Gold Price Forecast: Gold – Digging Beneath The News

Gold plunged on Tuesday to slightly below $1800 an ounce – the first time it did so since July. The news of further successful vaccine tests and U.S. President-elect Joe Biden beginning his transition to the White House have made investors bullish. There is hope on the horizon! But is that it? Did the yellow metal decline just on the news or are there other factors afoot?

Approximately two weeks ago gold plunged about $100…and we received a few messages saying that there was nothing technical about this move, and that it was just a reaction to the potential Covid-19 vaccine. Well, what about now? During today’s pre-market trading gold was down about $75 counting from Friday’s intraday high – what is this in response to? The U.S. Dollar Index and the stock market haven’t moved in any significant manner…and no major news hit the market. Why did gold decline?

Because things are not as simple as news-price-reaction models would have one believe. People’s interpretation of events is what matters – whether we’re discussing the performance of markets or any other life situation in general.

Let’s consider a bank robbery, during which precisely one person gets shot and it’s in the arm - without any major impact on their life (heals relatively quickly, no long-lasting damage). Was this person unlucky or lucky?

The event was clear and objective. But what about the interpretation?

If one chooses the following interpretation: they could have been shot fatally and/or many other people could have been shot - then based on what really happened, this person was lucky.

However, if one chooses the following alternative: they could have simply stayed home or there might have been no robbery at all - then based on what really happened, this person was unlucky (wrong place, wrong time).

Therefore, the feelings and implications garnered from the situation depend entirely on the person and how they subjectively interpret these scenarios.

The above example (taken from the book, The Happiness Advantage by Shawn Achor, which I highly recommend) can be applied to markets as well. The markets are bombarded with news every day. Some news is more important than others, and sometimes when a more important event takes place (or when something trivial happens), the markets move. But they move because they (markets = market participants) interpret a given situation in a specific way. And the way they choose to interpret news and events depends on the stage of a particular cycle that they’re in.

Do the markets want to move lower? If so, they will overreact to the bearish pieces of news, and will more or less downplay the bullish ones – either immediately or shortly thereafter. Did gold plunge two weeks ago based on the news regarding the Covid-19 vaccine? Yes, but the extent of the decline was based on something deeper. It could have declined about $15, right?

The current price movement proves that what we saw two weeks ago was indeed much more than just a reaction to news. Gold just plunged even without any major news announcement. In fact, it declined even without the most obvious trigger that it was likely to get – a rally in the USD Index.

What does it all mean? It means that while it’s not possible to predict unexpected news like a Covid-19 vaccine, it’s still possible to detect a large part of the market’s movements. This is possible thanks to the techniques aimed at detecting at which stage the market is at and what it wants to do next. Some of these gold trading tips include looking at the relative performance of gold vs the USDX and gold miners vs. gold, but there are many additional ones that one can use.

All things considered, it should now be obvious to everyone that gold wanted – and likely still wants – to move lower before soaring.

So, what’s next?

First of all, I previously wrote that gold might bounce from about the $1,800 level. I think this is no longer likely. Why? Because gold is already almost right at this level and the USD Index hasn’t rallied yet.

The USD Index refused to decline below the mid-August lows and the invalidation of the tiny breakdown was enough to trigger the slide in gold. In yesterday’s analysis, I commented on the above chart in the following way:

At the moment of writing these words, the U.S. currency is testing the previous lows. It’s very near to the last daily close price of 2020. At the same time, the USDX is below the 92.5 level, which is much more important than it seems at the first sight. Previously, in 2020, the USDX managed to stay below this level for a maximum of 2 sessions. This is currently the fifth session below it. Normally, this could be viewed as an early sign of a breakdown, but I don’t think this would be the proper interpretation.

Given the Thanksgiving seasonality, and the fact that the small breakdown below 92.5 didn’t result in a breakdown below the previous price lows, it’s doubtful that there are any bearish implications at all. Besides, that’s not even the most important detail from the precious metals investors’ point of view.

The most important detail is that all these bearish moves in the USDX failed to trigger any decent rallies in gold, which shows that the latter simply doesn’t want to rally from here.

The fact that gold declined so much based on just the USD’s inability to decline more is very telling. Precisely, because it tells us how much gold actually wants to slide, and how impatient it got with the lack of bearish triggers.

Since gold broke below the previous lows practically on its own, and it seems that it’s about to get a bearish push from the rising USD Index (it seems to have completed its broad bottom). Consequently, it’s likely that it will decline more than just an additional $10 or so when the USDX finally rallies.

Actually, it’s likely to decline much more. Based on the 50% Fibonacci retracement based on the entire 2020 rally, on the 138.2% Fibonacci extension based on the initial August – September decline, and on the April high in terms of the daily closing prices, the next short-term target is at about $1,770.

Still, I wouldn’t be surprised to see gold decline even more before it reverses. Based on the declining trend channel (the line that’s parallel to the line based on the August and November highs), gold could decline to about $1,750 or so (another $50) before bouncing.

And yes, “bouncing” not “bottoming”. If gold was able to decline as much without the USD’s help, then it’s likely to slide much more when the USD Index finally rallies. The bullish potential for the latter is significant, so gold could continue to slide well below $1,700 before bottoming.

On the other hand, there are multiple techniques pointing to $1,700 as strong support, which suggests an important rebound from this level. Will it be THE bottom? It’s a tough call to say at this time. As I wrote many times previously, it will be gold’s ability to hold strong despite USD’s rallies that will be the final bullish call. At this time, we have gold declining even without the USD’s help.

Summary

As opposed to our hapless bank robbery victim, gold is neither lucky nor unlucky. Its price point responds to the interpretation of market participants and a given situation, but happy will be those who wait patiently, examine the underlying fundamentals (and not just the news) and get in on the action when the time is right.

The following days are not likely to be pleasant times for anyone who jumps 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 yellow metal, forecasting gold’s rally without a bigger decline first is thus likely to be misleading. Silver is likely to slide as well. 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.

Thank you for reading our free analysis today. Please note that it is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the outline of our trading strategy as gold moves lower.

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Przemyslaw Radomski, CFA
Editor-in-chief
Sunshine Profits - Effective Investments through Diligence & 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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