Gold Forecast: The Yellow Metal On The Verge Of Crying

“That’s all Folks!”

- Porky Pig at the end of the Looney Tunes cartoon series

The above is what immediately came to my mind after seeing Friday’s price action in the precious metals sector. Why? Because of the reversals and tiny outperformance of silver.

And also because of USD’s decisive daily rally. Let’s start with the latter.

After briefly moving below its rising support line, the USD Index soared back up and the situation is now much more bullish than it was a month ago, when the USD Index was breaking through the 96 level for the first time in many months.

The reason is that now, the USD Index is already after a sizable consolidation. The RSI indicator reflects that as well – it’s no longer in the overbought territory.

And if the USD Index soars once again, precious metals are likely to slide. What we saw in gold, silver, and – in particular – mining stocks on Friday confirms that.

Gold moved to $1,815.70 on Friday, but it’s now once again below $1,800.

This means that the yellow metal moved above its rising support line on Friday, but it ended the day just slightly above it and based on today’s pre-market decline, it’s once again back below this line. The breakout was invalidated.

On Thursday, after gold’s reversal, I wrote the following:

Well, gold moved visibly higher from the recent lows, but:

1. It hasn’t invalidated its previous breakdown below the rising red support line
2. Even if the size of the very recent rally doubled, gold would not move up that significantly – perhaps to $1,815 or so.

There’s also a risk that gold might rally more visibly because of the similarity to what happened earlier this year.

Well, gold did exactly that. The yellow metal moved to late-November highs on Friday, to its 300-day moving average, and it all happened in tune with the previous patterns and with what I wrote previously.

There’s also another pattern that I marked on the above chart. After the previous sharp declines, gold corrected between 38.2% and 50% of the decline, and only after this consolidation did it move to new lows. We saw that in November 2020, January 2021, and July 2021. And it seems that it’s exactly what we saw right now.

On Thursday, I also wrote the following:

But how much did the mining stocks rally in July?

Please take a look at the areas marked with green rectangles. There was a tiny rally in July 2020, but it was nothing significant, unless one was engaged in day-trading or very short-term trading.

So, will we see a rebound here? That’s probably going to be the case. Will it be significant? That depends.

It might be quite visible in case of gold, but not necessarily in case of mining stocks.

In fact, at the moment of writing these words, gold is trading very close to its December highs, while the GDXJ (in London trading) corrected about 23.6% of the entire December decline.

Consequently, if I had a short position in gold, I would probably close it right now in order to re-enter it at higher prices, but since I don’t have one, but I have a short position in junior mining stocks, I’m choosing to keep it intact and wait out the possible correction.

Well, the corrective upswing in mining stocks wasn’t that significant as the one in gold. Miners moved just slightly above their December highs, but close back below them, thus invalidating this breakout. Unlike gold, they were not even close to reaching their late-November highs.

Silver outperformed gold on Friday, but only slightly and only on an immediate-term basis. Overall, just like mining stocks, silver was rather weak during this corrective upswing – relative to gold that is.

Does this remind you of something? It should, as it has March 2020 written all over it.

Silver corrected after a sizable short-term decline and after reaching its previous lows. Will it now decline substantially? That’s likely, but this time the decline might not be as volatile. After all, it’s not the case that the lockdowns are being introduced for the first time and nobody knows what’s going to happen and how. People are not panicking in the way they panicked in 2020.

Then again, the markets (the main stock indices) are more overvalued, and more capital was used to pump it, so the declines are likely to be huge anyway – also in the PMs. They simply might not be as sharp as they were in 2020. What happened a couple of days back then, might take a couple of weeks this time, but it’s likely to happen, nonetheless.

Summary

Summing up, gold declined in tune with my long-term-based indications, and the medium-term downtrend appears to have resumed. Based on the analogy to 2013 and other factors, a bigger decline in gold appears to be just around the corner (regardless of what happens in the very near term).

If the new Covid-19 variant makes the vaccine rather useless, we might be in for very wild price moves in most markets. In the case of the precious metals sector, the initial move should be to the downside, but at the same time, it makes the long-term outlook even more bullish.

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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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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