One shouldn’t expect this counter-trend rally to last long. Gold is likely to fall perhaps much more dramatically than in the past several days…
This surely isn’t one of William Shakespeare’s plays, but excitement over occasional corrections as if they herald something much bigger has elements of comedy. Let’s face it, emotion is ever present in the markets and when investors are swept up in waves of excitement, they sometimes make rash decisions and are pushed out to sea. Whether it’s precious metals or stocks, the lesson here is to keep one’s emotions at bay, especially with small upticks and counter-trend rallies.
Yes, gold is rebounding today – it rallied about $30 higher in today’s pre-market trading. Is the decline over, or is this nothing to call home about?
In short, it’s most likely the latter. If you recall the analogy to how gold performed almost a decade ago, then it’s clear that what we see here is quite normal. I described this analogy previously, but since this is particularly relevant today, it seems useful to go through the details once again.
The history rhymes, but this time, the similarity is quite shocking.
We copied the short-term chart and pasted it over the long-term chart above and next to the 2011 top.
They are very similar to say the least. Yes, these patterns happened over different periods, but this doesn’t matter. Markets are self-similar, which is why you can see similar short-term trends and long-term trends (with regard to their shapes). Consequently, comparing patterns of similar shape makes sense even if they form over different timeframes.
After a sharp rally, gold declined quickly. Then we saw a rebound, and a move back to the previous low. Some time later gold moved close to the most recent high and started its final decline. This decline was less volatile than the initial slide. That’s what happened when gold topped in 2011 (and in the following years), and that’s what also happened this year.
The patterns with this level of similarity are rare, and when they do finally take place, they tend to be remarkably precise with regard to the follow-up action.
What is likely to follow based on this pattern, is that we’re likely to see the end of the slower decline, which will be followed by a big and sharp decline – similarly to what we saw in 2013.
The above similarity also shows that gold’s decline might initially have counter-trend rallies – just as we saw in early 2013. Consequently, seeing such a rally could be viewed as a bearish confirmation of this self-similarity.
Well, that’s exactly what we see today – a counter-trend rally.
Does it change anything from the short-term point of view? Absolutely not. Gold didn’t even rally to its declining short-term resistance line.
Gold was declining almost each day recently, and no market can move up or down without periodic breathers – that’s exactly what seems to be taking place today. Not only is it not a game-changer; it’s actually in tune with how gold declined in 2013 – with periodic corrections.
Back in 2013 these corrections ended at some point and then the gold market truly plunged. This means that it seems best not to try to time each and every correction, but focus on the bigger move, instead.
Especially that the USD Index has just invalidated its small breakout below the September low.
Yesterday, I commented on the above chart in the following way:
At the moment of writing these words, the U.S. currency is testing its previous lows. It’s slightly below the previous intraday low and this tiny breakdown is definitely not confirmed.
Given the Thanksgiving seasonality, it’s doubtful that there are any bearish implications at all.
Speaking of cyclicality, please note that the U.S. Dollar Index tends to reverse its course at the turn of the month. That happened early in the months of January, February, May, July, August, September, and November – thus occurring in over half of the year. Today is the last day of November and given the above regularities, it seems that the USD’s breakdown will be invalidated shortly.
Besides, that’s not even the most important detail from the precious metals investors’ point of view.
The most important detail is that all these bearish moves in the USDX failed to trigger any decent rallies in gold, which shows that the latter simply doesn’t want to rally from here.
That’s exactly what we saw – the USD Index’s breakdown was indeed invalidated.
What does it mean? It means that while gold, silver, and mining stocks might move higher this week, one shouldn’t expect this counter-trend rally to last long. As the USD Index rallies, precious metals and miners are likely to fall – perhaps much more dramatically than they fell in the past several days.
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Przemyslaw Radomski, CFA