Gold declined sharply yesterday, and it took the mining stocks with it. Silver was down but not significantly so.
The decline made the outlook less bullish, but not bearish just yet. Of course, that relates to the short-term only - the outlook never stopped being bearish in case of the medium term.
It could be the case that the second top in gold is already in. However, it doesn't necessarily mean that the decline will accelerate immediately. We could still get another move higher in the PMs, especially if the USD Index declines. During this time, silver would be likely to outperform, just like we had indicated previously.
Why could gold move higher once again? As that would be in tune with how it topped in October 2008, September 2011, and in the first months of 2018. These are the multi-top formations where the first top was formed on huge volume - we featured charts with them in Monday's flagship Gold & Silver Trading Alert.
Anatomy of Gold Tops
In all three cases, gold topped on huge volume, but the decline didn't proceed immediately. There was a delay in all cases and a re-test of the previous high. The delay took between several days and a few months.
Since a similar pattern followed the huge-volume tops, it seems that we might still see a re-test of the recent high in the near future. We already saw one re-test - gold moved close to $1,600 but failed to rally above it. In all three cases, the attempts to move higher were then followed by sharply lower prices. But, these sharply lower prices were then followed by rallies anyway. Sometimes (2008 and 2018), gold attempted to move to new highs, and sometimes (2011) all gold was able to do was to correct a bit more than half of the preceding decline. Either way, gold didn't slide immediately. This means that gold is likely to decline, but back and forth trading is likely to take place first. Gold could form lower highs and lower lows during this stage, but it's unlikely to just drop hundreds of dollars in a day. At least not shortly.
Gold is likely to decline by hundreds of dollars, but it will take months, not just a day. It could be the case that this move is already underway, but even if it is, choppy trading is much more likely than a decisive, enormous slide now.
Let's add the more up-to-date news to the mix of analogies. In Monday's gold analysis, we explained that the link between fear of the coronavirus and gold is similar to the fear of the ebola virus in 2014.
We also emphasized that based on the fear factor, gold is likely to rally particularly visibly when the fear reaches extreme levels. Based on the levels the fear of ebola reached and the increasing easiness of sharing information and emotions online, the fear of coronavirus has most likely not reached its peak.
However, gold's decline puts this assumption to the test.
Gold Performance in the Coronavirus Days
Gold declined about $40 from its recent high.
Nothing like that happened during the ebola-scare-peak upswing that we saw in October 2014. It didn't happen during the initial August 2014 rally either.
This may mean that the fear has already peaked.
It may also mean that what we saw was only the initial peak - similar to the August 2014 one.
(chart courtesy of Google Trends)
The above chart shows how intensely people were looking for information regarding the viruses online. One of the lesser known gold trading tips is to examine how gold-related search terms performed over time. In this case, we see that tt took some time before both: ebola and h1n1 (swine flu) virus scares were over. The coronavirus scare seems to have only begun.
This means that gold might do whatever it was doing before the coronavirus became the hot topic for some time, and then rally once again when the fear truly spikes.
In mid-2014, gold declined significantly, between both peaks of fear, and it wasn't a good idea to wait for the fear to peak as the downtrend was much stronger. Even though the interest in ebola spiked well above its previous high, gold topped well below the previous top.
Based on the virus fear analogy, we are likely to see a short-term rally in gold, but not necessarily right away, and with a top as high as gold's current price. Based on the first-top-on-huge-volume analogy, we are likely to see another very short-term move higher, but it might not be significant - gold might not return to its previous highs as it didn't manage to do so in 2011.
This suggests that, given the way gold reacted yesterday, it's better to stay out of the gold market for a while and prepare to enter a short position to profit on the upcoming big decline. Silver is a different story, though.
Thank you for reading. If you'd like to read the full version of the above analysis, and get details for silver, and mining stocks, we invite you to.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager