Gold Price Forecast: How To Perceive The Rally?

The most recent gold behavior indicates mood swings. However, the yellow metal is likely to be back on its bearish track after the end of market holidays.

Gold rallied visibly on Monday as the USD Index gave away some of its Friday’s gains, and this sparked questions about whether this is actually bullish for gold. And rightfully so, after all, if a given market reacts to what it shouldn’t react to, it often tells us that the market wants to move in a certain direction. Let’s start with one of the questions I received:

Hi,

Thanks very much for your detailed reports. Just have a few observations and queries. On Friday we had the USD going up and Gold dropping a few dollars. Today we have again the USD continuing to go up, which is what you have been saying in your reports, but we also have Gold up $10. If you could help me understand why this is happening and how it fits into Gold going down as the USD goes up.

Thanks very much.

Let’s imagine that you’re about to go fishing with your friends, but you can’t ignore the fact that one of your friend’s behavior is odd, to say the least. While they are usually fine with your selection of the fishing spot and the time you arrived, today, they are annoyed by both. They don’t even like the road that your GPS system set for the drive, not to mention your driving skills. Whatever you say, it makes them complain. You might be tempted to think that this person is actually not that friendly at all and perhaps this friendship’s status has changed.

But… What actually happened was they were up all night as their heater broke, spilling water on the entire apartment, and since it was this friend that insisted on mounting it themselves, they didn’t want to brag about this result. They also didn’t have time to eat anything before they met with you this morning.

What is obvious based on the context might have been very misleading without it.

It seems to me that we have the same kind of situation in gold right now. The context here is that it’s the very final part of the consolidation – the right shoulder of a broad head-and-shoulders pattern, and, at such tops, markets can behave erratically.

Based on the identical blue rectangles, it seems that we might have seen the end of the correction.

The breakdown below the short-term support line – along with its confirmation – provides us with bearish indications as well.

Did gold manage to break to new highs yesterday? No. So, did it change anything from the technical point of view? No, once again.

The only thing that might seem bullish here is gold’s performance relative to the USD Index, but if it is indeed the very end of the correction, then this kind of performance might be understandable. After all, that’s where the emotions are at the zenith.

Moreover, let’s keep in mind that yesterday was a bank holiday in some parts of the world, including one of the world’s financial centers – London. If there are any days during the year when the markets are much more likely to behave erratically than on other days, it’s during market holidays and options’ expiration days. We had the former yesterday.

The performance of some stock market indices seems to confirm that. For example, the Nasdaq (the previous strong leader) declined yesterday, while the broad market ended the day slightly higher (yesterday’s session in the S&P 500 was another daily reversal, though).

And how could that fit the situation in the USD Index?

Well, the USDX is after a massive breakout, which means that it’s no wonder it corrected the move yesterday. And as it did, it’s also no wonder that gold traders assumed the USD’s rally was over. But the interpretation of the situation is likely to change as the USDX is moving back up today, and it seems that it’s about to confirm its breakout.

Now, if the USD Index keeps rallying for days and gold continues to show strength for days, we might be on to something bullish here. For now, it’s too early to say that.

Moreover, the gold-USD dynamic is not the only one that matters. While the links between gold and the USD Index as well as between gold and gold stocks often require confirmations, silver’s outperformance of gold is something that we usually see on a very short-term basis, and it’s an important sell signal without additional confirmations.

And while gold moved close to the recent highs but didn’t exceed them, silver moved visibly above them.

Silver price just outperformed gold on a very short-term basis, which is a great confirmation that yesterday’s session could have been the emotional peak – or a session that’s very close to such a peak.

While silver outperformed, miners underperformed.

Silver moved above its recent high, gold moved very close to it without breaking higher, and mining stocks didn’t move close back to the said highs. Consequently, gold stocks have underperformed gold.

Overall, the implications from the relative performance appear more bearish than bullish at this time, and they support other bearish factors that I’ve been discussing in my previous analyses.

Summary

It’s too early to determine if something really changed on the gold market based on its relative performance vs. the USD Index. For now, the bearish outlook remains intact.

Taking that into consideration, gold’s corrective action is pretty much over (or just about to be), and the weeks that follow are not likely to be pleasant times for anyone who jumps on the bullish bandwagon just because prices moved higher in the previous months or based on some forum posts. Tread carefully.

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 longer term 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
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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