Gold Forecast: The Tastiest Things Come in Bundles

What’s supersized tastes the best, and that’s why the drop in gold miners was the juiciest thing of recent days. Apart from my last 2forU, of course.

The Greatest Show

Ladies and gentlemen, we have a breakdown! Junior miners have just broken to new yearly lows, which means that everyone who joined us in the short position in the junior miners this year is now profitable (if they kept their position intact, that is). In fact, everyone who joined the trade in the past 12 months is profitable as well. In many cases, the profits are already huge.

And the best part is that this move is just getting started! That’s what the long-term HUI Index chart and long-term gold charts tell us. I went over both in detail in yesterday’s flagship Gold & Silver Trading Alert, so I don’t want to go through them once again today. I want, however, to make sure that the context of the breakdown to new yearly lows in the GDXJ is clear: this is not the end of the move, but a confirmation that its key (and the most profitable) part has just started.

The volume on which yesterday’s decline took place was significant enough to confirm the validity of the breakdown. However, I wouldn’t be myself if I didn’t check what happened when we previously saw a boost in the volume levels. I marked it with vertical dashed lines, and as you can see on the above chart, we saw the same thing in mid-June. We also saw the RSI indicator move relatively close to 30 then.

Some might view this as a sign of a reversal, but history suggests otherwise. Back in mid-June, there was a slight pause which was then followed by more declines, and a short-term bottom almost a month later. While it seems that we might see the next short-term bottom sooner, the key takeaway remains intact – the possible bullish indications that might appear to be important at first sight are actually nonexistent. Thus, the profits on the short positions are likely to become much bigger in the upcoming weeks.

Senior miners (GDX) didn’t decline as much as the GDXJ, and, unlike the latter, they didn’t move to new yearly lows. But they did something important from the technical point of view. Namely, the GDX ETF broke below the neck level of its head-and-shoulders pattern.

This move was not yet confirmed, but with the significant volume on which it took place, it looks quite believable. Therefore, it wouldn’t be surprising to see a few days of consolidation before senior miners move much lower.

In fact, gold has been consolidating so far in today’s pre-market trading, doing almost nothing.

Gold is a few dollars higher, which is actually more bearish than bullish as far as the immediate term is concerned. Why? Because if the recent move lower was fake, gold would be likely to rally without looking back. Remember silver’s fake-out just a few days ago? Silver didn’t hesitate before declining shortly thereafter. So, the fact that gold is up by only a few dollars is actually bearish, as it’s less bullish price action in gold than what one would expect if the recent decline was fake / temporary.

This means that the scenario that I outlined yesterday remains very much up-to-date:

I previously wrote multiple times that the gold market seems to really want to decline, and what happened over the last few trading days shows you that the market agreed with me.

Now, the shape of today’s pre-market movement might be concerning, as it’s ultimately a huge intraday reversal – at least so far. And intraday reversals tend to be bullish. Should we view the current movement as bullish then?

No.

As always, context is important. And this time, the context is provided by two similar situations: one from February and one from June. Back in February (marked with a red ellipse), when gold was right after a breakdown below the previous lows, it moved back up quickly after the initial slide. This didn’t mean that the decline ended. Consequently, seeing something similar this time shouldn’t make one think that the decline is over.

The most recent case when gold plunged was the fall in June. That’s when the yellow metal declined below $1,800. Right after the most volatile part of the decline, it moved back up, but that was not the true bottom. Gold continued to move lower after a quick breather, and it bottomed less than two weeks later.

All in all, based on both the above-mentioned analogies and on the triangle-vertex-based reversal, it seems quite likely that we’ll see a short-term bottom in the PMs and miners in the second half of August.

Also, let’s keep in mind that while gold corrected in June, junior gold miners really didn’t – they declined in a much steadier manner.

And speaking of silver, please note that despite yesterday’s correction, silver didn’t invalidate its breakout to new yearly lows.

Consequently, my yesterday’s comments on silver remain up-to-date:

While silver already moved to its support lines and then bounced back up, it doesn’t mean that the final medium-term bottom is in.

The move lower was volatile, and the support provided by the previous lows was strong. Consequently, a quick rebound here is quite natural.

Why isn’t silver likely to rally once again to $30 or so before declining (or not to decline at all)? Because of all the reasons that I wrote due to which gold is likely to decline. The white metal is unlikely to move completely independently of the yellow one. Instead, it’s likely to magnify its declines in their final parts. Besides, let’s keep in mind silver’s long-term cycle that I discussed earlier today.

The Dollar’s Importance

There are many very good reasons to expect continued declines in the precious metals; the breakout above the inverse head-and-shoulders pattern in the USD Index is one of them.

The August 2020 highs are the next short-term resistance for the USD Index, but I don’t expect it to decline significantly from there. Instead, it seems to me that the USDX will rally to almost 98 based on the inverse H&S pattern, and then it might consolidate.

The recent invalidation of the pattern was fake, similar to the fake nature of the pullback that we saw in 2014 – right before the USD’s massive upswing.

After all, they both took place in the middle of the year.

Let’s not forget that gold has been declining for a year now, and it has been doing so while the USD Index was declining (mostly). If the gold market was so weak that it declined despite the factor that should normally make it rally, then just think how significantly it will decline when the USD Index finally does rally in a meaningful way.

Summary

To summarize, the corrective upswing in gold is over, and it seems that the big downswing in gold, silver, and mining stocks is already underway. While the next few days may (!) bring some back-and-forth action instead of the decline’s continuation, it’s unlikely that this will take place for long. Based on the self-similar pattern in gold (similarity is mostly to the 2011-2013 period), gold is likely to decline to its previous 2021 lows relatively soon, even if it doesn’t happen right away. Based on the analogies to the recent past, it seems quite likely that gold will move lower in the following days and bottom in the second half of August.

And as silver often moves in close relation to the yellow metal, when gold falls, silver is likely to decline as well – it has probably already started its slide. 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.

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Thank you.

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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