In my blog on Monday I stated that, "...the dollar is now quite overbought...and may take a corrective breather. This could encourage a short-term rally in the precious metals, but...that rally may not be substantial."
It looks like this is happening now. The U.S. Dollar Index surged yesterday and early this morning to an overbought peak at 81.70 but is now falling sharply. Gold prices have reacted (so far) with a $17 surge and silver is breaking above $20 again. Are these metals breaking out now and starting their new long-term cycle? It is possible, but right now that does not seem likely. The current short-term cycle structure of both gold and silver does indicate the timing is right for a sharp rally, but other technical indicators are strongly suggesting it might not get very far. The fact that strong bear signals have appeared this week in many gold and silver mining company stock charts does not bode well for the metal prices, at least short-term. Another bearish factor now are readings in the well-known (at least by seasoned gold traders) COT Index. This index reliably shows the positions of "smart money" in precious metals, and right now those positions are bearish. There is resistance for gold at the $1330 - $1340 level so if the rally gets that high and stalls, that may be a good point to sell short. The long-term cycle structure for gold and silver may be changing right now, and this could push the deadline for the long-term cycle bottoms in both metals into next year. This means we may have to wait a bit longer to see those final bottoms. I had been expecting the long-term bottoms by the end of this month, but when technical patterns shift one has to follow the new data. This is a relatively recent development and I will have more to say about this possible change in the long-term cycle pattern in future blogs as I analyze it further. If this change is occurring, it will likely give us some opportunities to sell this market short before those final bottoms are in. If gold prices do break through resistance at $1330 - $1340 then this bearish picture could be negated. A clear break above $1370 -$1380 would likely indicate that gold's long-term cycle bottom is in, and the precious metals would likely be breaking out. If today's gold rally starts to gain some legs this week or next we will watch to see if those resistance areas can hold. Still on the sidelines.