Don't look now, but here come the precious metals. Again. Just at a time when everyone thought gold and gold stocks were overbought and a move to new multiday lows should cause a meaningful selloff in this sector, they come roaring back.
That's precisely what happens when trying to knock down a technically strong sector that's being carried by a real "surge" in momentum. Based on Investor's Business Daily rankings, the mining sector is the top-performing group over the last six months, with percentage gains through Tuesday of 57.6% in the XAU, the Philadelphia gold and silver index, far surpassing the performance in either the S&P 500 or Nasdaq Composite.
Adding to this surge in the miners was the ongoing selloff in the dollar. The FOMC meeting did little to calm the notion that the path of the U.S. Dollar Index (63% vs. the euro) remains to the downside, and the breakdown in the index to the lowest levels since mid-February caused a resurgence in metals and energy. Gold regained much of its weakness in the last few days, while getting back up to key resistance just shy of $1,280. Movement back to new monthly highs appears likely for gold, which could drive it back to levels not seen since early last year, near $1,305 to $1,310 for spot gold, which should provide a nice tailwind for gold and silver stocks.
XAU surged back to new highs on Tuesday, finishing above $71, the highest level since last May. Despite commonly watched indicators like the Relative Strength Index being overbought, we all know overbought doesn't mean "sell" and they can certainly stay overbought for some time. With the week nearly over, XAU is set to have its eighth straight week of gains, with an ongoing pattern of higher highs and higher lows. Only if it closes back under its 20-day moving average, which it hasn't done since the rally began in late January, would it be likely that XAU could experience some selling pressure.
Seen another way, a close at new multiweek lows at this point is a sign that gold and silver stocks are beginning a consolidation. For now, the Fed's actions have turned the dollar back to the downside and lifted the metals. This trend should continue up to test last January's highs near $83 at a minimum before any slowdown, technically speaking, which is about a 17% rise from current levels.
Charts of the U.S. Dollar index (DXY) have violated last week's lows, bringing prices back down to test areas near mid-February lows. Given trendlines drawn from the lows last fall (connecting the lowest low to the low that precedes the highest high, made last December) this trend has been violated again as of last week. Structurally speaking, momentum remains weak, but not oversold, while prices have traced out a pattern that should allow for a move back down to last fall's lows near 92.75 in DXY. In the near term, this should prove to be a boon for precious metals and for most materials and commodity-related stocks, which should outperform in an environment of a falling dollar.