Gold Price Forecast: Post-Election Highs – Good For Wall Street But Not For Gold

Following the conclusion of the U.S. presidential election and latest post-election euphoria, the price of gold sank by more than 4% today. Despite some storm clouds ahead in the form of vote recounts and court challenges by outgoing president Donald Trump, the market is experiencing a decrease in political uncertainty, which can only mean one thing: a continuing slump in gold, at least for now.

On Friday, I wrote that as the USD Index soars, gold is likely to slide, and I emphasized that this meant that the current test of the 38.2% Fibonacci retracement level (and the October highs) by the gold price was likely to have a bearish aftermath.

In the previous days, I had written that gold is likely to top along with the uncertainty, and that the rally was longer this year than in 2016 as the uncertainty was spread over several days. Anyway, I stressed that the outlook remained bearish and that gold was likely to decline soon after the outcome of the U.S. elections becomes known.

Gold is already visibly lower in today’s pre-market trading, so the situation is developing in tune with my expectations. And that’s likely just the beginning of the bigger decline.

Before moving further, I would like to stress that according to the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.

Having said, that, let’s focus on the fact that gold recently failed move above its previous long-term (2011) high. Since history tends to repeat itself, it’s only natural to expect gold to behave as it did during its previous attempt to break above its major long-term high.

And the only similar case is from late 1978 when gold rallied above the previous 1974 high. Let’s take a look at the gold chart below for details (courtesy of chartsrus.com)

As you can see above, in late 1978, gold declined severely right after it moved above the late-1974 high. This time, gold invalidated the breakout, which makes the subsequent decline more likely. And how far did gold decline back in 1978? It declined by about $50, which is about 20% of the starting price. If gold was to drop 20% from its 2020 high, it would slide from $2,089 to about $1,671.

Summary

Combining the celebratory mood kicked off by many Americans after Joe Biden was declared the winner, with the latest news about successful Covid-19 vaccine trials by Pfizer, can only serve to maintain the downward pressure on gold in coming days, as investors jump into riskier assets.

In other words, 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 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 lastingly 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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Przemyslaw Radomski, CFA
Editor-in-chief
Sunshine Profits - Effective Investments through Diligence and Care

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