The Many Aligning Signals in Gold

Precious metals moved strongly on Friday, and did so on significant volume. The reversals we have seen on Thursday got resolved with a heavy thud. Let’s dive into the many charts and perspectives and explore how well they support the upcoming move across the sector.
Przemysław Radomski
Gold

Let’s start this week with a bigger update on multiple gold charts. There are so many reasons due to which gold is likely to decline in the following months – we’ll start with last week’s closing day analysis.

PMs on Friday

Gold, silver, and mining stocks declined, and the way in which they did, was very informative. Gold closed both the day and the week below the $1,500 level and the volume increased as gold declined. In fact, Friday’s volume was the highest one that we saw so far this month.

And gold stocks’ strength that we saw on Thursday? Gone and invalidated. Friday’s decline in the HUI Index erased almost the entire October upswing. Neither in silver nor in gold have we seen the same kind of weakness. The miners’ underperformance is huge and it serves as a major bearish confirmation.

Of course, that’s just the tip of the signal iceberg.

Let’s consider what gold did in the previous cases when it topped while forming a few lower tops.

The Message of Gold’s Lower Highs

The similar cases are characterized by the declining green lines and the thing that we would like you to focus on is the price of gold compared to the green lines and the 50-day moving average. The latter can be useful for many things, and in this case it’s helpful in determining whether gold declined significantly enough for the move to be the start of a bigger downswing.

There was practically only one case when gold moved above one of its previous highs and it was in 2018. Back then, gold moved to a new high before starting the decline. But where did gold decline before this move? Only slightly below the 50-day moving average and the MA was far from the declining green resistance line.

In 2016 and earlier in 2019 when the declining resistance line moved to the 50-day moving average, and gold declined below the latter, there was no new high and gold’s decline continued. In early 2019, it continued only for some time, but in 2016, it was followed by a major and sharp slide. The latter happened in October, by the way. All in all, it seems more likely than not that the counter-trend upswing is already over. And if it isn’t, then it’s very likely that gold won’t rally to new highs before declining significantly.

We had written that gold has likely topped in August as it moved up on huge volume. It was hard to believe, due to the same thing that caused the volume to be high in the first place – the extraordinary, emotional bullishness. The same thing accompanied the 2011 high and the 2018 high. Gold declined in September, but it’s unlikely that the decline is over. Both above-mentioned highs were followed by $200+ declines in gold and it doesn’t seem that this time is any different.

To be clear, it is different, but not in a way that would prevent gold from declining at least $200 from the recent high.

The move to which gold’s top and the current decline are particularly similar are the 1996 top and the subsequent slide to the final lows.

Gold’s Analogies

We wrote about it in mid-August, but it’s worth bringing up the most interesting chart from that analysis:

The shape of the decline and the subsequent upswing is very similar to what we saw in previous years. However, that’s not even the most important detail that makes the decline so likely. It’s the USD Index and gold’s link to it.

The 2014-2015 rally caused the USD Index to break above the declining very-long-term resistance line, which was verified as support three times. This is a textbook example of a breakout and we can’t stress enough how important it is.

The most notable verification was the final one that we saw in 2018. Since the 2018 bottom, the USD Index is moving higher and the consolidation that it’s been in for about a year now is just a pause after the very initial part of the likely massive rally that’s coming.

If even the Fed and the U.S. President can’t make the USD Index decline for long, just imagine how powerful the bulls really are here. The rally is likely to be huge and the short-term (here: several-month long) consolidation may already be over.

There are two cases on the above chart when the USD Index was just starting its massive rallies: in the early 1980s and in 1995. What happened in gold at that time?

These were the starting points of gold’s most important declines of the past decades. The second example is much more in tune with the current situation as that’s when gold was after years of prolonged consolidation. The early 1980s better compare to what happened after the 2011 top.

Please note that just as what we see right now, gold initially showed some strength – in February 1996 – by rallying a bit above the previous highs. The USD Index bottomed in April 1995, so there was almost a yearly delay in gold’s reaction. But in the end, the USD – gold relationship worked as expected anyway.

The USD’s most recent long-term bottom formed in February 2018 and gold [topped in August]. This time, it’s a bit more than a year of delay, but it’s unreasonable to expect just one situation to be repeated to the letter given different economic and geopolitical environments. The situations are not likely to be identical, but they are likely to be similar – and they are.

What happened after the February 1995 top? Gold declined and kept on declining until reaching the final bottom. Only after this bottom was reached, a new powerful bull market started. 

  • But gold just rallied so significantly in the last several months!

… And that’s most likely what people were saying in early 1995, while they were buying at the top.

It’s easy to get carried away by momentum and emotions that it generates. We’re here for you to analyze the market as objectively and with as much cold logic as possible. And the key points in gold’s supposedly bullish story simply don’t add up.

Gold topped on extreme volume in August, just as it did in early 1996. The view from other currencies apart from the U.S. dollar confirms how bearish the outlook really is for the following months. Let’s see the summary for full details.

Summary

Summing up, it seems that the corrective upswing in gold is over or almost over and that the big decline in gold is already underway (and that it had started in August as we had written previously). The invalidation of breakouts above the 2011 high in case of gold priced in the euro and the British pound confirm how bearish the outlook really is for the following months. Gold is likely starting to decline hundreds of dollars. If it rallies a few or even $20 dollars right now, it doesn’t matter much given the above. The profits from the short position in gold, silver and mining stocks are likely to be legendary, but the difficult part is not to miss the decline. That’s why we were so quick to get back to the short position in Friday. It was much better to do so than to risk missing out of this epic move.

Today’s article is a small sample of what our subscribers enjoy on a daily basis. For instance today, we’ve covered the chart takeouts of gold priced in the euro and in the British pound price for the yellow metal. We’ve also delved some more into silver and miners. Finally, we’ve also included a helpful summary of the gold move’s determinants at play. Check more of our free articles on our website, including this one – just drop by and have a look. We encourage you to sign up for our daily newsletter, too – it’s free and if you don’t like it, you can unsubscribe with just 2 clicks. You’ll also get 7 days of free access to our premium daily Gold & Silver Trading Alerts to get a taste of all our care. Sign up for the free newsletter today!

Thank you.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits – Effective Investments through Diligence and Care


All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All
IMPORTANT DISCLAIMERS
The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
RISK DISCLAIMER
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.
FOLLOW US