We might see a plunge in gold prices quite soon. History repeats itself to a huge degree at the moment – let’s see what it has to offer.
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Today’s technical analysis will be very similar to what I provided to you yesterday because the markets pretty much moved exactly as I had expected. As you may recall, I wrote about the analogy between now and early August in the following way (I’m putting the key part in bold):
The situation now appears to be the same as it was at the beginning of August, where the bottom also took several days to form, but when the USD Index finally moved higher once again, gold plunged. To be precise, back then, the bottom formed over 5 trading days, and yesterday was the fifth trading day of the current bottom. On the sixth day – back then – the USDX did very little and gold declined modestly, and it was the seventh day when the action really started. And… the short-term decline was over on the very next day. It was not easy to catch this decline if one wanted to wait for a big confirmation that it was indeed taking place. It seems that the same – patient – approach is justified in the current situation.
The RSI indicator (upper part of the chart) continues to confirm this similarity.
Gold Is Down By $6
Yesterday, the USD Index ended the session 0.13 higher, so – just as in early August – it moved very little. Gold declined modestly back then, and, well, it moved lower by $13.40 yesterday, so it seems that it fits well. Gold is down by $6 in today’s pre-market trading (at the moment of writing these words), so it seems that history might repeat itself to a very big degree.
If it repeated itself to the letter, we would have a $100+ decline in gold this week. But since history rhymes more than it repeats, I think it’s more realistic to simply expect gold to fall substantially soon, without giving the decline just 2 days to materialize.
Yesterday, I described the above chart as “another attempt”. Mining stocks (GDX ETF) once again failed to hold the move above their September highs, which is – of course – bearish. GLD failed to hold above its previous October highs as well. It did manage to close above the declining resistance line based on the previous highs, but given today’s pre-market rally, it’s doubtful if GLD will be able to hold this level for long.
There are different rules for confirming a breakout or breakdown, but in the precious metals sector, based on almost two decades of experience in it, I prefer to see three closes above or below a certain level to view the breakout or breakdown as confirmed. Gold / GLD hasn’t confirmed its breakout just yet, and it seems to me that it won’t confirm it soon. Instead, another – big – downswing seems to be just around the corner.
To explain, the green line above tracks the GDXJ ETF from the beginning of 2013 to the end of 2015. If you analyze the left side of the chart, you can see that when Fed Chairman Ben Bernanke hinted at tapering on May 22, 2013, the GDXJ ETF declined by 32% from May 22 until the taper began on Dec. 18.
Moreover, the onslaught didn’t end there. Once the taper officially began, the GDXJ ETF enjoyed a relief rally (similar to what we’re witnessing now) as long-term interest rates declined, and the PMs assumed that the worst was in the rearview.
All in all, the technical picture for the precious metals sector looks bearish, even though the recent short-term corrective upswing might make one think otherwise.
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Przemyslaw Radomski, CFA
Sunshine Profits: Effective Investment through Diligence & Care
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.