The stock market rebounded very nicely last week, and it even corrected more than 61.8% of the recent decline. Earlier this year, gold and stocks fell sharply together (in March) and then they both rallied back up to new highs. So, does this strength in stocks indicate upcoming strength in gold as well? Not necessarily.
Let’s start with examining the former.
The big news of the previous week was that the general stock market managed to move higher, despite the invalidation of the early-2020 high. This is something unusual for any market, as commonly invalidations of breakouts or breakouts are strong indications that the market is going to move in the opposite way. The invalidation of the breakout was therefore a strongly bearish sign.
So, what happened? Well, it could have been the case that the nothing-bad-will-happen-before-the-elections rule applied, and the rally was more orchestrated than natural. By that we mean that some powerful investors bought enough to trigger the rebound. And let’s keep in mind that the Fed pledged to play an active role right now – even more so than it did in 2008.
What does it mean going forward? It means that the slide could be delayed, but I don’t expect it to be averted entirely. After all, no market can be “triggered artificially”, “supported”, “set”, or “manipulated” for longer periods (of course, except the interest rates), and despite the massive money printing, the economy is not doing great. And that’s an obvious understatement.
From the technical point of view, we would like to point out three things:
- Stocks have corrected more than 61.8% of the recent decline, so they could move higher in the short term. That’s not something certain, though.
- In 2018 we saw a tiny invalidation of the breakout, then another move higher (slightly above the previous highs), and stocks plunged shortly thereafter.
- In early 2020, the very initial decline was relatively small, and it was followed by another move higher (slightly above the previous high). Stocks plunged shortly thereafter.
Consequently, in analogy to two most similar situations to the current one from the recent past, it wouldn’t be surprising to see stocks move to or even slightly above the previous highs, before they turn south in a spectacular way.
This could mean a delay in precious metals’ and miners’ decline as well. Again, a decline, not its absence. Especially that the situation continues to be excessive on the forex market.
How did gold respond to the sizable upswing in stocks?
Gold moved above the declining resistance line, but stopped at its 38.2% Fibonacci retracement. Let’s keep in mind that stocks erased more than 61.8% of the preceding decline. This means that the reaction in gold was much smaller – not something that we would expect in case of a market that’s supposedly about to “take off”.
So, even if the general stock market moves to or slightly above its previous 2020 highs, it doesn’t mean that the same would be likely for gold. The decline of the latter would likely be delayed in this case, though. If the general stock market fails to rally, but the USD Index does, the gold price would be likely to plunge.
Moreover, please note that the move above the declining resistance line was not significant, and thus it would require a confirmation. Gold closed last week practically right at the resistance line, so it’s not that clear if the breakout is anything more than a blip on the radar screen. In today’s pre-market trading gold moved a bit lower, but not yet enough to invalidate the breakout.
Overall, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Gold is not showing strength here, despite what one might think based on Friday’s upswing alone.
Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it’s likely to slide in the upcoming weeks and/or months. Even if it doesn’t happen right away.
Summing up, the stock market’s strength is far from being a proof that gold is about to decline. Conversely, the relatively small size of gold’s upswing compared to the one in stocks is yet another factor pointing to lower gold prices over the next several weeks (not necessarily days, though). Gold is likely to move to new highs, based on many fundamental reasons, but not without declining first, on technical grounds.
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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager