Gold price moved lower today after yesterday’s powerful reversal, but is the rally really complete?
Let’s start with a reminder of what I wrote about gold futures chart on Monday:
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“Gold rallied once again, and it even moved close to the ultimate resistance of $3,000. What does it tell us?
It tells us that the next triangle-vertex-based reversal that’s due on Friday (or close to it) is likely to mark the top.
Don’t get me wrong. I’m not saying that gold futures have to continue to rally until that time with new highs achieved each day. What I’m saying is that the decline is very likely to start on this day or close to it. The path to the final top could take the shape of the continuous rally, but it could also take the form of a quick correction starting today, then a consolidation and another move [up] – perhaps to today’s high (or perhaps even to $3,000) and then a clear slide next week (or perhaps even this Friday).
If we were shorting gold, I would not want to wait for the rally to burn itself out and I’d have a more cautious approach. However, we don’t have a short position in gold – we have ones in miners and in FCX. And since miners are already not performing as well as gold, it seems that keeping the short positions intact is still justified from the risk to reward point of view.”
Yesterday, I added that given how close gold price was to its triangle-vertex-based reversal point, it seemed that we might get one more attempt to move higher, which would then be the final top.
Today’s decline is in perfect tune with the above. Another attempt to move higher later today, tomorrow, or on Friday would also be in perfect alignment with what I wrote and with the triangle-vertex-based reversal that’s due in a few days.
In other words, Tuesday’s reversal might have been the top, but we might need to wait a few days before the decline truly starts.
Also, please keep in mind that the recent rally in gold is almost certainly merely a thing connected with investors’ panic based on gold’s availability in London, which I already discussed yesterday. Silver didn’t even move higher recently.
This is not a sector-wide rally, it’s just something gold-specific. And likely temporary – just like the slide in crude oil futures (that moved below $0) in 2020 was.
There’s something else that’s emerging on the silver chart – it’s the similarity between the recent price moves and what we saw in 2020 and 2021. I marked it with orange rectangles. As you can see, we had a few distinct tops that were then followed by lower prices. Of course, that was all taking place after markets got pumped by Covid-based stimulus money. This means that this time, investors might not have the “hey, it’s free money, let’s spend/invest it” mentality – not with interest rates still high and long-term rates poised to move even higher.
This, in turn, means that silver might decline much more this time than it did in 2021 (and 2022).
Especially if stocks decline in a major way as well.
Having said that, let’s move to what I mentioned in the first part of the title of today’s analysis – gold price in terms of the euro.
If you look at the RSI indicator at the top of the above chart, one thing becomes clear.
What we see is not only excessive – it’s simply unsustainable.
There were times when gold soared due to multiple reasons, and this is one of those times. However, in none of the preceding two cases in the past 30 years, did gold soar so fast so far.
The thing is that no market can move up or down without periodic corrections. If the rally was of long-term nature, then the correction will likely be of medium-term nature (assuming that the bull market remains intact). This means at least (!) months of declines.
Getting back to the regular – USD – perspective and zooming out even more provides us with the same implications.
The only time when gold price in terms of the USD was this overbought and with similar recent (in terms of years) price moves was at the 2008 top.
It’s easy to spot – there was just one case where we saw two excessive readings in gold’s monthly RSI levels next to each other, and there was just one case when MACD (bottom of the chart) performed similarly.
And you know what’s truly remarkable? That the size (percentage-wise) of the rally above the previous (2006) high is practically the same as the size of the current (previous?) rally in gold above its 2020 high. That’s what I marked with the blue lines.
History rhymes and the above suggest that the rally has already run its course, and if not, then that the top is very close.
There’s a bit of a different long-term analogy in the USD Index as well, and it also supports the above outcome.
There was only one other time when the USD Index invalidated a big breakdown below the rising, long-term support line (rising black line) – it was in 2020-2022 – that’s how long the USDX stayed below it. When it finally invalidated this breakdown, it then corrected above the recent high (marked with a red, horizontal line), and it then soared. This rally continued for months, and it took the precious metals sector lower (in particular, mining stocks declined heavily).
That’s the same thing that is taking place right now. We saw a pullback after the USDX moved above the previous (2023) highs, which I also marked with a red line. In fact, this is what happened during previous huge rallies in the USDX as well – in 2008 and in 2014.
Additionally, we see a very similar action (I mean the similarity between 2022 and now) in terms of the RSI – it had moved above 70, and then it corrected somewhat. We saw that recently. The huge rally in the USD Index is now likely to continue, and the implications for the precious metals sector (in particular for the mining stocks) are very bearish.
And if you still think that this is a huge rally in gold that’s starting (and not ending), please consider how mining stocks’ ratios perform currently and compare it to how they performed in 2000 and 2016 when the long-term rallies were actually starting.
Gold stocks to gold ratio shows almost no rally despite gold’s move to new highs.
Gold stocks to other stocks (S&P 500 Index) shows the same thing. Miners “didn’t care” that gold moved higher.
In 2000 and in 2016, both ratios soared.
This rally is ending, not starting.
Also, before wrapping it up for today, remember what I wrote about FCX on Monday?
The part that I put in bold about the latter was “this might be the final call to enter short positions in FCX before the decline returns. If one has been waiting for a second chance to enter this position – it’s here (in my opinion).”
FCX declined by over 2% yesterday, and it looks like it’s about to invalidate its short-term breakout just like it did in mid-January. It looks that those that added to their short positions on Monday (or entered them), are very happy that they did. If that was you – congratulations.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief