Gold Price Forecast: Anticipating Gold’s Top

As the USD Index is testing its declining resistance line, the question now is whether gold’s corrective rally is running out of steam.

Very little changed yesterday (Feb. 10), and whatever changed served as a bearish confirmation for the short term. Let’s take a look at the charts for details.

Gold moved higher once again on Wednesday, but it reversed and declined before the closing bell. Does it mean that the next top is in or about to be in? That’s exactly what it means. Especially considering that yet another daily reversal in gold took place almost right at the triangle-vertex-based reversal and during USD’s breakout’s verification.

Figure 1 - USD Index

I previously wrote that because assets don’t move in a straight line, it’s plausible that the USD Index retests its declining resistance line, while gold retests its rising support line. If this occurs, the USDX is likely to decline to the 90.6 range, while gold will receive a short-term boost. I emphasized that the outcome does not change their medium-term trends and the above confirmations signal that the USDX is heading north and gold is heading south.

The part that I put in bold is exactly what is being realized right now. The USDX is correcting after the breakout, likely verifying the previous resistance as support.

Unless the USDX breaks back below the declining medium-term support line in a meaningful way, the bullish implications for the following weeks will remain intact. At the moment of writing these words, the USD Index is practically right at the support line, which means that it’s quite likely to reverse shortly.

Figure 2 - COMEX Gold Futures

Gold formed a reversal yesterday, but it ended the session slightly higher. That’s the second “shooting star” reversal in a row. It’s also been two days in a row when gold has shown that it no longer wishes to react to bullish signals from the USD Index. The corrective rally appears to be over.

Let’s keep in mind that gold was just at its triangle-vertex-based reversal (based on the declining black resistance line and the rising red support line), which perfectly fits the shape of yesterday’s (Feb. 10) and Tuesday’s (Feb. 9) sessions – the shooting star reversal candlestick. The implications are bearish.

Today, gold moved slightly lower and its currently trading lower than in the past 24 hours right now (valid at the moment of writing these words). This all means that the short-term top might already be in.

What about silver – did the white metal change anything?

Figure 3 - COMEX Silver Futures

Not really. Just like gold, silver is taking a breather after the increased volatility. This is normal.

And the miners?

Figure 4 - VanEck Vectors Gold Miners ETF (GDX)

Mining stocks are not doing anything right now – they are moving back and forth in a calm manner – just like what they did at the beginning of the year. Back then this was a top that was being formed, and given what I wrote earlier today and – more importantly – what I’ve been writing about in the previous days and weeks (Monday’s flagship Gold & Silver Trading Alert features myriads of details), this could be the start of another bigger move lower. The next downside target is at about $31 in case of the GDX ETF, after which I expect to see a rebound to the $33 - $34 area.

Ever since the mid-September breakdown below the 50-day moving average, the GDX ETF was unable to trigger a substantial and lasting move above this MA. The times when the GDX was able to move above it were also the times when the biggest short-term declines started.

So, did anything change yesterday? Not really.

Let’s examine the chart above (figure 4).

The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders pattern to the left shoulder (figure 4 - both marked with green) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.

Due to the uncanny similarity between the two green rectangles, I decided to check what happens if this mirror-similarity continues. I used purple, dashed lines for that. There were two important short-term price swings in April 2020 – one shows the size of the correction and one is a near-vertical move higher.

Copying these price moves (purple lines) to the current situation, we get a scenario in which GDX (mining stocks) moves to about $31 and then comes back up to about $34. This would be in perfect tune with what I wrote previously. After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.

This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, the day of reckoning for stocks is coming. And it might be very, very close.

Summary

Even though the USD has dropped slightly, thereby boosting gold, one must remember that markets don’t move in a straight line and countertrend rallies are expected along the way. Gold’s most recent rally does not change the fundamental outlook for the PMs.

The medium-term top in the precious metals is in and the following weeks 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 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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