There are two primary factors that drive the gold price in the long run. One is the USD Index, and the other is real interest rates.
That’s what I’ll discuss in the following part of the analysis, and I’ll start with a quick update on the short-term developments.
Gold was up in today’s pre-market trading, and it reversed after moving close to the declining resistance line and Friday’s intraday high. That’s good – it proved that those levels are indeed strong resistance.
The new short position in gold remains profitable, and given what we just saw, it’s likely that it will become more profitable soon. It’s pennies to the upside, tens of dollars to the downside – likely more.
What I’d like to add here is that it’s not only gold on its own that is suggesting that it will decline soon, but the same indication is also coming from the USD Index.
The latter declined, touched its 50% Fibonacci retracement and the May high once again, and then it reversed in a clear manner. It looks like the local bottom is in.
Since the USD Index and gold tend to move in the opposite directions, the above is likely to translate into lower gold prices.
Let’s zoom out – by a lot.
The above chart features not 4-hour, but monthly candlesticks. We saw two major signals in the previous two months as gold formed shooting star reversal candlesticks in April and May. This suggests much lower prices in the following months.
As far as June is concerned, gold didn’t do much – it moved somewhat up and somewhat down, and it closed the month $6.20 lower. This means that the bearish implications from the previous two reversal candlesticks remain in place. The tiny decline doesn’t invalidate it.
In fact, please note that when gold topped in this way in early 2022, it then did very little in the following month as well.
Now, what you can also see at on the above chart is a yellow arrow – it points to November 2022, when gold was trading below $1,700.
Why did I mark this time / price on the above chart? Because it’s also the price to which I think gold is heading in the medium term and because it’s where gold was when the real rates were where they are right now.
The real 10-year rates are quite high after bottoming visibly below 0. It’s no wonder that that’s where they bottomed – how can people be expected to lend out money for less than inflation?
My point here is that from the fundamental point of view, the U.S. real rates point to gold price levels that we saw in… November 2022, which is below $1,700.
Sure, some will say that the demand from China is so big that gold won’t fall that low. But let me remind you about the verification of the breakdown in the Chinese stocks (and technicals usually precede fundamentals). Here, some will say that the Chinese investors will move from stocks to gold further boosting its price, but… That’s not what used to happen during major slides in the Chinese stocks.
What happened is this:
- During the initial part of the decline in the Chinese stocks, gold and gold stocks either do nothing (mid-2015) or they rally (late-2007, early-2022 – but in this case it was also the Russian invasion that triggered the rally in gold).
- Then when the decline in the Chinese stocks matures, we see a decline in gold and mining stocks that is particularly profound.
- The huge decline takes gold and miners much lower, and it creates a superb buying opportunity of at least medium-term importance: the 2008 and 2015/2016 bottoms serve as perfect examples. The 2022 bottom was very important as well.
So, yes, the initial (2023 – 2024) part of the decline in the Chinese stocks did correlate with rallies in gold and mining stocks, and that’s normal. What will also be normal is for the following move lower in the Chinese stocks (again, it’s very likely, as the breakdown was verified) to take gold and mining stocks lower with them. In the case of the mining stocks (in particular, junior mining stocks), the decline is likely to be particularly significant (and profitable for those positioned to take advantage of it).
Can gold really fall to $1,700 or lower and bottom there?
Yes, the real rates already support that, and the upcoming moves in the USD Index and Chinese stocks are likely to support that as well. The biggest decline is likely to be seen in junior mining stocks. Silver and bigger miners are likely to fall substantially as well, but the slide in juniors is likely to be epic.
And it’s not too late to establish short positions in junior miners, either (in general, just my opinion, not individual investment advice).
As always, I’ll keep you – my subscribers – updated.
Thank you for reading my today’s free analysis. If you’d like to read more and stay up-to-date with the quick trades, intraday Alerts, and all the key details that my subscribers are getting, I invite you to sign up for my Gold Trading Alerts or the Diamond Package that includes them. Alternatively, please sign up for my free gold newsletter today.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
P.S. While I think that gold will move lower in the following months, please note that I’m keeping my insurance capital (physical gold / silver) intact. If you want to establish this capital or you want to buy gold/silver now anyway(or plan to do so soon), I encourage you to do so using the gold dealers that we trust. The above link will take you to a page that includes one US and one UK dealer. The former also has a pretty cool Inflation / Retirement Calculator, I encourage to check it out. PRO TIP: fill out their quick form – when you decide to buy gold, it will be faster to proceed at that time thanks to having a connection with the dealer.