Gold Forecast: Gold Wins Oscar For Wasting Chances To Rally

Neither the pandemic and inflation, nor war. Nothing seemed to be able to motivate gold to surge, although there were opportunities. When’s the next chance? 

Friday’s session was rather uneventful, so today’s analysis is going to be fairly brief. However, there is one part of the precious metals sector that’s definitely worth discussing.

The junior mining stocks closed the week above the declining medium-term support line, which might be viewed as something bullish. Let’s take a closer look.

The GDXJ ETF closed the week above the declining red line and below the 38.2% Fibonacci retracement level. However, should one view this as really bullish?

Not really, as long as one remembers that not everything is about the price. The volume is also an important indicator as it shows, among other things, how much the market participants are really convinced that a given move is likely to take place. If the price moved higher on significant volume (but not excessively huge, as that could mean that the rally burnt itself out), it would mean that bulls won after a fierce fight.

Friday’s volume, however, was small. In fact, it was the lowest volume in the GDXJ ETF that we have seen this year. The second-lowest volume was recorded on Jan. 4, which was right before GDXJ’s decline.

So, should the breakout above the declining resistance be trusted? No, at least not yet.

This is especially the case given that the sell signal from the MACD indicator remains intact. These signals were highly effective at detecting major short-term tops. The fact that we just saw one indicates that the outlook for mining stocks is bearish.

Besides, while the GDXJ ETF moved above its medium-term resistance line, it also moved below its rising short-term support line, as we can see on the below 4-hour chart.

The ETF closed practically right at the line at the end of the week, but the initial breakdown indicates that a major slide could happen any day – or hour – now.

Based on the above, the small breakout above the declining red resistance line (visible on GDXJ’s daily chart) is likely to be invalidated, and much lower GDXJ prices are likely to follow.

Let’s keep in mind that, based on the clearly confirmed breakout in the USD Index and a visible breather in it, the U.S. currency is likely to rally in the following days / weeks. This means that the precious metals sector is likely to get a bearish push shortly.

As the war-based premiums on gold and the USD appear to be waning, a high-interest-rate-driven rally in the USD is likely to trigger declines in gold. The correlation between these two assets started to decline. When that happened during the last two cases (marked with orange), gold declined profoundly shortly thereafter.

However, isn’t gold forming a cup-and-handle pattern that could make it soar?

Let’s take a look at the gold market from a broader point of view to find out.

Well, it might be, but we won’t know until we see a confirmed breakout above the top of the pattern – the previous 2020 and 2022 highs.

What we saw recently was an indication that it’s unlikely to happen anytime soon, without gold’s major decline taking place first. What indication? One might ask. The answer is that despite raging inflation (and still low interest rates), a pandemic, and war in Europe that at some point looked like something that could turn into a nuclear war, gold still failed to rally above its 2020 high. In fact, at the moment of writing these words, gold is trading at about $1,935, which is just slightly above its 2011 high. Yes, you read that right: despite all these factors that should have made gold exceed the old highs a long time ago, it didn’t manage to do so.

That’s just gold. You know what silver and gold stocks did, right? They didn’t even rally close to their 2020 high, which itself was not even close to their 2011 highs. In fact, they both managed to only correct half of their declines that started in 2011.

So, no. I don’t think we’ll see the completion of the cup-and-handle formation in gold before we see a profound decline, and the way gold, silver, and mining stocks reacted (they almost didn’t) to the recent developments confirms it. On the technical front, please keep in mind that before a formation is completed, its implications are nonexistent – it’s all just potential. If you bought a lottery ticket, you could potentially be a multi-millionaire. However, until you actually win, it doesn’t happen (unless you are one right now, of course). It is the same with patterns, until they are completed, they have no implications.

Besides, the “it’s a huge cup-and-handle pattern” argument is an old one. We heard it multiple times in 2012 when gold, silver, and mining stocks were topping, and before we saw a major slide in them. The patterns are just like what we saw back then, with the tiny exception that this time gold peaked close to the original top. However, it’s a normal, geopolitically-driven thing. Without it, the patterns might have been almost 100% identical. The implications are very bearish for the following weeks/months, especially that self-similarity to late 2012 is present also in silver and gold stocks.

Of course, if the Russians use tactical nuclear weapons, gold prices might again react in the near term. If it escalates into a full-blown nuclear war, then:

1. We’ll have many other problems to worry about than the near-term price of gold. The more common problems would be securing access to clean water and electricity (bitcoin payments without electricity, anyone? Or maybe electronic currency is useful except times at when you really need it).

2. The gold that we have in the insurance part of our capital (all Gold & Silver Trading Alerts feature details for three parts of the portfolio: trading, investment, and insurance) would likely soar, more than making up for any financial losses one might incur on many fronts due to the nuclear war.

I’m writing about the above as I received a question that I’d like to quote below:

“There are rumors that Russia may begin to use tactical nuclear weapons in the very near future (2-4 weeks). How do you see this affecting gold prices if this eventuates?”

The important detail here is visible at the beginning of the question: “There are rumors.” If the rumors are already present, then it means that gold has already reacted to it and it’s already after a rally based on that. The market buys on rumor and sells on fact. Consequently, it’s even possible that if nuclear weapons are used on a small scale and without an analogous reaction from other nuclear powers, then gold’s price could actually decline as markets could view it as a “relief” from the scenario in which a full-blown nuclear war starts.

Again, please make sure you remember this rule: the market moves on rumor and then moves back on fact. If you see that the rumors are prevalent, you’ll know that the price has most likely already reacted to it.

All in all, technicals favor a decline in the precious metals sector sooner rather than later.

Summary

As after the outbreak of the pandemic and in the face of constantly rampant inflation, also in the context of the war in Ukraine gold did not manage to rise above its previous peaks. It did not react vigorously even to the rumors about Russia's possible plans to use nuclear weapons. Thus, it seems the yellow metal is beginning to stop benefiting from war-driven upheaval. The changes can also be noticed in the USDX, and they mean one thing for gold.

Despite the ongoing Russian invasion of Ukraine, and despite gold being the traditional safe haven in times of turmoil, the overall outlook for the precious metals sector remains bearish for the next few months, and the medium-term outlook for the yellow metal remains pessimistic.

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Thank you.

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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