Gold is soaring based on the shortage in London – will this upswing continue?
Remember yesterday’s comments on copper and FCX? 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 significantly, and it looks like it’s about to invalidate its short-term breakout just like it did in mid-January. That invalidation was followed by a sizable immediate-term decline, and the one that follows this correction might be much bigger.
One factor pointing to it is FCX’s weak performance relative to copper, and the other is the situation in the latter itself. Quoting my yesterday’s comments on it:
“The second-best electricity (and heat) conductor’s price rallied, but it seems that the rally is over as I’m typing this – over very, very close to being over.
Copper touched its 61.8% Fibonacci retracement, and this level already worked in late 2024. This price level is also where copper topped in July and in late April. The resistance is strong, and it seems that whatever rally we see from here, is going to be invalidated shortly – just like the late-2024 one was.”
The breakout above the 61.8% Fibonacci retracement was just invalidated. This proven technical resistance worked once again – just like it did in the second half of 2024.
This stuff works. Over and over again. Not in each and every case, but it works so often that ignoring it is not the most profitable thing that one can do (at least unless they have something just as good in their arsenal).
Now, the reason that I’m writing that this decline in the FCX is likely to be bigger is that copper is now declining from a much stronger resistance and while being more overbought on a short-term basis. This creates a superb trading opportunity in the FCX.
What does this have to do with the precious metals market? While this is not a direct reason for the precious metals market to decline, it’s a good indication that the tide is turning not just for copper, but also for the PMs and miners. This is the case as both markets: copper, gold, silver, and miners tend to move together in case of the bigger, medium-term moves. For example, they just all rallied this year, haven’t they and their bottoms were more or less aligned. Tops are likely to be more or less aligned as well.
To understand why those markets are related – and why Fibonacci levels (as well as multiple other tools provided by the technical analysis) – work, it’s key to get back to the basics of what makes the price move.
The price moved, because someone bought. The purchase is almost always an emotional decision and while some are much better than others at justifying and rationalizing their decisions, emotions always play some part (btw, there was study that checked if eliminating emotions from decision making made one’s choices better, and actually the opposite was the case). That’s simply how humans operate – how our species evolved.
This tends to work even if you think it doesn’t. You may think that you’re buying that sports care because of its technical specifications, but you’re really doing so, because you’re excited by the vision of driving it and feeling the thrill of excitement.
The same goes for investment purchases – perhaps even more so. People fear losses, they fear of missing the opportunity, they want to earn more and more, and this creates all sorts of emotional combinations nobody on the market acts in isolation but rather responds to what others have done recently. This creates price bubbles, trends, resistance levels and so on.
Humans act in similar ways when approached with similar situations, and the key part here is that the similarity has to take place on the emotional level. It might not matter if the interest rates are now going this way or that way or did this politician say this or that thing. What matters is how people perceive it and how they react to it (emotionally). Whatever is the direct trigger for action (buying / selling) is not that important, as how people really want to react. And this will depend on their emotional status at the moment when the news hits them.
If people are already super emotional and in a buying frenzy and something makes them buy even more – they likely will – perhaps even on credit. That’s one of the emotional mechanisms.
Here’s the news:
“London is encountering a gold shortage as many major gold holders are transferring their gold to the U.S. London companies have sent an estimated 134 billion dollars worth of gold recently to the United States, which has led to a significant backlog in gold retrieval waiting times in the UK.”
What’s underneath?
Fear.
- I may not get my gold on time – there’s none left, better grab my gold before it’s all gone!
What’s more likely real? Based on tariff (and trade-wars-related) threats, people are playing it safe, and they are moving gold from one place to the other. That’s pretty much it. Gold is not “gone” – all gold that was ever mined is pretty much here in one form or the other.
Will gold come to London from some other places unaffected by tariffs? That’s very likely to be the case. Is this a major game-changer on the gold market? No, it isn’t.
Remember when price for crude oil futures moved below zero as there was a problem with physical delivery during the Covid era?
Markets panicked at that time, and nobody wanted that crude oil.
Fear.
What – OF COURSE – happened next?
That was the bottom, someone figured something out with regard to the physical delivery, and the price rallied back up to normal levels. Those, who were able to see through this and bought had a chance to become very wealthy in a short period.
What we see in gold (gold shortage) is likely the opposite of the negative prices in crude oil from 2020. And what’s likely to happen next? Some will figure something out with regard to the physical delivery and the price will move back to more normal levels. Those that are positioned to get their gold-related income regardless of what gold does will get it, but the price of the yellow metal itself? It can – really – decline.
Given that the USD Index recently verified its breakout above its 2023 high, copper probably topped, and gold itself rallied a bit more than it did before the big 2020-2022 consolidation, it seems that we’re seeing a top in the making.
After I saved the above chart, gold moved a bit higher, but not above yesterday’s high. The daily reversal is a fact. That’s how this rally might be ending. It’s also in perfect tune with how I described the situation in gold in yesterday’s Gold Trading Alert:
“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 – 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.”
Given how close gold price is to its triangle-vertex-based reversal point, it seems that we might get one more attempt to move higher, which would then be the final top.
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 today. Silver didn’t even move higher recently.
In particular, today’s decline is telling – while gold moved much higher in the overnight trading, silver hasn’t. This is not a sector-wide rally, it’s just something gold-specific. And likely temporary – just like the slide in crude oil in 2020 was.
This is a massive opportunity, but it’s difficult to take advantage of it from the emotional point of view – and the vast majority of investors won’t be able to do that. It’s always like that at the tops – that’s when everyone wants to buy.
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Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief