Gold: some calm before the storm

Gold: some calm before the storm by PRZEMYSŁAW RADOMSKI, CFA for Sunshine Profits

Gold’s very sharp drop on Monday and subsequent slight rebound on Tuesday doesn’t change the overall narrative: gold has to drop significantly further for it to climb steadily again.

Gold truly plunged yesterday, erasing practically the entire election-uncertainty-based rally in just one day. I admit that I didn’t expect this decline to be as big on a single day, but the gold market was definitely ready for a decline, and since it got an unexpected boost from Pfizer (the optimistic test results regarding the possible Covid-19 vaccine), gold sank.

This situation emphasizes why it’s often a good idea to stick to one trading position even if it’s possible that one sees a counter-trend move on a more short-term basis.

Of course, there will be some who will say that all the technical work resulting in me expecting gold to slide shortly after the U.S. elections was useless, as gold simply responded to more-or-less random news from Pfizer.

But why did gold decline in light of this news at all? Back in March, gold was declining as Covid-19 cases increased rapidly, so if we’re about to see this trend reversed, shouldn’t gold rally instead?

And even if one agrees that the Covid-19 vaccine is fundamentally bad for gold (and it is, as it decreases the demand for safe-haven assets, since the situation is seemingly getting back to normal), then why did gold decline almost $100 in a single day, instead of declining $4, $7, $15, or any other – insignificant – number of dollars?

And why did gold end the session lower without a visible rebound, even though the general stock market erased most of its intraday gains before the session was over ? Given the above, it seems the market realized that initial testing is far from being proof that the vaccine is indeed safe (for long-term use as well), and even further away from being introduced. If people realized that they got ahead of themselves with regard to stocks, then why didn’t the same happen with regard to gold?

With all these questions in mind, things are no longer as simple as they might have appeared at first sight.

I’ll tell you why – because the vaccine announcement was just an additional trigger that wasn’t even necessary for gold to decline. The trigger’s presence caused gold to decline more than it would have otherwise, however without it, gold would have declined anyway, due to all the technical reasons.

I featured multiple reasons in yesterday’s analysis, and I encourage you to read it, if you haven’t had the chance to do so, and today, I would like to show you one thing that might be too obvious for one to notice.

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It’s about gold’s, silver’s, and miners’ relative performance to what happened in the US Index, and the general stock market since early September.

The USD Index moved close to its September low, while the S&P 500 moved to its September high. Did PMs and miners exhibit similar strength? No! Gold closed about $150 below its September high, silver closed about $5 lower, and the GDX closed about $4 lower.

Gold ended yesterday’s session close to $1,850, and based on what I wrote yesterday, it seems that the USD Index is on the verge of moving much higher, which will likely trigger more declines in gold. And indeed, since gold just moved to its September lows yesterday and ended the daily decline there, it will now likely take a breather (it moved about $10-$20 higher today, which is negligible compared to yesterday’s slide) and then I expect to see a breakdown. This breakdown would be likely to lead to gold declining to about $1,700 – in tune with what I’ve been writing for weeks. I expect gold to rally back up (above $2,000 and beyond) only after declining significantly. And this decline is likely already underway.

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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager


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