Miners’ have been suggesting this for some time, but THIS technique adds precision.
When a price moves to new nominal highs, it’s not so easy to create targets for the upswing, simply because the previous highs are often the resistance that keeps gains in check. Rising trendlines and their upper borders, indicators, Bollinger bands and similar provide some insights, but there’s one technique that’s remarkably precise. It doesn’t provide targets very frequently, but when it does, it’s a really good idea to pay attention.
This technique is applying the use of the Phi (1.618) number to the previous price moves and extending them into the future. Other Fibonacci-based numbers (such as 1.382 or 2.618) can also be useful in that regard, but the 1.618 extension is the key number.
Many people know about the Fibonacci retracement levels (and for a good reason, the 50% Fib. retracement just stopped the corrective upswing in stocks and those retracements worked thousands of times in many markets previously), but the other way to apply the Phi number is not as known.
Yes, it’s essentially about applying the same number. 1 / 1.618 is ~0.618. And 1 - 0.618 is 0.382. In case of the retracements, the question that we’re replying to is how much of the previous rally is likely to be erased during the correction. In case of the extension, we’re asking, how much of the previous rally (how big part thereof) is likely to be repeated.
Why would those numbers work at all? Because they are found in multiple places in nature. There’s something about them that represents how things simply work in nature in general for whatever reason. The are multiple special mathematical properties of those numbers as well, but the former seems more important. After all humans are a part of nature as well, and humans also create markets (or they program algorithms that also participate in the trades). Therefore, seeing those numbers work on the markets (over and over again) is like seeing yet another place in nature where they appear.
As you might have guessed by now, there is a good reason why I’m explaining all this to you right now. And yes, it’s related to gold.
The thing is that gold just reached the 1.618 extension based on its previous long-term rally – the 2015 – 2020 one.
Not only did it reach this number – it also moved back down a bit after touching it.
Is the top in gold in?
Of course, nobody can tell with certainty but given how profound the 2015 – 2020 rally was, and how important the 1.618 extension is, this seems quite likely at this time. Of course, keeping gold for retirement might still be a good idea as the investment horizon is very long in many cases, but if one is considering placing bets for the next several months or they are aiming to forecast gold’s performance during the remainder of the year, I’d suggest caution.
Also, please note how one of the Fibonacci levels aligns with the 2017 top – making the mathematical connection between those levels even stronger – further strengthening the resistance at the just-reached extension.
Of course, all this comes on top of the bullish case for the USD Index (based on the previous tariff announcements, we know that the USDX is likely to gain based on the former, not lose – unlike the U.S. stock market), as well as the underperforming mining stocks (GDXJ didn’t even move to its 2020 high, let alone its 2011 high. Silver is not strong here (the same note with regard to silver and retirement-focused time-frame applies)
One final note is that the markets often move on the rumor and reverse based on the fact. Gold and copper seem to have rallied based on the rumor that the tariffs are going to be increased on April 2 (which Trump called the “Liberation Day”). The above rule suggests that those moves can now reverse, and this would perfectly align with long-term technical charts for both: gold and copper.
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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief