Gold Forecast: Gold Prices Rise Due To Rumors Of War

Investors fell into a shopping frenzy as tensions increased between Russia and Ukraine. Was the purchase of precious metals as safe haven justified this time?

Presumably, the rally of gold based on shocking news will not be significant and may end soon. Its continuation could only be triggered by genuine military action. However, I question its probability.

In yesterday’s intraday Gold & Silver Trading Alert, I wrote the following:

Gold, silver, and mining stocks moved to new yearly highs in today’s trading, without any other major moves in the markets. So far, the session is only halfway completed, so quite a lot can still change. If we saw a decline in the second half of the session, the day would become a reversal, and it would be bearish. If we see the daily close in the GDX ETF at the current price levels, then… It will still not be bullish at this time (!).

Huge daily rallies on big volume (and it’s likely that today’s volume will prove to be big) in mining stocks (GDX) are what tends to take place at the end of a given short-term upswing or close to it. For example, we saw that on Nov. 10, 2021, Aug. 27, 2021, Jul. 29, 2021, and May 17, 2021.

Also, please note that zig-zag patterns are quite common form that corrections take place, at least in case of the mining stocks. Another way to call this pattern is an ABC pattern. The bottom that we saw in mid-December could have been the start of the A rally, then we saw the B decline in early January, and what we see now could be the C rally, and perhaps the final part thereof.

Still, most importantly, please keep in mind the examples when the big daily rallies on strong volume were good shorting, not buying opportunities. It’s rather unlikely that right now – AFTER the daily rally – we are at a favorable moment to go long or to close the short positions. It seems much more likely that we are in a situation where short positions are much more justified from the risk to reward point of view.

The reason I’m quoting this Alert is that it remains up-to-date. The GDX ETF ended the day visibly above the previous yearly highs, and the volume that accompanied yesterday’s sizable decline was indeed huge.

What does it mean? Well, it means that, from the technical point of view, we just saw another day similar to the other days that I marked with vertical dashed lines and black arrows. Those days were either right at the tops or not far from them. As much as yesterday’s (7%!) rally looks bullish, taking a look at the situation from a broad perspective provides us with the opposite – bearish – implications.

The zig-zag scenario is being realized as well. The GDX ETF moved to the upper border of the rising trend channel. Also, doesn’t it remind you of something? Hint: it happened at a similar time of the year.

Yes, the current price/volume action is similar to what we saw in early 2021. The RSI was above 60, a short-term rally that was preceded by a bigger decline, and a strong daily rally on huge volume at the end of the corrective rally. We’ve seen it all now, and we saw it in early 2021.

In the case of gold, we see something similar, but this time, the rally is visibly smaller.

The volume is still significant, and the implications, theoretically, should be bearish. Here’s what I wrote on that yesterday:

The rally above the 2021 highs in bond yields might have come as a shock to many investors, and they might not have been sure how to react or what to make of it. It might also have been the “buy the rumor, sell the fact” type of reaction. Either way, it seems to me that we’ll have to wait a few days and see how it plays out once the dust settles.

The volume that we saw yesterday was huge. After a period of relatively average volume, we saw this huge volume spike. I marked the previous cases with red arrows. In those cases, such volume accompanied gold’s sizable declines. This time, the volume spike accompanied a $4.10 decline, which might appear perplexing.

Fortunately, gold is not the only market that we can analyze, and – as it’s often the case – context provides us with details that help to make sense of what really happened. Let’s check the key supplemental factor – silver’s price action.

Gold didn’t decline, but it moved higher instead. Why could that be?

Tensions around Ukraine have just supposedly escalated, which likely made people buy the precious metals (and mining stocks) as safe havens against possible geopolitical turmoil – against any possible annexations, war, and similar.

I put “supposedly” in bold because, in my opinion, that’s simply not true. It’s possible (everything is, right?), but just because something is possible, doesn’t make it likely.

In particular, in the case of the above-mentioned supposed “news” about greatly increased tensions, I don’t think that the safe-haven buying frenzy is justified. It’s not, and there are several good reasons for it.

Here are two articles on that:

https://www.theguardian.com/world/2022/jan/19/russia-could-act-against-ukraine-at-any-moment-says-us

https://www.bbc.com/news/world-europe-60048395

First of all, let’s consider the source of the information. The source was the White House, which is on the other side of the planet. It’s the very opposite of the “local source”, or a source that would not be biased by any agenda (here: political). It’s also the same source that provided misleading and/or unverified information many times in the past.

Remember when gold soared on the U.S.-based news that an Iranian ship attacked some other ship, “likely” leading to conflict? Nothing like that was confirmed by any other source. Remember Iraq’s weapons of mass destruction (before the U.S. invasion of that country) that were never found? I don’t mean to say that everything coming from the U.S. government and White House is “bad”. I’m saying that the information on which the market rallied is of relatively low quality when it comes to objectivity, and thus that market’s reaction was way too big, compared to what makes sense.

One of the article titles says “Russia could act against Ukraine ‘at any moment’, says US” and the other says “Ukraine tension: Blinken says Russia could attack at short notice”. Please note that while they both make it sound like it’s something “very likely” or that it’s likely to happen “soon”, the text actually says nothing like that. Just because Russia “could” attack, doesn’t mean that it’s likely. It could attack any day, and it could have attacked on any day in the past decades. If something is just 0.0000001% likely, then it’s still true that it “could” happen and both titles would be true. However, it doesn’t mean that acting on it is justified!

One of our Team Members is located in Ukraine (the source doesn’t get any more “local” and objective than this), and he had this to say about the current situation:

“I’m sure that Russia, with its current president Putin, will never take massive military action against Ukraine. If they wanted to do it, they could probably “capture” all of Ukraine in a matter of weeks, if not days. It would be a quick fix for the problem of uniting what has always been one country (Kiev, the ancient capital of Russia, and Kharkov, where I was born, had always been in one state with Moscow until thirty years ago).

However, such military action would create the ideologema of a “captured” Ukraine for future generations of Ukrainian nationalists, resulting in the obvious intent to liberate the “captured” state. It might also make countries that are currently friendly to Russia perceive it as an aggressor. Those are just a couple of the many reasons why it’s obvious to me that such military action is not going to happen any time soon.

The news/propaganda might be targeted toward forming the public opinion on joining Ukraine to NATO, painting the picture of “Russian aggression” or other social engineering purposes”.

Moreover, please note that what we’re discussing here is a geopolitical event, and such events are likely to have only a temporary impact on the precious metals prices. We wrote about that in our Dictionary section, and you’ll find more details there.

All in all, we saw a rally, but it’s unlikely to be the start of a bigger rally. Instead, it’s likely that what we saw was either the final part of the corrective upswing that started in mid-December, 2021, or it’s close to the final part of the corrective upswing. Either way, I think that the short position in the junior mining stocks remains justified from the risk-to-reward point of view.

Summary

To summarize, despite appearances to the contrary, the outlook for the precious metals sector still remains bearish for the next few months.

Gold reacted reluctantly to the dollar’s rally in January, but eventually something made the yellow metal soar: Russia’s military buildup on Ukraine’s borders. However, please note that if the rally was indeed solely based on the increased tensions regarding Ukraine, then it’s likely that it’s not going to be significant, and it might already be over.

Since it seems that the PMs are starting another short-term move lower more than it seems that they are continuing their bigger decline, I think that junior miners would be likely to (at least initially) decline more than silver.

From the medium-term point of view, the key two long-term factors remain the analogy to 2013 in gold and the broad head and shoulders pattern in the HUI Index. They both suggest much lower prices ahead.

And as silver often moves in close relation to the yellow metal, when gold falls, silver is likely to decline as well – it has probably already started its slide. The times when gold is continuously trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits - Effective Investments through Diligence and Care

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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 subject to change without notice. Opinions and analyses are 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 deemed 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.

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