Last Thursday I discussed the rather sudden bullish "breakout" of the U.S. Dollar Index and its bearish implications for gold and silver prices. This could mean lower prices for these metals for several months as the dollar strengthens. It looks like the U.S. dollar started a new medium-term cycle with its low of 89 on March 26 which means it is still very early in this cycle, and the early stage of any cycle is usually very bullish. OK, that is not good news for the precious metals, possibly through the summer, but what about the longer-term picture for gold and silver? Gold and silver "bugs" can take heart in the fact that the bigger technical picture for these metals is still looking very bullish.
As I have mentioned in past blogs, there are giant inverted "head and shoulders" chart formations in both gold and silver that have been building since 2013. The one for gold is unusually symmetrical and striking. The inverted "head and shoulders" formation is a very bullish chart pattern, and because these have been building over the last four years, they could be heralding a major bull market about to begin in the precious metals. Both formations are near completion. Once complete, both metals could break out above their head and shoulder "necklines" and begin a major rally that could take prices to new all-time highs. (Right now those necklines would be around $1380 in gold and $19 in silver.) That said, it could still take several more months for the final right "shoulder" of these formations to be completed in both metals, and we could see some fluctuations in gold and silver prices before they break above those necklines. If the dollar does edge higher, gold could dip into the $1220 - $1240 range and silver as low as $15 without damaging their head and shoulder patterns.
The bottom line here is that we are still bullish on gold and silver, but we may have to wait for a good spot to buy as the dollar's potentially strong rally pushes prices down. Today both metals made new weekly lows, but there are some short-term signals indicating a possible bounce now. I suspect any bounce won't get too far before turning down again. Gold breaking below $1304 and silver below $16.13 would be a sign of lower prices ahead. We will remain on the sidelines of this market for now as we watch the progress of the U.S. dollar over the next few weeks. There is another reversal zone specifically for gold and silver coming up in the second week of May (May 8 - 17). That may be a significant turning point to trade, but it is too early to tell if it will be a high or a low.