The key thing that is currently taking place this week is gold’s sharp upswing.
I’ll start with this issue, as it seems that it might be the key thing that you might be worried about, and because the link to the previous cases when gold topped and what happened in the following weeks and months is quite clear.
Here’s the deal:
Gold just jumped to its 61.8% Fibonacci retracement. On a day-to-day basis, we just saw a sizable, two-day rally that might seem like uptrend’s continuation.
BUT.
This is exactly what used to happen multiple times after gold tops. This is the default post-top price action for the yellow metal. Again, default.
That’s how gold topped in 2020, 2022, and 2023. It even topped in this way in mid-2019.
In 2008, gold corrected slightly more than 61.8% of its initial decline before plunging, but I’ll move to that in a while when I’ll describe the analogies between now, 2008 and 2022 in multiple markets.
For now, the above chart provides enough context to prove (!) that the current move up in gold – to its 61.8% retracement – is a normal part of the post-top decline.
Normal, default – whatever one chooses to call it, the key thing about it is that it’s NOT a game-changer. It’s not a return to the previous uptrend. Or at least what we saw so far is NOT an indication thereof.
It is impossible to see when looking at just the day-to-day performance, I know, but it’s so obvious and clear when we take a step back and look at the situation from a distance.
As far as the link to 2008 and 2022 is concerned, I described it more thoroughly on Wednesday, but the implications remain up-to-date. I added Fibonacci retracements on the gold charts so that you can see that what we see now is indeed NORMAL.
I emphasized many times that the current situation is analogous to 2008 and 2022 due to several reasons, and one of them is the similarity in world stocks. They reach the same price levels.
In all three marked cases – 2008, 2022, and now – we see similar performance in mining stocks. The latter moved higher in a way that was quite notable on a short-term basis, but not when compared to the previous medium-term price moves.
I described that the overall implications are bearish as ultimately in both: 2008 and 2022 miners declined significantly, but what I would like to do today is to examine those previous years in greater detail and consider what was happening also in other markets at that time.
Starting with 2008, we see that stocks were actually first to top, then gold topped along with the USD Index’s bottom – and that was when miners also formed their final high.
The important detail, however, is that initially (between Nov. 2007 and Mar. 2008) miners (XAU Index at the bottom of the chart) were weak relative to gold, and then they faked strength right before the decline. In late June and early July miners moved quite close to their previous high, while gold didn’t, especially in late June. The decline in gold and miners picked up pace when the USD Index rallied decisively and when stocks declined in a profound way. The latter was particularly important for the miners.
Let’s check how it looked in 2022.
Once again stocks were first to top, then gold and miners topped. The interesting thing this time, was that the USD Index’s bottom and gold’s top were not aligned. The dollar bottomed first, and gold ignored its rally initially, but only initially. When the USD Index showed that it wasn’t fooling around and that it meant business, gold plunged
The U.S. stocks (S&P 500 Index) moved higher in a more visible manner.
Once again, the really interesting thing was that after being weak initially (in early March 2022 miners didn’t move to new high while gold did), miners faked strength right before the big decline. Namely, in early April 2022, miners moved to new short-term highs, while gold didn’t.
The April – June decline was particularly big in case of miners as both: gold and stocks were declining.
What does the above tell us? Several things:
- The huge declines in stocks are likely to translate into huge declines in miners, but before the most volatile part of the decline happens, the timing doesn’t have to be aligned in the short run.
- Gold price is likely to be linked to the USD Index, but it might initially rally despite USD’s gains, and it’s likely to slide once the USD Index proves that it can continue to rally for longer.
- The final days/weeks before the really big decline are likely to be characterized by mining stocks’ fake strength.
- The U.S. stocks might be rallying in the final parts of the rally while world stocks no longer move to new highs.
All right, let’s see how the above checks out in the current market environment.
Starting with point 4, we see a reaction that’s more or less in the middle of what we saw in 2008 and 2022. The U.S. stocks are rallying more than world stocks and their outperformance is visible particularly since the beginning of 2023, but it’s not the case that the world stocks stopped at their short-term highs. They stopped at their long-term highs, though, suggesting that the situation are indeed rather similar.
Point 3 definitely checks out – I marked the recent “strength” of miners with the orange rectangle, and its clear that miners had underperformed previously as they didn’t even move to their 2023 high, while gold moved way above it.
Point 2 appears to be aligned as well. Gold price initially rallied despite USD’s rally and now it’s declining.
Point 1 is something that’s still likely to play out in the future – it’s not the time to assess it. We’ll know only once both declines happen, which means that it will be too late to react. This will be the time that the ones that had prepared will be wondering what to do with their huge profits.
All in all, the things that might seem game-changers (why are miners holding up so well?) or out of tune (are gold and dollar de-coupling here?), are actually yet another rhyme of history that becomes clear when one examines the situations that are indeed analogous. The upcoming price moves are likely to bring superb returns to those, who are prepared, and being aware of the long-term cycles and analogies helps in that process.
The above further emphasizes is that what we see here is not a game-changer, it’s history’s rhyme. Even mining stocks’ short-term “strength”.
Moreover, the bearish implications of the monthly April reversal remain in place.
This is important not just on its own (heh, “just” – as if a monthly reversal was a small feat – it ISN’T). It’s so critical because we saw similarly clear monthly reversals only a few times in the recent past – twice in 2008 and once in 2008. In all those cases, gold then declined by hundreds of dollars.
What’s so remarkable about those cases is that those were the years when we saw major declines in world stocks! We got yet another confirmation that those years are analogous. Since this is a completely different indication – independent from what we see in stock markets around the word, it serves as a reliable confirmation.
Even the volume itself confirms that gold’s medium-term rally is likely over and that it’s going to decline in the weeks (and perhaps months) ahead.
Will gold stop at $2,000 or slightly above, or will it invalidate the move above it remains to be seen. Given the situation in the USD Index, a decline back below $2,000 still seems to be the most likely outcome.
As far as the short-term price target is concerned – one for the end of this month, my previous comments also remain up-to-date and today and yesterday’s upswing don’t change that:
Gold price has more than confirmed its breakdown below the rising support line, and this, a as well as the situation on the forex market (along with many other indications like silver’s short-term underperformance) suggest that gold is now going to turn south once again.
The last several days have been relatively boring as gold has been moving back and forth, but it’s something relatively normal now. Gold wants to decline, but the USD Index moved lower, so the lack of rally here is what is meaningful – and it’s a bearish thing. Once the USD Index rallies visibly again, we’ll likely see more visible declines.
How low can gold go in May?
After breakdowns, price of a given asset tends to decline until it reaches some sort of support, after which it pauses, rebounds, and then decides what to do based on bigger trends / factors. So, the question is where’s a near support level that can trigger a rebound or a pause. The Fibonacci retracements, previous highs and lows as well as rising/declining support lines help to estimate the those price levels. And when more than one technique points to a certain price level, seeing a rebound from it (or a pause) becomes even more likely.
In case of gold, we have this kind of triple support close to $2,150, so in my view this level could trigger a more visible pullback or some back and forth trading.
Those three support levels are the 50% Fibonacci retracement, the December 2023 high, and the rising red support line based on the Oct. 2023 and Feb. 2024 lows.
So, if I had to pick a level around which prices would be hovering at the end of May, I’d go with $2,160 as that’s a bit above the above-mentioned target. Gold could slide to its 50% Fibonacci retracement earlier (in 1-3 weeks), and then pause.
Once that happens, I expect gold to fall further.
It seems that the major tide is here in the case of currencies (USD/YEN!), stocks (tech stocks, broad market), bitcoin, and precious metals. It also seems that junior mining stocks provide an excellent opportunity right now, and I invite you to subscribe and read all key details in my premium Gold Trading Alert (along with trading details). Subscribe today.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief