It’s almost 9/11 – 20 years ago everything changed for so many people. The world was never the same since the day of the tragedy. So many unnecessary deaths, and so much suffering that resulted from them…
Gold – being the safe-haven asset – soared in the immediate aftermath, but it was not the immediate rally that really mattered. It was the shift in the global sentiment that was the real change. The world suddenly became a much more violent and uncertain place in the eyes of many investors. Therefore, the need for getting protection – in the form of gold – started to emerge on investors’ radars.
Twenty years later we have gold priced over 6 times higher than the price it reached immediately after the 9/11 disaster. Moreover, with the monetary authorities printing massive amounts of money in the aftermath of yet another tragedy – the recent pandemic – gold seems poised to soar to the moon.
Just because something is likely to move much higher, it doesn’t mean that it can’t become overvalued on a temporary basis.
Just because something is likely to move much higher, it doesn’t mean that it’s likely to go higher now.
And finally, just because something is likely to move much higher, it doesn’t mean that it’s likely to go higher without declining first.
And the gold price – as bullish as it might get in the long run – is very likely repeating its pattern from 2013, when it declined profoundly. There are multiple confirmations present in other markets (like gold stocks) and ratios (like gold to bonds ratio, and gold stocks to gold ratio that shows the extreme weakness of the entire precious metals market), but in today’s analysis, I would like to focus on gold’s price itself.
It’s Not a Rhyme Anymore. It’s Repetition!
The history repeats itself to a considerable degree, and you will soon see that the fact that gold was unable to hold its breakout above its 2011 highs was not accidental. It’s not a coincidence that gold is now about $300 lower than it was when it reached its August 2020 high, even though the USD Index is trading approximately at the same levels as it was trading in August 2020. Let’s jump right into gold’s long-term chart.
Even without zooming in, you can clearly see that both areas marked in yellow are similar (please note that you can click on the chart to enlarge it).
Before discussing gold’s price moves, please note that the positions of the indicators (the RSI in the upper part of the chart, and the MACD in the lower part of the chart) are almost identical now and during the 2012-2013 decline. The areas marked with red and blue correspond to each other.
To make the analogy clearer, I’ll zoom in on them separately, using two charts below.
Both yellow areas start with a small consolidation that takes place after a big rally and right before an even more profound rally, which takes gold to a spike-like high.
Then gold declines. After the first drop and a quick rebound (in both cases), we get the first local top, where gold shows that it’s unable to reach the previous high, let alone break above it. We saw that in November 2011 and in early November 2020.
Then we see another decline in gold’s price. This time, it takes gold below its 40-week moving average (marked with red). Both bottoms form quickly, and the comeback is swift. That happened in December 2011 and in late November 2020.
Then we see another move higher – right to the most recent local high. That happened in February 2012 and in early January 2021.
And then we see another slide lower. In this case, gold bottoms close to the small consolidation that preceded the final (2011, 2020) top. The bottoms were broad and took place between May 2012 and July 2012, as well as between March and April 2021.
Then we get yet another rally that takes gold relatively close to the previous local tops (October 2012 and May 2021). In both cases, the shape of the top is broader than it was in the case of the previous two tops.
After that top, a huge decline in the price of gold begins, but it’s not clear at first, and many people still think it’s just a consolidation that will be followed by more rallies.
During this time (October 2012 – early 2013, and May 2021 – now) gold moves back and forth with lower lows and lower highs. Gold stocks underperform gold in a clear manner in both periods.
So far, the moves have been extremely similar, and if the history simply continues to be similar, we can estimate what’s ahead by extrapolating what we already saw in 2013. Based on this analogy, it seems that we’re about to see one final correction when gold once again moves to its previous (2021) lows, but this correction won’t be significant. It will be the final good-bye to the current trading range before gold truly slides – just as it did between April and June 2013.
Now, this is what the situation looks like right now, and the above outlook is based on much more than just the above (extraordinary, but still) single analogy. The remarkable self-similarity is present also in the HUI Index, and what’s likely to take place in the case of gold’s arch-nemesis – the USD Index – fully corresponds to the above-featured scenario. Silver’s performance confirms it as well. (By the way, have you noticed the fact that even though gold temporarily moved above its 2011 high, neither gold stocks nor silver managed to do the same thing? They were not even close. This should make even the most bullish precious metals investors concerned.)
I’m looking at the markets each day, I’m going through many charts and news announcements (hint: most of them matter very little) on a daily basis, and I will accordingly report to you – my subscribers – as soon as I notice any meaningful change in the above analogies so that you are able to adjust your outlooks (and investment/trading positions) in advance. If the change is not urgent, I’ll let you know through the regular daily analyses, and if it is urgent, I’ll notify you via a quick email message. As always, I’ll keep you informed.
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Przemyslaw Radomski, CFA