Forecasting Gold’s Short And Medium-Term Price Moves

Gold and silver closed Friday’s session relatively unchanged, but mining stocks rallied to new October highs. This means changes, but not of the kind most investors would assume.

The above doesn’t change either the short-term or medium-term outlook for the precious metals market. Miners’ daily strength could be something neutral (it’s just one day of strength), or something bullish (miners outperformed gold, after all), which serves as a mild confirmation of the bullish outlook for the very short term. The outlook was already bullish for the very short-term as our subscribers knew earlier), so the above doesn’t change it.

The outlook for the medium-term has been bearish based on multiple strong factors, including the analogy to what happened in the 90s, and Friday’s daily strength doesn’t impact any of them. Consequently, the just as the very short-term outlook remains bullish, the medium-term trend remains strongly bearish.

So, what changed? Gold’s upside target. It’s not because the price moved substantially higher or lower, but because some time passed and the declining resistance line to which gold was likely to move, is now lower.

The resistance line didn’t decline tens of dollars, but the decline was significant enough to make our previous profit-take levels too high.

Before zooming in to gold’s short-term resistance line, let’s consider the intraday performance of silver. It declined initially, but reversed later on and closed the day practically flat. The recovery created a bullish reversal, which has bullish implications for the near term. Having said that, let’s take a look at gold.

The resistance line is relatively close, but it wasn’t reached yet. The same goes for the 61.8% Fibonacci retracement level based on the September – October decline. As you can see on the above chart, gold is down today, but it’s not below either the Friday or Thursday intraday high, which means that it’s not really breaking lower.

The declining resistance line and the 61.8% Fibonacci Retracement are now very close to Thursday’s intraday high, which means that there are now three reasons for gold to reverse after moving to about $1,527. Gold might also move even higher in the very short term, but it’s not something we would suggest betting on. The easy to profit part of the rally is the one that ends at the declining resistance line, as that’s what’s in tune with historical patterns that we described previously:

Based on how close gold is to its resistance line, it seems that it will be first to reach its target. This will create a relatively risky situation from the point of view of the long positions in silver and mining stocks. The bullish signal was strongest in case of gold, so it is very possible that gold will be the only part of the precious metals market that rallies indeed visibly. While we’ll leave the details to our subscribers, the above means that once gold hits its upside target, it might be a good idea to close one’s long positions in gold, taking profits, and consider opening short positions.

The above is also supported by the medium-term analogies.

Looking at three similar topping patterns, we see that short-term comebacks to the declining resistance lines based on the initial and the following high were quite common. In 2016, 2018, and earlier this year, gold moved back up for at least one more time before declining. In case of the 2016 and 2018 tops, major decline declines followed, whereas earlier this year, we only saw a short-term decline and then yet another rally. Still, we did see a short-term decline first.

Based on the long-term factors and the medium-term situation in the USD Index, it’s very likely that the current situation is much more similar to what we saw in 2016 and 2018 than to the first half of 2019. Consequently, the rally back to the declining resistance line is unlikely to change anything with regard to the following huge downswing. But the rally is quite likely to take place, anyway.

Summary

Summing up, the big decline in the precious metals sector appears to be finally underway, but based on gold’s invalidation of the breakdown below the head-and-shoulders pattern, a quick rally is more likely to take place in the very near term. It’s possible that the rally will be very short-lived (it might even end today), or that it will continue until the middle of the month and we see a top based on the triangle-vertex-based reversals in silver and mining stocks that we discussed on Wednesday.

The following months are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months, but what’s profitable is rarely the thing that feels good initially. Forecasting gold’s upswing without a bigger decline first is likely to be misleading. There will most likely be times when gold is trading well above the 2011 highs, but they are unlikely to be seen without being preceded by a sharp drop first.

Naturally, the above is up-to-date at the moment of publishing and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis, we invite you to sign up to our gold newsletter. You’ll receive our articles for free and if you don’t like them, you can unsubscribe in just a few seconds. Sign up today.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

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