Gold Right Now: 2011-Style Spike Highs Followed By Significant Decline More Likely Than Broad Top

Will it be the US dollar, or the stock market, that causes the major cyclical turning-point and decline in gold?

by Przemyslaw Radomski via Sunshine Profits

Gold declined quite visibly in today’s pre-market trading (moving briefly below $2,000) and it happened right before miners’ daily reversal. This seems to be a very bearish indication for the next several hours, and it might really be the case that the PMs will slide right away. However, we are still not ruling out a situation in which gold tests the previous highs once again, before finally topping.

Gold declined in a specific zig-zag pattern, which is a consolidation pattern. We saw something somewhat similar in late February. The initial decline was not THE decline yet. Gold first tested the previous high and then topped in the most profound way. The thing that confirmed the top, was when gold failed to hold the breakout above the previous highs. Will we see something like that once again?

It’s unclear at this time. The shape of the decline so far makes both outcomes possible.

The USD Index seems to have formed a double-bottom pattern, but… We still can’t rule out a scenario in which the double-bottom pattern would turn into a triple-bottom pattern. The USDX just reversed and declined a bit, and gold reacted with another rally. So, it seems that if the USD Index continues to trade sideways, gold will do the same thing.

After all, most of the bottoms in the USD Index that formed mid-year (marked with purple ellipses) were rather broad, so we wouldn’t rule out something similar also this time.

Then again, gold is very overbought in the short run (and so is silver and the rest of the precious metals sector), so it’s likely to be vulnerable to a meaningful show of strength in the USDX.

Will the latter finally rally soon? This seems likely based on the invalidation of the breakdown below the rising long-term support line, but a rally without another move closer to the recent lows is far from being a sure bet.

Gold is not likely to form a broad top here, as it’s not the kind of performance that gold exhibited after similarly sharp rallies in the past – in 2006, 2008, 2009/2010, and 2011. Interestingly, all the above-mentioned spike tops formed close to gold’s long-term cyclical turning point – which is also where gold is right now.

So, on one hand we could (but don’t have to) have a broader bottom in the USD Index (which might indicate a broader top in gold), and on the other hand, we could have a spike-high in gold based on analogy to similar short-term rallies and long-term turning points. What’s the most likely outcome here?

In my view, it would be most useful to look at gold’s top that formed at the most similar price levels – the 2011 top.

There was an initial top in early August, then an initial top, and then – after several days – the final top. Gold’s plunge was significant even after the first top. However, it was not significant after the initial early-August-2011 top.

The USD Index had been trading sideways, forming a broad bottom in 2011 and while the first decline in gold took place practically without USD’s help, it was the decisive move higher in the USDX that really changed the picture.

Will the USD Index rally significantly from here? That’s most likely in our view. But will this happen without an additional move to the previous lows? This is unclear.

Since markets don’t move in isolation, we might get the final “go” signal from a different market. And this could be the stock market.

In yesterday’s analysis, we wrote that all in all, gold is likely to rally far in the long run, but in the short run it’s vulnerable to a sizable decline, when the economic implications of the pandemic’s continuation become obvious to investors.

The S&P 500 is approaching its previous 2020 high. Given the economic background, I find this performance unfounded. But the markets can stick to a certain emotional trend for longer than many investors can remain logical, which would fit the above picture.

Back in 2015 stocks topped below their previous highs, and in 2018 they topped a bit above them, so the proximity to the previous is far from being a precise sell signal. It does indicate, that the stock market is likely vulnerable to sell signals coming from other markets and that this emotional rally could end sooner rather than later.

Do you remember what happened in February when the S&P 500 lost its upward momentum? They plunged, and that was when tops in mining stocks and silver formed. Gold made another attempt to move higher but ultimately declined profoundly in the following days.

The S&P 500 is approaching its previous 2020 high. Given the economic background, I find this performance unfounded. But the markets can stick to a certain emotional trend for longer than many investors can remain logical, which would fit the above picture.

Back in 2015 stocks topped below their previous highs, and in 2018 they topped a bit above them, so the proximity to the previous is far from being a precise sell signal. It does indicate, that the stock market is likely vulnerable to sell signals coming from other markets and that this emotional rally could end sooner rather than later.

Do you remember what happened in February when the S&P 500 lost its upward momentum? They plunged, and that was when tops in mining stocks and silver formed. Gold made another attempt to move higher but ultimately declined profoundly in the following days.