We had been expecting the end of last week to be volatile (and we carefully took profits off the table from our short positions early on Thursday) and precious metals certainly turned out to be volatile. The employment numbers shook the market and resulted in multiple technical developments. This rally added to the already significant year-to-date advance of the yellow metal (over $250 based on Friday’s closing prices).
However, before assuming that the above statistic directly implies that the declines have truly ended, let’s try to answer a very important question: “What actually caused gold to rally this year?”
The fundamental situation is positive, that’s for sure, but that has been the case for years, and yet gold declined in the previous ones. So, the question is what – specifically – made gold rally this year.
Of course, the point of technical analysis is not to reply to the “why” question, but to take what we have without knowing the reply, use it, and profit on it. However, discussing the above should be beneficial in terms of detecting in what kind of big trend gold is right now.
To make a long story short, there were basically two major events that triggered huge daily rallies in gold this year. These events were likely responsible for a large part of the follow-up action as well but for the sake of being conservative, let’s assume that it was only the immediate daily reaction that we’ll take into account.
These events are:
- Reaction to Yellen’s remarks on NIRP (as a reminder: Yellen said that the Fed can’t rule out negative interest rates in the future and markets viewed this as an indication that it is something likely, which in reality is the only way Yellen could have replied – they can’t rule out any tool in advance, so she had to reply otherwise).
- Unexpected outcome of the Brexit vote (up to this day, the vote hasn’t resulted in basically anything – the UK is still in the EU).
The markets seem to have overreacted to these events, which pushed gold’s price higher (and – naturally – the rest of the precious metals market followed).
These two rather more emotional than logical moves accounted for a large part of gold’s upswing earlier this year, which – in opinion of many investors and analysts – is something that proves (!) that gold is in a major uptrend right now. However, if we view these two moves as accidental and choose not to put too much emphasis on them and consequently take them out of the current price of gold, will we the seemingly bullish implications remain in place? The individual replies depend on each investor’s and analyst’s analytical techniques, but let’s check where would the price of gold be today, if the two above-mentioned moves were removed (charts courtesy of http://stockcharts.com).
The solid lines (blue and green) represent the daily moves in terms of closing prices and the dashed lines represent the daily moves in terms of the open – intra-day high moves. So, if everything else was exactly like it transpired, but these two sessions were taken out of the picture, where would the price of gold be today?
After removing both daily rallies (deducting the price moves) from the current price of gold (Friday’s closing price), we are left with about $1,145 in case of the intra-day analogy and with about $1,210 in case of the analogy based on closing prices.
That’s still well above the 2015 low, but the most important thing is that both levels are relatively close to the previous local highs. In case of the intra-day analogy, gold would even be below the October 2015 high (the lowest of local highs) and gold would be in a clear downtrend (having invalidated the breakout above this high). In case of the higher of the hypothetical price levels ($1,210), we would have gold below the May 2015 high and only about $20 above the October 2015 high – still close to the lowest of the local highs.
The point is that if only two sessions were taken out of the picture (and both of them seem to be an overreaction to what actually happened and how much it changed), the entire “we are already in a major rally in gold” point of view becomes doubtful.
What does it all mean? The above is just a hypothetical situation – a thought experiment, so it’s not a direct buy or sell signal. It does, however, very strongly suggest that all that’s been written about gold’s “imminent” rally in the following months should be taken with a healthy dose of skepticism, to say the least. The fundamental situation in gold is favorable, but let’s not forget that this has been the case for years and it hasn’t stopped gold from declining hundreds of dollars in the past few years. Consequently, while gold is likely to be much higher than it is right now in the coming years, it may not be higher in a few months.
The above is up-to-date at the moment of posting this article and the situation can change in the following weeks. In order to stay updated on our latest thoughts on the precious metals market, we invite you to sign up for our premium Gold & Silver Trading Alerts. The alerts are sent on each trading day and if the situation requires it, we’re also sending intra-day follow-ups. Sign up today.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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