 9^th, and to hold the RSI 40 level that it has been above since June 2021, but it closed below the trendline and then began cascading down, while also losing that 40 RSI level.

 

Weaker than expected CPI print didn’t help and today we got it again with a weaker than expected PPI print. Rather than a waterfall though, today DXY is fighting to hold at the 38% Fib retracement from the May 2021 lows to the Sept 2022 highs. We are now short term oversold with a deviation from the moving averages that is rarely seen, and when it IS seen, it typically means a rally back to meet them is coming soon.  Now it should be noted, that “meeting” the moving averages, which currently sit between about 109.25 and 110.25 can come in different forms. We could have a sharp rally in the next few days up about 3 points that tests those moving averages, OR we could simply consolidate for a bit and wait for them to catch up. But any way you cut it, the decline here looks like it’s, at the very least, ready to pause.

Looking over at the Euro for a mirror image of DXY confirms the same things. After a break of major support at around 105, an area that was a bottom from 2015-2017 and was tested 3 times and held, Euro broke below it falling to 96 in Sept. Today, we are retesting that major support level (now resistance level) at 105, which coincidentally, is also where the 200-day moving average sits. We are now starting to get some push back on that rally here, after a MASSIVE move higher. We have a deviation in the short-term moving averages in the Euro which typically indicates a pause, as well as a deviation in price from those moving averages that confirms this. Additionally, we have the highest RSI print on the daily chart in almost 2 years and the highest print on MACD in 2.5 years. We also have a massive divergence in MACD between its signal line and moving average, which again, has typically indicated a pause in the past.

Jumping to the weekly chart on Euro we see another concern here in the short term. RSI is nearing that all important level of 60, a level it typically peaks at during rallies in bear markets. Add that to the major resistance we’re at and faltering on a news event at the 200-day moving average and we are starting to paint a picture that is indicating a pause here. Again, a “pause” could mean a sharp pullback then back and forth consolidation for an extended period (like it did from 2015-2017), a tight consolidation while extended indicators “catch” up and overbought levels back down (like it did as it rallied all during 2020 after a big move higher from COVID lows), OR it could mean a bear market rally high, with eventual new lows to follow.

As everyone has already mentioned, this drop in DXY has been one for the history books but HASN’T been unique. We saw a similar drop after a similar rally from 2014-2015. A sharp move down after a lower high in April 2015 saw the downside catch right at the red moving average which, like today, also sat near the 38% Fib retrace from the low of its nearly 1 year move higher. What came next was a sharp rally higher that failed at a lower high with RSI topping at the 60 level on the weekly chart. It then consolidated for 6 months, eventually retesting highs before falling back to the consolidation lows again. It was not the high of a bull market, we broke to new highs a year and a half later. It was not the beginning of a bear market either, those lows near 93 held for over 2 years. That 7-point initial loss from highs at 100, when it finally did break down, did so after hitting new highs and only broke down an additional 5 points. The sudden drop from highs that came in just 4 weeks was the majority of the move lower for the next couple of years.

I mention this because it is remarkably similar from a technical standpoint to where we are today. I wouldn’t be surprised to see dollar bulls and dollar bears BOTH disappointed by the next few months of action in DXY. If history rhymed here, we could see a sharp rally up to around the 109-110 area on DXY (which would likely coincide with ~1-1.01 on the Euro) before trending sideways for a frustratingly long time.

 

It’s worth noting the correlation with Gold and DXY during this time as well. It may SEEM like the 2014-2015 period was not heavily correlated to gold vs today but there were a few interesting points that I think are similar. We can plot the big notable moves in gold over the last 2 years on the DXY chart and it makes perfect sense. I did so on the chart below. Low in DXY Aug 2020 coincided with highs in gold and silver. Lower low in DXY Jan 2021 saw a retest of silver at the $30 highs, but only $1960 on gold, then a fast reversal in both from those levels. (In hindsight, that was one of the first warning signs, failure to make a higher high with a lower low in DXY).

After a retest of Jan lows in June 2021, DXY exploded higher after the June FOMC meeting where the Fed first began planting the seed of “taper” in the markets mind, and ultimately the first steps in this tightening cycle. Proportionately, the move down in gold and miners after this was excessive vs DXY’s gains and another warning sign for precious metal bulls. (That was the warning sign I took that made me bearish on gold, citing similarities here with 2013 and advising caution.) A few months later, DXY began moving to new highs and gold, silver and miners began dropping to new lows. Now, as DXY looks to have peaked with a big move down, we are seeing a HUGE rally in metals and miners (and everything, really).

 

In the 2014-2015 rally, DXY peaked at 100 in March 2015. At the same time Gold was 1140. DXY dropped sharply and gold took that cue to rally over $150 to 1300 in just 3 weeks. 9 months later, DXY is retesting highs at 100 and gold is falling to new lows by another $100/oz. That was the bear market low for gold. Despite the fact that DXY made a higher high 1 year later, gold rallied strongly for the first 9 months of 2016 as DXY was weak and did not break to new lows while the dollar hit higher highs. In fact, comparably, it gave back very little in relation to new highs in DXY. The next 2 years is what is interesting. DXY hit lower lows in early 2018 but gold did not hit higher highs. As DXY rallied back to near the highs at 100 from 2015, gold rallied too, seemingly uncaring about what the dollar was doing at that point. As DXY retested 100, the 2015 high in mid-2020, Gold tested 1750, a 35% gain from the 1300 level where it was in 2015 when DXY hit 100 the first time.

 

Now that we’re on the subject of Gold, lets take a look and then circle back to the dollar and what this could mean for gold going forward if history does indeed rhyme with that 2014-2015 period.

 

We have a lot of similarities with Gold as we do with the Euro. We rallied $170, or about 10% since the lows 2 days after the Nov FOMC. That gain came in just 9 trading days. Currently, we are testing just below the important 1800 level, which also near where the 200-day moving avg sits at about 1765, and today, we’re starting to see gold struggle. This area between 1760-1800 is a big floor that held gold prices for most of 2020-2022 with a couple exceptions, until we broke down to new lows this year. That “floor” of support is now a “ceiling” of resistance and bears seem to be pushing back, with bulls getting exhausted in the short-term here. Much like the Euro, (and inverse to the DXY), we are seeing a very large divergence in price from the short-term moving averages, and a large divergence between the moving averages themselves. Again, same as the Euro, this typically, at the very LEAST, indicates a pause is coming while either price declines to “meet” them or the moving averages increase to meet price while it consolidates. We also have the highest RSI and MACD levels in 9 months, with another big divergence in MACD signal line vs it’s moving average.

Silver is similar, with the exception being it has exceeded it’s 200 day moving average. It’s testing its former “floor” of 22 and seeing a big pushback today after initially rallying on a weaker than expected PPI number. Again, RSI is at the highest level in 9 months, as is MACD. MACD however, has seen this level only twice before in the last 2 years. Both instances saw a sharp drop follow. (It’s also worth noting, after outperforming gold most days since it began rallying, we are seeing a SIGNIFICANT underperformance in silver today, down over 2% while gold is essentially flat. 

On the note of miners, you may begin seeing a theme here. GDX is testing near the 29 level “floor” it held all of last year. Again, testing the 200-day moving average and struggling. Again, seeing a huge divergence in price from short-term moving averages, and a huge divergence between those moving averages themselves. RSI turning down after highest level in 9 months, MACD at areas it has failed at before and has only exceeded once in 2 years. Additionally, we have a big gap at 27 that is begging to be filled, and strong support (former resistance) near the 26-25 level that I think needs to be tested. I could say the same points for GDXJ but will instead just post the chart. Everything is the same for both. Same warnings we are seeing in the Euro as well and the inverse signs we’re seeing in DXY.

Now here is my major concern, and here’s where we take it back to the DXY rally from 2014-2015.

 

I know the perma-bulls have been calling for “The FINAL low in gold” for 2 years now and been completely wrong so far, all seem to think this is finally it. This may come as a surprise to some of you (sarcasm), but I disagree and think they are probably wrong yet again.

 

I think what we are seeing here in DXY is going to rhyme a lot with the 2014-2015 rally, and what happened after as it began to break the uptrend (by that I mean a consolidation, no new highs for the bulls, no bear market decline to appease the bears. Just boring back and forth). Equally, I think gold could act similarly to what it did then as well.

 

As I mentioned that breakdown in DXY in April 2015 sparked a big, straight up rally in gold. After consolidating at around 1140 for a few months, we rocketed up 150 to 1300 as DXY broke down. Majority of that move came in 12 days (We’re up 170 and it’s been 9 days so far this time). We saw a massive divergence between the 2 short-term moving averages, a huge divergence in price and those moving averages and the highest RSI and MACD levels in 6 months. A lot of this move higher in gold is identical to the rally in early 2015. Additionally, the catalyst for the move higher (a break down after a long and strong uptrend in DXY) is identical to back then.

Now again, if history were to rhyme, what this may mean is we are not done declining in gold, but we may be very close in both price and time. In terms of time, the final low in gold came 1 year later after the DXY broke its uptrend. In terms of price, it was about 10% lower than its previous low before the rally to 1300 started at 1140. So that COULD indicate a final low in gold coming Fall-Winter 2023, with price bottoming near 1450 (10% below previous low at 1620).

 

Some of you might remember that 1400ish was a target of mine for a final low for quite a while. I elaborated on many reasons why in my article “Cost” from July 2022.  For the “too long, didn’t read” crowd, the answer is the name of the article. I am looking for price and cost to meet at an area that makes profit margins razor thin for producers, which historically, (like in the 2015 low), was an incredible time to buy miners with multi bagger returns in the years that followed. I HAD been expecting, as gold is a volatile market, for price to decrease at a speed that was faster than the increase in the cost of major producers, but that hasn’t been the case so far. (It’s not easy to hit 2 moving targets with one bullet). But the idea of it is sound, and playing out pretty accurately (so far). ABX and NEM both just reported AISC at about 1275/oz last quarter, and with inflation still higher than 0, it continues to increase. A decline in price within around a 12 month period into the 1400 range, should certainly see costs within the 1300 range, even if they increase from here at a “slower rate” than they have been.

 

Interestingly, this long-term chart on gold could support that view, as 1400 was major resistance all throughout the bear market from 2013-2018, and 1440 was the 2020 Covid crash low. This area around 1450 is also a confluence of Fib levels. But perhaps most important is a major uptrend line that began at the 2006 lows, connecting the 2008 crash lows, 2015 bear market bottom and the 2018 low. If we were to extend this out about 1 year from now, it intersects that area right around 1450 in late 2023.

Obviously, it is a much better investment to buy producers when profit margins are 100/oz on their way to 500/oz, then to buy them when profit margins 500/oz HOPING that a moonshot up thousands of dollars in the gold price will give you profit margins of 1500/oz (and the triple on your investment that SHOULD logically follow that). Unfortunately, that’s not what most people do, as we can see few were buying miners into 2015 as profit margins dropped to about 50/oz, but plenty were talking about “to the moon” in Aug 2020 after gold had already rallied 50% in the last 6 months and profit margins for major miners we at nearly 1000/oz.

 

Now down to brass tacks. As always, this is NOT financial advice, always do your own research and all decisions you make on investments are your own, I can simply tell you what I am doing and what I WOULD do in certain situations.

 

If you were like me, and buying when I outlined that “the boxes are being checked for a rally” on Oct 25^th, this is a good place to take profits, which is being confirmed by my model as a “logical profit taking opportunity” and that’s exactly what I am doing this morning.  Jan calls on SLV, GDX and GDXJ (All in or near the money at the time of purchase) have doubled since I said this on Oct 25^th, and all 3 have more than tripled since the Friday Nov 4^th lows after FOMC.  To me, it seems obvious and logical to take this opportunity to cash out on a little more than half of these calls. This takes my initial cost off the table and a little bit of profit. The remaining calls are all on “the houses money.” If we continue higher, I profit more. If we take a sharp, quick decline, it is all still profit, just less of it then before. I can then decide if the pullback is acting in a way that warrants adding back more of these calls or taking the remaining profit off the table, but from here on out, it’s a ZERO risk position.  (I should mention, as I talked about very similar setups that were screaming for a pause in gold and miners that are identical in the Euro right now, that I am also shorting the Euro here).

 

Note, I’m NOT selling long term investment positions. What I’m selling is from the cash portion of my gold portfolio that I have been using for hedging for the last year and a half while we declined and adding to those long-term positions with the profits from those hedges. Then, using that cash position as leverage when we identify incoming rallies by buying calls on the ETFs. This method has SIGNIFICANTLY mitigated my downside risk on my portfolio during the declines and given me the liquidity to add to my positions at great opportunities, as well as emphasizing the upside when we are gearing up for a rally and continued to build yet a bigger cash position for those opportunities and for future hedges if and when we begin acting weak again. I am not suggesting selling long term investments, especially if you believe in them.

 

Whether we pullback in a way that looks like we want to buy again, or whether this rally is done for now will entirely depend on what I said in that Oct 25^th tweet, “the reaction after a big move.” We just had a HUGE move. Up 20% on GDX since that call. If this rally has another leg to run higher left in it, then I want to see buyers coming in on pullbacks. They can be sharp and decline quite a lot, but I want to see those moves get supported if they occur. This would mean I want to see gold hold 1700 min, Silver ~20/oz, GDX 25-26 and GDXJ 30-31. We will likely see some gyrations beyond those levels on a few of them if we pullback strongly from here, but we will have to analyze that as it comes and make the decision then as to whether this still looks good or not. I will certainly update as to what I am doing when that determination is made.

 

In conclusion, be realistic. I know the “to the moon” crowd is out again, proudly exclaiming their victory in calling this low (that makes their records 1 in 423 by my count) and predicting 3,000+ for gold in the coming months. It is certainly possible, I’m not gonna say it WON’T happen, but I am also not gonna BET my positions on it. I’m buying and selling on what is LOGICAL and PROBABLE. I’m not treating the market like a Powerball ticket.  Since my call on the 25^th, you got +8.5% on gold, +15% on silver, and +18% on GDX and GDXJ. Since the lows after FOMC, it’s +10% on gold, +20% on silver and over 25% on GDX & GDXJ.  All in 3 weeks if you were buying on my signals! We’re making a profit, and that is good!

Now take some.   

-Jonathan Mergott