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Gold Investment Update - Focusing on Gold's Strength Against the Ongoing USDX Rally

October 5, 2020, 4:04 PM Przemysław Radomski , CFA

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On Friday, we commented on the above gold chart in the following manner:

The short-term triangle-vertex-based reversals were quite useful in timing the final moments of the given short-term moves in the past few weeks. Please keep in mind that the early and late September lows developed when the support and resistance lines were crossed.

We can see the same thing happening once more. Based on the recent highs and lows, yesterday, the support and resistance lines both crossed again. And indeed, gold is trading below yesterday's closing price in today's pre-market trading.

Now, this technique might not work on a precise basis, but rather on a near-to basis, and given the highly political character of the current month (before the U.S. presidential elections), things might move in a somewhat chaotic manner... But still, this technique worked multiple times in the previous months and years, and it has worked recently as well. It seems quite likely that the days of this corrective upswing are numbered.

Indeed, gold moved lower in this week's pre-market trading. Therefore, what we've analyzed above remains valid, and the outlook continues to be bearish for the next several weeks - next few months.

Based on the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.

As far as the white metal is concerned, previously, we've indicated the following:

Silver is also after a major breakdown and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any major rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.

Once again, that's exactly what happened.

At this point one might ask how do we know if that really just a dead-cat bounce, and not a beginning of a new strong upleg in the precious metals sector. The reply would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very likely because of multiple factors, and the clearest of them are the confirmed breakdowns in gold and silver, and - most importantly - the confirmed breakout in the USD Index. The invalidation of the breakout above the previous 2020 highs in case of the general stock market is also a bearish factor, especially for mining stocks (and silver).

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