“Golden Troubles”: A Breakdown

As was emphasized yesterday (Apr. 14), gold’s most recent small upswing is nothing more than a correction in a medium-term downtrend.

It’s time for a recap and to mention all the important factors that are playing a role in indicating weakness in the yellow metal and what the incoming weather spells for the precious metals.

What a boring week… One might say that about the precious metals market, and they wouldn’t be far from the truth. However, just because the week didn’t feature spectacular price moves, doesn’t mean that we didn’t get any clues. Even during yesterday’s (Apr. 14) practically non-existent price movement, we saw a subtle indication of what’s likely to happen next.

This indication comes from the relative performance of gold, silver, and mining stocks. The thing is that there’s a kind of performance that is specific to the precious metals market that one can observe at the tops. It’s the day when mining stocks underperform gold, while silver outperforms it.

To be clear, we don’t really see short-term weakness in mining stocks right now. We don’t see their strength either – they’re performing normally. However, the context here is the relentlessly rallying general stock market, which often exerts pressure on miners’ prices. If miners were truly neutral now, they would still be showing some strength relative to gold due to the stock market’s strength. So, their “average” or “normal” performance compared to gold is not necessarily such.

So, the miners’ relative weakness is there, it’s simply not visible at first sight.

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Technically, nothing really changed yesterday – the sell signal from the stochastic indicator simply became more visible. Please keep in mind that there were two similar situations with regard to the shape of the top and the stochastic’s sell signal: in mid-March and in early January.

This is important in light of what’s happening in gold.

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Gold – A Deceptive Rally

In the case of the yellow precious metal, we see only one similarity – and it’s the one for the situation in early January. The sell signal from the stochastic indicator based on gold is now clearly visible and it now moved back below the 80 level. This was the case in early January.

Moreover, please note that the January top was preceded by approximately a monthly rally. Last week’s top (gold topped last Thursday, right at its triangle-vertex-based reversal point) was also preceded by approximately a monthly rally. It was not as big as the one that we saw in December 2020, but it took as much time. And time is more important than price.

Besides, if gold was to remain symmetrical in its performance compared to the April – June 2020 performance, it couldn’t rally much higher. Consequently, my comments from yesterday are more (they were confirmed) than up-to-date:

Gold topped right at its triangle-vertex-based reversal, just like it did in mid-March and in early January (please note the points that are marked on the above chart for confirmation – they are described in red). That happened on Thursday (Apr. 8), and since that time gold has continued to move lower.

Gold invalidated the breakout above its mid-March highs, proving that what we saw was nothing more than just an ABC (zigzag) correction within a bigger downswing. The moves that follow such corrections are likely to be similar to the moves that precede it. In this case, the move that preceded the correction was the 2021 decline of over $150. This means that another $150+ decline could have just begun.

It might appear bullish that gold rallied yesterday (Apr. 13), but it only appears this way until one compares this rally with what happened in the USD Index during the same time. Paying attention to today’s (Apr. 14) pre-market price moves further emphasizes the fake nature of yesterday’s rally in gold.

And speaking of the USD Index, let’s take a look at its recent price movement.

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The USD Index – Monthly Lows

In yesterday’s analysis, I commented on it in the following way:

During yesterday’s session, the USD Index moved to new monthly lows and this decline continued in today’s pre-market trading. Consequently, if gold was at least reacting to the USD’s movement “normally”, it should move to new monthly highs. If gold “wanted” to rally, it would have likely exploded to the upside. But what happened instead? Gold moved higher only somewhat yesterday – not to new monthly highs – and in today’s pre-market trading it’s actually slightly lower.

This tells us that gold “wants” to move lower now.

The USD Index moved lower, and it can move even lower on a very short-term basis, perhaps to the 50% Fibonacci retracement based on the entire 2021 rally, and the previous lows. And what would be the likely effect on gold? Based on what we saw yesterday, and what we see so far today, it seems that gold will likely ignore this decline in the USD Index, while waiting for the latter to finally show strength – so that it (gold) could decline.

After all, gold has already topped right at its triangle-vertex-based reversal point. Consequently, it’s no wonder that it now continues to trade sideways, waiting for a trigger to move much lower.

Moreover, please note that the recent zigzag makes the situation similar (approximately symmetrical) to what we saw about a year ago – between April and early June. Once gold breaks to new yearly lows, one could view this as a breakdown below the neckline of a major head and shoulders pattern where the April 2020 – June 2020 and the recent consolidations are the shoulders of the pattern. Based on such a pattern, gold would be likely to slide profoundly, probably well below $1,500. And the relative performance of gold vs. the USD Index tells us that such a short-term breakdown (to new yearly lows) is a likely outcome in the following weeks.

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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