Gold and Silver Going Up? The Dollar Could Be Turning
Central banks around the world are competing in a “race to the bottom” to lower interest rates in anticipation of slowing global growth.
That’s why European (ECB) and Australian monetary authorities indicated their openness to additional Quantitative Easing and lowering interest rates in their respective countries last week.
No one wants to be the one with the strong currency going forward.
The first currency to blink in this “race” was the US dollar. The US Dollar Index (USDI) suffered what, in hindsight, we could view as a decisive key reversal price action. Whether this turns out to be a death blow for the US dollar, or just a temporary setback, it appears the dollar’s highest price levels have been established for the rest of the summer.
We can see this in the weekly USDI chart. There’s lots of overhead resistance in USDI right now:
Every time the dollar has tried to rise in recent times, the sellers assumed control by the end of the week once again. We know this because USDI has closed at or near its lows every time it’s tried to rally.
Moreover, there appears to be a double top forming in USDI. If that’s the case, then it would represent a major turn in the dollar that would have far-ranging effects for months and years to come.
Now of course there’s still lots of work to be done before we can say there’s truly a double top in place (and a trend change), but the current price action is suggestive that we’re in the very early stages of something big.
Let’s look at the EURUSD (the Euro against the dollar) monthly chart to get some ideas.
As we can see, this pair has formed a very large, very long term descending triangle. That’s very bearish, of course.
But in the last month, EURUSD has definitely poked its head up in defiance of the most recent multi-month downtrend. (This monthly bar has yet to complete, but we’re nearly there.)
Now it could be a head fake before the price drops again, or perhaps EURUSD will go into a sideways trading range for the next several weeks. However, we haven’t seen aggressive price action like this in EURUSD for many, many months.
GBPUSD is showing something similar on its monthly chart. We might be looking at a bullish key reversal in this pair.
We need to wait until the end of the month, but right now GBPUSD is looking like it wants to make a significant reversal. What adds weight to the potential move is that it’s happening at a major support level where GBPUSD has turned around before.
This suggests bullishness or at least a sideways trading range in place of GBPUSD’s earlier bearish downtrend.
The dollar is also looking weak against another key currency …
It’s my favorite FX pair right now, as readers of these reports will be well aware!
USDJPY (the dollar against the Japanese yen) is the short trade I like the most. That’s based on numerous bearish price patterns established several years ago and which USDJPY has been unable to overcome.
That’s why I’ve been steadfast in my analysis (and trade suggestions) in this pair since late April. I’ll talk more about those trades in just a moment. First let’s look at USDJPY at the monthly and then weekly level:
On the monthly chart, we see a double top followed by a symmetrical triangle.
Due to the bearishness of the double top, I expect the triangle to be broken on the downside and parity (100 yen to the dollar) as the longer term target here.
As for the weekly chart, there’s a head and shoulders pattern with a double top making up the head.
Then a descending triangle has defined the slow descent since. Lower highs each time is very bearish, of course.
On this chart the first target is 104 and after that I expect to see 100.
So how am I taking advantage of this?
On April 21, I sent out my trade set-up and analysis in USDJPY and indicated I was getting short at 111.61. I am still short USDJPY and last Friday this pair closed at 107.31.
So I’m currently sitting on a 430 pip gain in this pair, although I’m also short USDJPY at other levels too. I don’t intend to exit any of these short positions until we see at least 104.
Is the U.S. dollar looking weak against everything?
No. When we review AUDUSD (the Australian dollar against its U.S. counterpart) there’s no reversal apparent, unlike EURUSD and GBPUSD.
AUD is very weak. Although the price is sitting at a significant 0.58 support level, I don’t see this support lasting. After all, the major pattern on this monthly chart is the bearish head and shoulders that was followed by a smaller double top.
AUDUSD is another excellent short to consider and try shorting any rally here if it materializes. (And unlike USDJPY and possible future trades in EURUSD and GBPUSD, it’s not a bet on a weaker dollar! It’s a bet on a weaker AUD.)
Now let’s focus on even bigger news.
After USDJPY, the other pair I’ve been watching with utmost attention is XAUUSD (spot gold) and the precious metals in general.
Before we look at gold in detail, it’s essential to review the price action in XAGUSD (spot silver).
As I’ve stated in previous commentaries, XAGUSD exhibits some very negative price action within the descending triangle we see here on the monthly chart:
Normally I like to see a descending triangle at the top of a rally – that’s when it’s a reliable reversal pattern.
But this triangle is at the bottom and it’s much less reliable as a reversal indicator. While there’s been some support at the $14 level, we need to wait at see if XAGUSD can close above the trendline of that triangle.
If and when that trendline is broken, we would likely see a pullback to support before a real bull trend can emerge here. So although XAGUSD is showing a bit of life right now, it’s got a lot of work to do before I can call myself a silver bull.
It’s worth re-examining the gold/silver ratio too.
At the moment, the ratio sits at 91.25, almost a historical high at a level we haven’t seen for literally decades. (We calculate the ratio by dividing the price per ounce of gold by the price per ounce of silver. Therefore $1,398 / $15.32 = 91.25.)
To return the ratio to a less extreme value in line with history, either gold drops or silver takes off relative to gold.
Otherwise we’ll see history being made with this ratio, as it has never held at this level for very long.
I don’t know which of these scenarios is going to happen next (gold down, silver way up, new territory for the gold/silver ratio) but there’s some strong evidence we’re on the cusp of a major move in the metals markets.
The gold price action is giving us some idea of what might be ahead, though.
Onto spot gold (XAUUSD) at the monthly level.
Last week this pair penetrated above a 5-year resistance high dating from 2014. Penetrating that resistance coincided with a decisive break-out of a 10-year Symmetrical Triangle price pattern.
This is very bullish.
XAUUSD projects to $1,700 or better now that the initial long-term resistance has been taken out.
To get that number, we measure the distance from the bottom to the top of the recent range. So $1,400 – $1,050 = $350. Then we add that amount to $1,400 get a $1,700 – $1,750 target.
We can see how strong gold looks on the weekly chart now:
There’s a double bottom and then gold hammered out a bullish ascending triangle with successively higher lows. This triangle has taken a long time to form – it’s been so stubborn that XAUUSD has only now broken through in the last week.
I wouldn’t be surprised to see a re-test of the previous resistance at $1,360 – $1,380. If that should hold, then the run to $1,700 or better should get underway.
That means some very interesting times are ahead for gold and possibly also silver.
Meanwhile, the US stock markets presently have the “wind at their backs” and appear poised to surpass all-time highs across the board. The path of least resistance is higher for now.
Here’s the NASDAQ100 index, is the proxy for American-listed tech stocks:
The NASDAQ looks ready to reach for new highs. However, it does face potentially heavy resistance at current price levels. I’m not ready to bet on the long side yet as I want to see if new highs actually materialize before I put on a trade.
For now I’ll stand aside and see if the NASDAQ can set a record high and hold above that resistance zone.
That doesn’t mean there’s nothing worth trading in the stock market.
I’m very bullish on Facebook (FB).
Since establishing a well-defined double bottom during the December to January timeframe, I’ve consistently maintained that Facebook’s price trajectory is to keep heading inexorably higher.
I continue to believe FB will exceed its all-time high around $220. The stock is currently trading around $192, which gives you the price target I have in mind on the long side.
The financial media are of course excited about Facebook’s announcement of its own crypto-currency as justification for a higher price move. But if you look at the FB chart, the bullishness was already showing up in the price action long before the news went public. This is why I’m a pattern trader and not a news trader.
By trading the patterns instead of the news we catch moves like this much earlier than by relying on news releases.
If you want to go long on Facebook stock, consider buying at $191 with a stop loss at 175. Your take profit should be at $225.
So that’s it for this week: the dollar is looking weak across the board except against AUD, gold is looking poised for a major run, and silver is going to have to do something very interesting soon to avoid all-time record highs in the gold/silver ratio.
I remain short USDJPY until we see 104 or lower.
I wish you a very healthy and prosperous trading week.
Mark “USDTurn” Shawzin