The last two months have been difficult for precious metal investors, and many have turned bearish. Prices have swung wildly in both directions whipsawing even experienced traders into submission. The charts have been difficult to decipher since October, to put it mildly. Nevertheless, a pattern has emerged supporting a potential low for gold prices next week.

The extended decline in gold has presented a similar setup to what we encountered in December of last year (see gold chart). The drop from early November is comparable in time and depth to the decline into the $1,045 low. If the correlation continues, gold prices could fall to around $1,150 next week and make a significant bottom around the time of the FED announcement.

The COT also supports a possible low. Commercials have reduced their short exposure by 33% (from 360K to 241K) since November 14th and approximately 50% from the July 8th high of 464k contracts. Not the lowest levels we’ve ever seen but a step in the right direction.

The market is estimating a 95% chance of a rate increase next week. Participants are anxious to hear the FED’s projection for continued rate hikes in 2017, and that will drive markets. A larger than expected increase or no rate at all hike would be unsettling to markets.

US Dollar

It looks like the dollar reached a cycle low Thursday at 99.25; a close above the trend line is necessary for confirmation. The potential of a strong dollar and continued weakness in the EURO could make it difficult for gold prices. Their relationship is something we will continue to monitor.

Gold

The drop into the December 2015 low is eerily similar to what we are currently experiencing. A close above the 10-day EMA and upper trend channel next week could signal a major low.

The final decline of last year extended for several weeks reaching 24-consecutive closes beneath the 10-day EMA. We are currently sitting at 24-consecutive closes below the 10-day EMA. Prices could bottom next week around the time of the FED decision.

Note: A daily close below $1,130 would void the correlation, and a capitulation event would likely crash prices below $1000. In this event, my max low for gold would be $892.00.

Silver

It would take a close below the trend line and then below $16.15 to void the positive divergence in silver prices. The relative strength to gold suggests silver prices will outperform during the next bull rally.

XAU 

Prices are testing the trend line once again. A solid close below it could trigger another wave of selling.

GDX 

Prices closed back below the 10-day EMA, however, there was a decent buying on weakness number that popped up after the close.

Buying on weakness

Data provided by the Wall Street Journal.

GDXJ 

Junior miners are testing the lower aspect of the triangle once again. It’s possible prices make a marginal low below $32.80 next week and then reverse higher.

DOW Theory 

The DOW theory non-confirmation was nullified this week as prices produced a higher high.

SPY 

The hot money keeps flowing into stocks, pushing prices higher.

WTIC 

Prices are holding above the 10-day EMA and may make another run at $52.50.

Expect several updates next week. I’ll begin entering long positions if gold successfully closes above the trend channel and the 10-day EMA ($1,180). Volatility is likely to increase next week, so I’ll keep initial positions small with the option to add more once a low is confirmed.