Gold Price Forecast – Is A Gold Dip Not Too Far Ahead?

Technical analysis is based on the proven premise that history tends to rhyme and that ignoring it comes at your own peril. And historical patterns (similarities) have a place in the proverbial hall of fame – so, how is the 2008 to 2020 analogy standing currently?

In short, the long-term analogy in terms of prices to what happened in 2008 still seems somewhat intact:

In 2008, after the initial plunge, and a – failed – intramonth attempt to move below the rising support line, gold came back above it and it closed the month there. The same happened in March 2020.

During the next month in 2008, gold rallied and closed visibly above the rising support line. The same was the case in April, 2020.

In the following month – the one analogous to May 2020 – gold initially moved higher, but then it plunged to new lows and finally closed the month below the rising support line. We might see something very similar this month.

In fact, it seems that we have already seen something very similar this month – gold moved very close to the April highs, but failed to break higher and it’s now declining. It’s too early to say with 100% certainty that the top is already in, but combining this with what we see on gold’s seasonality chart, makes it likely that the top is already in or that it will form before the end of this month.

Let’s check how low gold could decline during this slide. In short, the above is based on the long-term gold chart and it hasn’t changed this week.

Our current (and it might change in the following days) estimate is that gold would decline to the 2016, 2017, and 2018 lows – slightly below $1,400. Why? Because this level is confirmed by several major highs, which makes it the strongest support that’s below the previous 2020 lows.

Moreover, back in 2008, gold bottomed about 8% below its initial September bottom. The recent bottom in gold was about $1,451. If history repeats itself, gold could decline to 92% x $1,451 = about $1,335.

In 2008, gold also declined by about 27% from its previous high. If the history repeats itself here, and gold topped yesterday (which seems quite likely), we can see gold’s bottom at 73% x $1,789 = about $1,306.

The 2016, 2017, and 2018 highs are the strongest gold support that we have close to the above-mentioned price levels. Gold’s fundamental situation is even better now than it was in 2008, so we think that looking for the support above the above-mentioned 2008-based price levels is more appropriate than basing it the above-mentioned gold trading tips. The 2016, 2017, and 2018 highs fulfill this requirement.

This means that gold would be likely to bottom between about $1,350 and $1,380.

Of course, the above estimates assume that gold would decline significantly…and not modestly, when the USD Index does indeed break higher.

The way gold responds to USD’s rally from the current levels to the previous 2020 highs should tell us a lot about what’s really in store for gold in the following weeks.

Please note that the very long-term cyclical turning point in gold (marked with vertical, gray lines) is due in July. Until the 2011 top, these turning points were tops, and after the 2011 top – in each case – these turning points corresponded to major bottoms. If gold is to bottom in July, it’s about time for it to start declining. This factor serves, thus, as a bearish sign.

Summary

Gold’s historical performance in 2008 is still relevant to the yellow metal’s moves we see unfolding right now. Coupled with the gold seasonality lessons, it’s likely that gold is currently topping out. This is further supported by the metal’s interaction vis-à-vis the faltering greenback. As it’s not rising in response, the king of metals is sending out a bearish message.

The following days are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months. But what’s profitable is rarely the thing that feels good initially. As silver often moves in close relation to the king of metals, forecasting gold price's rally without a bigger decline first is thus likely to be misleading. The times when gold is trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

Naturally, the above is up-to-date at the moment of publishing and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis, we invite you to sign up to our gold newsletter. You’ll receive our articles for free and if you don’t like them, you can unsubscribe in just a few seconds. Sign up today.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits: Analysis. Care. Profits.

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