The key factor that really matters right now.
Have you ever heard of the 80/20 rule? Also known as the Pareto principle, it's one of those powerful concepts that applies to an astonishing range of situations. Italian economist Vilfredo Pareto first observed that roughly 80% of land in Italy was owned by 20% of the population. This same distribution kept appearing everywhere he looked – and since then, this principle has been found to apply to business (20% of customers generate 80% of revenue), productivity (20% of your efforts produce 80% of your results), and countless other domains.
In financial markets, the Pareto principle is particularly valuable. Among the countless indicators, news items, and technical patterns that bombard traders daily, typically only about 20% of these factors drive 80% of market movements. The challenge, of course, is identifying which 20% truly matters at any given moment.
Right now, in the precious metals market, we're seeing a textbook example of the Pareto principle at work. The relationship between gold and the USD Index has emerged as that critical 20% factor that's likely to determine 80% of gold's upcoming performance (in the following weeks).
For months, gold had faithfully responded to USD movements with a reliable inverse correlation – when the dollar dropped, gold rallied proportionally or even more vigorously. It was practically mathematical. But something fundamental has changed, and this shift is sending us a powerful signal that the smart money has already recognized.
When a key relationship that has been consistently reliable suddenly breaks down, that's not just another data point – it's a flashing warning sign that deserves our full attention. While many analysts are distracted by a multitude of other factors, this single relationship is quietly telling us almost everything we need to know about gold's likely near-term direction.
As you'll see in the analysis below, gold's response to the recent USD decline reveals a striking weakness that simply wasn't present during previous dollar drops. This divergence from the established pattern isn't just interesting – it's potentially the most significant development in the precious metals space right now.
Let's examine exactly what happened last week and what it means for gold investors:
It’s not the USD Index’s decline itself that’s the shocker. Yes, that too, but the key thing is how gold reacted to it. And by this, I mean how it didn’t.
The slide in the U.S. currency was clear and huge – it plunged to new yearly lows, pretty much doubling the decline from the yearly high.
Did gold’s rally match USD’s slide?
Absolutely not!
Gold wasn’t able to rally above its yearly high. It didn’t even move very close to it.
While the USD Index more or less doubled its decline from its yearly high, gold rallied about half of what it had declined from this year’s high.
This means that gold replied to about just a quarter of the stimulus. This is not a bullish situation for gold – it’s strongly bearish.
This is a new situation for gold. In the previous months, when the USD Index was declining, it reacted positively – generally multiplying USD’s movement (in the opposite direction). I marked those cases with green rectangles. This has been the case until the recent top.
But then everything changed.
As you can see, the most recent red rectangle shows quite the opposite. Gold’s weak. That recent rally that we just saw – it’s a bearish rally.
Yes – a bearish rally can be a thing, despite what most people usually think. You see, a rally describes a factual situation – current or historical. But being bullish or bearish describes an expectation based on some factors. In this case, we have a rally (it happened – that’s the fact), but since gold’s move higher was so weak compared to what the USD Index did, it actually has bearish implications. Therefore, it’s a bearish rally.
The USD Index itself is still testing its 61.8% Fibonacci retracement. And it’s most likely bottoming there. What I wrote about the above chart previously remains up-to-date:
It just declined to its 61.8% Fibonacci retracement and the RSI based on it is now below 30. That’s a powerful bullish combination.
Also, looking at the areas marked with orange makes it clear that the underperformance of mining stocks is even stronger than the one that we see in gold. Gold stocks topped in October and are unable to break higher since that time regardless of what gold or USD Index do.
This means that we are very, very likely correct about focusing on mining stocks as the proxy for benefitting from the likely upcoming decline in the precious metals sector.
Meanwhile, copper didn’t invalidate the move above its 61.8% Fibonacci retracement YET, but it already invalidated the second attempt to move above its late-2024 high. Yes, this is already a sell signal, but we’re likely to get another confirmation soon – likely when the USD Index rallies once again.
And speaking of confirmations that we’re very, very likely correct about selecting proxies for the upcoming declines, here’s how FCX performed given (so far) a small decline in copper’s price.
That’s an almost 2% decline that we have here that followed a daily reversal. FCX now erased about half of its March rally – more than copper did.
Also, please note that FCX is trading lower than it did at the beginning of the year, even though copper even though the latter is trading about 15% higher. FCX is truly weak and remains a superb shorting opportunity.
What is more, this creates a special kind of opportunity for option traders. You see, options’ prices are determined not just by the price of the underlying instrument and how far it is from a given option’s strike price but also by the time left until the expiration, the risk-free rate, and – what’s most important in this case – volatility of the underlying instrument.
After all, the higher the volatility, the greater the chance of a given instrument (stock, ETF etc.) to move beyond the strike price just based on random movement. This means that options on stocks with higher volatility will have higher values – sellers will charge extra for compensating for the risk.
The reason that I’m bringing this up today is that since FCX moved back and forth since the beginning of the year, its medium-term volatility went down. This, in turn, means that one might be able get options at lower prices than in high-volatility environment.
Now, when the USD Index rallies and copper slides – given FCX’s weakness – the latter is likely to slide, increasing the volatility (so, also option prices). Consequently, the current weakness inf the FCX creates a special kind of opportunity, because its recent weakness not only made the declines MORE likely – it also made options less expensive based on the decreased volatility.
So, while I’m not advocating option purchases to anyone specifically (I think this is better left to more advanced traders, and I’m not providing any individual investment advice), focusing on the options on FCX right now might be a good idea. You’ll find more details in the Summary section of today’s Gold Trading Alert.
…And you’ll find details of Wednesday’s exciting webinar in the following section. Before you dig into details, I just want to add that I know Lech personally, and I attended his in-person workshop on creative solution solving and collaboration, and it was amazing. Combination of learning, excitement, and fun. Lech is specializing in leadership and all things connected to it, and he’s one of the very few people that I’m paying attention to what he’s doing regardless of what it is – it’s simply always been worth it. When Lech asked what kind of content you might appreciate, we discussed various options, and – also based on the survey that some of you filled out several weeks ago) – we agreed on the topic of actually making changes instead of just knowing that they would be a good idea. What makes one change something, and what is blocking them? The reply might be the thing that is standing between you and much bigger profits.
I strongly recommend that you check out this webinar – it’s this Wednesday at 10 AM EST (5 PM CET). Confirm your seat now.
As always, I’ll keep you – my subscribers – informed.
Transform Your Investing Mindset: Are Hidden Beliefs Holding You Back?
Are you finding yourself caught in the same trading patterns despite your best analysis and intentions? Just as we've seen gold markets struggle to break through key resistance levels, many investors struggle to break through their own mental barriers.
This isn't simply about market knowledge – it's about the psychology behind your decisions.
As we've observed in recent market volatility, the difference between success and disappointment often comes down to psychological factors: fear of missing out, reluctance to cut losses, or hesitation when the opportunity presents itself. These mental patterns can undermine even the most sophisticated trading strategy.
This Wednesday (March 12th, 10:00 AM EST), Lech Guzowski – an expert in leadership (including self-leadership) who has worked with companies like Meta, BNP Paribas, and MongoDB – will host a powerful webinar on breaking through these hidden psychological barriers.
In his eye-opening course, and to some extent in the upcoming session, you'll discover:
· Why your brain resists change – even when you logically know what action to take
· The hidden commitments keeping you stuck in unprofitable patterns
· How to shift from emotional reactivity to strategic decision-making
· A practical framework for challenging limiting beliefs that impact your investment decisions
· Techniques to create sustainable habits that improve your market performance
The principles Lech will share apply directly to market psychology. Just as we analyze support and resistance levels in gold charts, you'll learn to identify and break through the resistance levels in your own mindset.
The best part? You can access the first lesson of Lech's course for FREE in his dedicated space on Golden Meadow right now. It's an excellent primer before the webinar and will help you formulate questions, to which Lech will be happy to reply.
Register for the Webinar: Break Through Your Mental Barriers →
This could be the missing piece in your investment approach – because sometimes the biggest obstacle to success isn't the market... It's what's happening between your ears.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief