Gold’s Upcoming Plunge: The Powerful Analogies, Confirmations And Reasoning

Gold, silver and mining stocks plunged on Friday and the yellow metal closed the week below the $1,300 barrier. The gold-silver ratio soared once again and it all happened in tune with our expectations and despite the recent dovish comments from the Fed. And – believe it or not – we have something much more important and exciting about the precious metals sector to tell you today.  

Remember the analogy between 2012-2013 decline and the current situation in gold, silver, and mining stocks? We featured it in the previous year and the entire sector appeared to be declining in tune with it. The last few months of 2018, however, along with the initial part of this year, seemed to have entirely invalidated this analogy. But did they?

Over the weekend we dedicated a lot of time to the analysis of the long-term charts and as we’re going to show you, it turns out that the analogy between 2012-2013 plunge and the current situation is definitely in place, but we had been earlier in the analogy than we originally thought. What we thought to be a decline similar to the late-2012 slide, was actually the smoothened version of the early-2012 decline. The most recent upswing is just like the mid-2012 upswing. And it seems to have ended.

In the previous months, we had described multiple long-term bearish factors, and the recent few months of higher gold prices were in opposition to them, so something didn’t seem right. We now see what it was. It was the shape of the decline and its starting point. Let’s take a look at gold’s very long-term chart for details.

Long-term View of Gold: The Analogies

(Click on image to enlarge)

The very first few months of 2018 were similar to the late-2012 decline, so it was natural to start the analogy with these moves. As we now see, something else fits the analogy better. The record-breaking monthly volume that we saw in 2011 and in 2018 is something that starts an analogy that is confirmed by multiple developments (and not only from gold) and the most recent upswing doesn’t invalidate it. Conversely, it fits and confirms it.

Starting with the record-breaking volume (marked with red rectangles), in 2011 we saw 9 months of declines, and in 2018 we saw 8 months of declines. In both cases, we then saw 4 months of higher prices and then a month where gold moved higher only on an intraday basis but declined in terms of the monthly closing prices. Both tops formed not too far from the previous high, but still below it. Then gold kept declining for several months.

Quite interesting so far, isn’t it? And we’re just getting started.

The similarity is not only in price. The monthly volume readings are remarkably similar as well. When gold rallied in mid-2012, it did so on declining volume that increased in the final monthly upswing. It was exactly the same case in late 2018 and in January 2019.

What about the shape of the initial decline (late-2011 – early 2012) that was rather chaotic and volatile compared to the stable nature of the mid-2018 slide?

Looking at it with the benefit of hindsight, it’s easy to see why these moves were different. It’s the question of what preceded them. In particular, it’s the question of what kind of volatility was present overall. The former move was preceded by the parabolic upswing in gold prices and the top, while the latter was yet another (boring?) attempt to rally above $1400, which ultimately failed. The volatility that was present at and below the former was very high and the volatility that was present at and below the latter was very low. Consequently, it’s normal and natural to expect that the former decline would be volatile and chaotic, and the latter would be calm. This is normal, not something that breaks the analogy. You can check the volatility levels by looking at the upper part of the above chart – it includes the Bollinger Bandwidth, which can be used as a reliable proxy for volatility.

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Disclaimer: All essays, research, and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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