Briefly: gold and the rest of the precious metals market are likely to decline in the next several weeks/months and then start another powerful rally. Gold’s strong bullish reversal/rally despite the USD Index’s continuous strength will likely be the signal that confirms that the bottom is in.

Welcome to this week's Gold Investment Update. Predicated on last week’s price moves, our most recently featured outlook remains the same as the price moves align with our expectations. On that account, there are parts of the previous analysis that didn’t change at all in the earlier days, which will be written in italics.

Let’s start with an update on the cross-asset implications that could affect the precious metals in the coming weeks.

Over the medium-to-long-term, the copper/U.S. 10-Year Treasury yield ratio is a leading indicator of gold’s future behavior.

I wrote previously:

When the copper/U.S. 10-Year Treasury yield ratio is rising (meaning that copper prices are rising at a faster pace than the U.S. 10-Year Treasury yield), it usually results in higher gold prices. Conversely, when the copper/U.S. 10-Year Treasury yield ratio is falling (meaning that the U.S. 10-Year Treasury yield is rising at a faster pace than copper prices), it usually results in lower gold prices.

If you analyze the chart below, you can see the close connection:

Peaking and rolling over within days of one another, gold and the copper/U.S. 10-Year Treasury yield ratios have been in sync since August. And continuing their strong positive relationship, the copper/U.S. 10-Year Treasury yield ratio surged by 7.84% last week, while gold jumped by 2.05%.

Please see below:

However, on the back of the U.S. 10-Year Treasury yield’s largest weekly decline since July 2020, a reversal of fortunes could be in order. Case in point: despite the U.S. 10-Year Treasury Note’s rise last week (remember, bond prices move inversely of yields), non-commercial (speculative) futures traders reduced their long positions by nearly 43,000 contracts and increased their short positions by more than 44,000 contracts.

Please see below:

Source: COT

In addition, after defying historical precedent for all of 2020, the USD Index is beginning to mirror the behavior of the U.S. 10-Year Treasury yield. If you analyze the table below, you can see that a bottom, and subsequent move higher in the U.S. 10-Year Treasury yield, has coincided with a rise in the USD Index 80% of the time since 2003.

And with a bounce in the former likely to elicit a similar response from the latter, a continuation of the New Year’s uptrend could weigh heavily on the yellow metal.

Why so? Well, since gold exhibits a strong negative correlation with the U.S. dollar, if a revitalized USD Index enters the equation, it will add even more concrete to gold’s wall of worry.

On the flip side, if we extend our time horizon, there are plenty of fundamental reasons why gold is likely to soar in the coming years. However, even the most profound bull markets don’t move up in a straight line, and corrections are inevitable.

As it relates to the precious metals, a significant correction (medium-term downtrend) is already underway. However, the pain is not over, and a severe climax likely awaits.

For context, potential triggers are not always noticeable, and the PMs may collapse on their own or as a result of some random trigger that normally wouldn’t cause any major action. However, a trigger will speed things up and that’s where the S&P 500 comes in:

S&P 500 (SPX) Signals

While timing remains the million-dollar question, the S&P 500’s swan song will eventually be heard loud and clear across financial markets. Making quick work of 4,000 – and now gunning for 4,200 – investors are partying like it’s 1999. However, with the 2018-2019 analogue signaling trouble ahead, the epic rally could also have an epic ending.

To explain, I wrote previously:

Despite April’s nonfarm payrolls report buoying the S&P 500 above 4,000, the U.S. equity benchmark is still following its 2018-2019 script. Back then, the S&P 500 recorded a sharp move higher, consolidated (with heightened volatility, which I marked with a green box below), continued its uptrend, then suffered a material drawdown. And over the last 12 months, the S&P 500 has already completed the first three steps.

But how did it unfold?

Well, if you analyze the green-shaded area on the left side of the chart, you can see that the S&P 500’s breakdown below the black and red lines (that are based on the previous bottoms) was accompanied by increased volatility. From there, the rally continued before the stock market eventually collapsed.

Analogous to today’s price action, we’ve already witnessed the first three scenes from the theatrical performance. Only this time, the S&P 500 hasn’t plunged… Yet.

However, because fits and starts signal an identical outcome, after breaking below its red and black dashed rising support lines in 2020 and 2021 (on the right side of the chart), the S&P 500 is still trading below both levels. Furthermore, the heightened volatility that unfolded from August to October is a tell-tale sign that the 2018-2019 analogue could eventually rear its ugly head.

In addition, the S&P 500’s RSI (Relative Strength Index) currently signals overbought conditions. Approaching 72, prior readings of this magnitude preceded major tops in 2020 and heightened volatility in 2021. As a result, while an epic climax may or may not unfold this week, but at least a short-term pullback could be in order soon.

Please see below:

As for the NASDAQ Composite – which led equities’ surge in 2020 – the tech-heavy index still hasn’t recaptured its all-time high. Moreover, not only has the NASDAQ Composite trekked higher on negative RSI divergence – where upward price momentum has coincided with a RSI that’s seemingly running out of steam – volume has also been waning in recent days. Thus, while relative illiquidity can support higher prices in the short term, the superficial strength indicates a lack of conviction among market participants.

If that wasn’t enough, while Big Tech seemingly negotiates from a position of strength, the NASDAQ Composite could be about to form a unique head & shoulders pattern.

Please see below:

For context, the potential H&S pattern remains relatively immature, and – based on the shape of the recent price moves – a double top may end up being the final outcome. However, if the NASDAQ Composite breaks below ~12,000 (the neck level), a drawdown to ~10,550 or ~10,850 (the mid-2020 lows) could be next in line. Remember, the six largest companies in the NASDAQ Composite – Apple, Microsoft, Amazon, Tesla, Facebook and Alphabet – are also the six largest companies in the S&P 500. Thus, a drawdown of the former will weigh heavily on the latter. Likewise, a potential equity rout is profoundly bearish for the PMs, as silver and the miners will likely be the hardest hit.

For context, if you analyze the table above, you can see that NASDAQ 100 drawdowns of more than 2.00% tend to unnerve the PMs. Moreover, if you exclude silver’s short squeeze on Jan. 29 and the NASDAQ 100’s relatively ‘quiet’ 2.63% drawdown on Feb. 22, bouts of equity volatility significantly impact the PMs (especially the miners).

The bottom line?

While a profound drawdown is likely over the medium term, short-term indicators signal that at least a minor pullback is likely to unfold in the coming days/weeks.

Keep in mind though: a decline in stocks is not required for the PMs to decline. But a break in the former could easily trigger a sell-off in the latter, and if history decides to rhyme again, silver and the miners will be the hardest hit.

Very Long-term MACD Sell Signal for Gold

Blinded by gold’s recent strength, precious metal investors often can’t see the forest through the trees. Case in point: despite the yellow metal’s recent bounce, the move was immaterial when analyzing from a monthly perspective. Moreover, if the yellow metal ends April at $1.780.20 (the Friday, Apr. 16 close), it would have no impact on the MACD indicator’s sell signal. As a result, because corrective upswings are expected within a medium-term downtrend, gold’s outlook remains profoundly bearish over the next few months.

To explain, I wrote previously:

With February’s monthly close the last piece of the puzzle, the MACD indicator’s sell-signal is now perfectly clear. If you analyze the chart below (at the bottom right), you can see that the MACD line has crossed the signal line from above – a development that preceded significant drawdowns in 2008 and 2011.

Based on gold’s previous performance after the major sell signals from the MACD indicator, one could now expect gold to bottom in the ~$1,200 to ~1,350 range. Given the price moves that we witnessed in 1988, 2008 and 2011, historical precedent implies gold forming a bottom in this range. However, due to the competing impact of several different variables, it’s possible that the yellow metal could receive the key support at a higher level.

Only a shade below the 2011 high, today’s MACD reading is still the second-highest reading in the last 40 years. More importantly though, if you analyze the chart below (the red arrows at the bottom), the last four times the black line cut through the red line from above, a significant drawdown occurred.

Also ominous is that the magnitude of the drawdowns in price tend to coincide with the magnitude of the preceding upswings in MACD. And with today’s reading only surpassed by 2011, a climactic move to the $1,250/$1,450 range isn’t out of the question for gold. The above is based on how low gold had previously declined after similarly important sell signal from the MACD

Now, the month is not over yet, so one might say that it’s too early to consider the sell signal that’s based on monthly closing prices, but it seems that given the level that the MACD had previously reached and the shape of the top in the black line, it makes the situation so similar to 2011/2012 that the sell signal itself is just a cherry on the bearish analytical cake.

Considering the reliability of the MACD indicator as a sell signal for major declines, the reading also implies that gold’s downtrend could last longer and be more severe than originally thought. As a result, $1,500 remains the most likely outcome, with $1,350 still in the cards.

The USD Index (USDX)

With an epic struggle for supremacy set to unfold in the coming weeks, battle lines have officially been drawn: with the USD Index hovering near its 50-day moving average and gold recapturing its 50-day MA, negatively correlated assets have officially collided. And, as the rules of engagement specify that to the victor go the spoils, which one is likely to wave the white flag?

Well, with the USD Index built on a foundation of relative fundamentals and gold a beneficiary of shifting sentiment, the former remains locked and loaded and poised to neutralize the threat. Case in point: despite the USD Index’s recent recoil, non-commercial (speculative) futures traders actually increased their net-long positions last week.

Please see below:

Source: COT

Moreover, let’s keep in mind that when net-speculative short interest as a percentage of total open interest (based on the CoT data) became extremely high in 2014 and 2018, the USD Index recoded two of its sharpest rallies in history. How sharp? Well, let’s take a look at how things developed in the past – after all, history tends to rhyme.

Let’s focus on what happened when the net speculative positions were significantly (!) negative and then they became significantly (!) positive, so without paying attention to tiny moves (like the one that we saw last summer).

In short, rallies that began with extreme pessimism include:

• The big 2008 rally (over 16 index points)
• The big 2009 – 2010 rally (over 14 index points)
• The 2011 – 2012 rally (over 11 index points)
• The 2013 rally (“only” over 5 index points)
• The big 2014 – 2015 rally (over 20 index points)
• The 2018 rally (over 15 index points)

The current rally started at about 89, so if the “normal” (the above shows what is the normal course of action) happens, the USD Index is likely to rally to at least 94, but since the 5-index point rally seems to be the data outlier, it might be better to base the target on the remaining 5 cases. Consequently, one could expect the USD Index to rally by at least 11 – 20 index points, based on the net speculative positions alone. This means the upside target area of about 105 – 114. Consequently, a comeback to the 2020 highs is not only very likely, but also the conservative scenario.

In addition, let’s keep in mind that the very bullish analogy to the 2018 rally remains intact. If you analyze the chart below, you can see that back in 2018, the USD Index rallied sharply and then corrected back to its previous highs. And in similar fashion, the current weakness is nearly identical. More importantly, though, with the 61.8% Fibonacci retracement level sitting just below the USD Index’s 50-day MA, the cavalry is already on the way.

Please see below:

The current correction is much bigger than what we saw in mid-April 2018, so it seems that what we see right now is more of an analogy to what we saw in June 2018. That was the first big correction after the breakout – above the 50-day moving average and the declining blue resistance line – that definitively ended the yearly decline.

I marked the situation from 2018 that seems similar to what we see right now with a dashed, horizontal line. Back in 2018, the pullback ended when the USD Index moved to its first Fibonacci classic retracement level (the 38.2% one). In case of the current rally, I marked those retracements with red. The USD Index is already below the first two (taking today’s pre-market decline into account) and it seems to be on its way to reach the final – most classic – 61.8% retracement. This kind of retracement provides substantial short-term support and it’s something that’s likely to trigger a rebounding.

This retracement is slightly above the 90.7 level, and at the moment of writing these words, the USD Index is trading at 91.14. This means that the USD Index can reach its very strong short-term support any day – or hour – now.

The very important detail about the June 2018 decline (and bottom) is that while this was the moment after which the USD Index’s started to move higher at a slower pace, it was also the moment after which the precious metals market started to decline faster.

At the beginning of the year, I wrote that the precious metals market was likely to decline and that the preceding rally was likely fake. That’s exactly what happened.

Right now, I’m writing that the recent rally was also fake (a correction within a medium-term decline) and – even more importantly – it seems likely that the next downswing could take place at a higher pace than what we saw so far this year. And – just as was the case in 2018 – this upcoming (fast) decline is likely to lead to the final bottom in the precious metals sector.

Of course, just because the bottom is likely to be formed in the following months, doesn’t mean that it’s in at this time or that it’s a good idea to ignore the bearish implications of the situation in the USD Index (as well as other indications pointing to lower gold prices).

As further evidence, the USD Index’s 2020 decline has not invalidated its long-term breakout. And with the long-term implications taking precedence over the medium- and short-term ones, the USDX still has its guns pointed in the right direction.

Adding reinforcements to its infantry, the USD Index also has another ally in the U.S. 10-Year Treasury yield. After sitting out much of the rally in 2020, the former has been following in the latter’s footsteps since the New Year’s Day. And while the U.S. 10-Year Treasury yield’s frailty has been a negative over the last two weeks, the dynamic could be about to flip.

Please see below:

Trending in the opposite direction of the USD Index futures, non-commercial (speculative) futures traders have moved from net-long to net-short the U.S. 10-Year Treasury Note. For context, bond prices move inversely of yields, so a lower U.S. 10-Year Treasury results in a higher U.S. 10-Year Treasury yield. And after non-commercial (speculative) futures traders reduced their long positions by nearly 43,000 contracts and increased their short positions by more than 44,000 contracts, speculators went from being net-long nearly 84,600 contracts to net-short nearly 2,700 contracts.

Please see below:

As a result, if the U.S. 10-Year Treasury yield and the USD Index engage in an all-out offensive, their military might could indicate the death knell for the precious metals. Case in point: if you analyze the table below, you can see that gold, silver and the mining stocks often move inversely to the U.S. dollar.

The bottom line?

Given the magnitude of the 2017-2018 upswing, ~94.5 is likely the USD Index’s first stop. And in the months to follow, the USDX will likely exceed 100 at some point over the medium or long term.

Keep in mind though: we’re not bullish on the greenback because of the U.S.’s absolute outperformance. It’s because the region is doing (and likely to do) better than the Eurozone and Japan, and it’s this relative outperformance that matters, not the strength of just one single country or monetary area. After all, the USD Index is a weighted average of currency exchange rates, and the latter move on a relative basis.

In conclusion, the generals have mapped out their strategies, soldiers have manned the perimeter, and the loser of the upcoming battle will likely end up losing the war. However, with the precious metals being outmanned and outgunned, the USD Index will likely plant its victory flag, while gold, silver and the mining stocks are forced to retreat and regroup. As a result, a major fallback is likely before the precious metals can resume their long-term uptrend. Due to the USD’s breakdown below the 50% retracement, they could decline in the very near term (while gold rallies a bit more – say to $1,800 or so), but don’t let that trick you into thinking that the next big move is going to the upside. In my view, that’s actually likely to be an important top that’s then going to be followed by an even more important decline in the precious metals and mining stocks. Then, after several weeks or months of declines, PMs can bottom and finally soar without huge declines on the horizon.

Expanding on our list of potential upside catalysts, let’s not forget that the USD Index is after a long-term, more-than-confirmed breakout. This means that the long-term trend for the U.S. dollar is up.

In addition, a material drawdown of the NASDAQ 100 could eventually rattle U.S. equities’ cages. And with the NASDAQ 100/S&P 500 ratio still above its dot-com bubble peak, a reversion to the mean will likely elicit plenty of fireworks.

To that point, given the USDX’s strong negative correlation with the NASDAQ 100, a material reset could propel the greenback back to its March highs. Moreover, following a short-term consolidation, the USDX could even exceed those previous highs.

As for the FED/ECB ratio, relative outprinting by the European Central Bank (ECB) remains of critical importance. Last week, the ratio increased by 0.82%, while the EUR/USD rallied by 0.73%. However, given that the ratio has declined by nearly 19% since May, the EUR/USD still has some catching up to do.

Please see below:

The bottom line?

With the ECB injecting more liquidity to support an underperforming Eurozone economy, the FED/ECB ratio, as well as EUR/USD, should move lower over the medium term. More importantly, though, because the EUR/USD accounts for nearly 58% of the movement of the USD Index, EUR/USD pain will be the USDX’s gain.

To explain, I wrote previously:

The top in the FED/ECB total assets ratio preceded the slide in the EUR/USD less than a decade ago and it seems to be preceding the next slide as well. If the USD Index was to repeat its 2014-2015 rally from the recent lows, it would rally to 114. This level is much more realistic than most market participants would agree on.

The Gold Miners

With the GDX ETF attempting to regain its former glory, the senior miners breathed a sigh of relief after breaking above their declining resistance line (the blue line below). However, mirroring the zigzag pattern that we witnessed in late 2020/early 2021, on Apr. 16, the GDX ETF hit the upper trend line of its roughly one-and-a-half-month channel. More importantly though, the development ended the GDX ETF’s rally in early 2021 and ended up being a prelude to the senior miners’ material fall from grace.

Please see below:

Moreover, the GDX ETF’s rally above its declining resistance line is a classic example of ‘been there, done that.’ Case in point: back in November 2020 and January 2021, the GDX ETF managed to peak its head above the aforementioned blue line. However, shortly after declaring victory, the senior miners suffered severe drawdowns. As a result, the current move is nothing to write home about.

In addition, if you analyze the vertical blue dashed line above – connecting the peak-to-trough price action in October/November 2020 – you can see that the magnitude of the correction also mirrors the current swoon. What’s more, the final two days of the November rally culminated with the GDX ETF moving sharply higher on Thursday and slightly higher on Friday. And following the same script, the GDX ETF’s sharp rally on Thursday (Apr. 15) was followed by a tepid bounce on Friday (Apr. 16). Thus, the technicalities of other markets, technicalities of mining stocks, the futures’ traders’ positions, and historical precedent are all signaling a material reversion.

Still, I would like to point out that it’s still possible that the head-and-shoulders formation that I marked previously was not THE formation that is going to take mining stocks to much lower prices. It could be the case that the left shoulder is as I described previously, but that the head of the pattern is bigger and the right shoulder is being formed right now. If this is the case, then we might still see the GDX ETF at about $37 level or so before it really slides. This would be in tune with how the situation developed in 2008 and 2012 – you’ll find details of this comparison in the following part of the analysis, where I discuss the HUI Index’s very long-term chart. For now, let’s keep in mind that even a rally slightly above $37 in the GDX ETF would not invalidate the bearish outlook for mining stocks (even though it would feel very unpleasant in the short term).

Still, it could be the case the initial head and shoulders pattern is going to hold anyway. As further evidence on this (more bearish in the short term but just as bearish in the medium term) scenario, let’s take a look at other proxies for the mining stocks. When analyzed through the lens of the GDXJ ETF, the pattern is far from invalidated. Case in point: the GDXJ ETF has yet to break above the neckline of its bearish H&S pattern.

Please see below:

To explain, the GDXJ ETF is relatively far from the neck level (which I marked with a thick, black line). On a side note, the breakout that we saw recently (above the short-term declining resistance line) seems similar to the breakout that we saw in January – above the line that was important back then. Just as the January strength turned into declines, I expect to see the same thing this time.

So, how low could the GDXJ ETF go?

Well, absent an equity rout, the juniors could form an interim bottom in the $34 to $36 range. Conversely, if stocks show strength, juniors could form the interim bottom higher, close to the $42.5 level. For context, the above-mentioned ranges coincide with the 50% and 61.8% Fibonacci retracement levels and the GDXJ ETF’s previous highs (including the late-March/early-April high in case of the lower target area). Thus, the S&P 500 will likely need to roll over for the weakness to persist beyond these levels.

In addition, both the HUI and the XAU indices ended Friday’s (Apr. 16) session below the necklines of their bearish H&S patterns.

The bottom line?

The GDX ETF is the only wolf howling at the moon. Therefore, it seems prudent not to give particular meaning to what happened in the GDX ETF alone.

Also, eliciting bearish undertones, the HUI Index/S&P 500 ratio has recorded a major, confirmed breakdown. And with the ratio nowhere near recapturing its former glory, it’s another sign that the GDX ETF is a significant outlier.

Please see below:

For context, I wrote previously:

When the ratio presented on the above chart above is rising, it means that the HUI Index is outperforming the S&P 500. When the line above is falling, it means that the S&P 500 is outperforming the HUI Index. If you analyze the right side of the chart, you can see that the ratio has broken below its rising support line. For context, the last time a breakdown of this magnitude occurred, the ratio plunged from late-2017 to late-2018. Thus, the development is profoundly bearish.

Playing out as I expected, a sharp move lower was followed by a corrective upswing back to the now confirmed breakdown level (which is now resistance). Mirroring the behavior that we witnessed in early 2018, after breaking below its rising support line, the HUI Index/S&P 500 ratio rallied back to the initial breakdown level (which then became resistance) before suffering a sharp decline. And with two-thirds of the analogue already complete, the current move lower still has plenty of room to run. Likewise, the early-2018 top in the HUI Index/S&P 500 ratio is precisely when the USD Index began its massive upswing. Thus, with history likely to rhyme, the greenback could spoil the miners’ party once again.

In addition, the HUI to S&P 500 ratio broke below the neck level (red, dashed line) of a broad head-and-shoulders pattern and it verified this breakdown by moving temporarily back to it. The target for the ratio based on this formation is at about 0.05 (slightly above it). Consequently, if the S&P 500 doesn’t decline, the ratio at 0.05 would imply the HUI Index at about 196. However, if the S&P 500 declined to about 3,200 or so (its late-2020 lows) and the ratio moved to about 0.05, it would imply the HUI Index at about 160 – very close to its 2020 lows.

All in all, the implications of mining stocks’ relative performance to gold and the general stock market are currently bearish.

But if we’re headed for a GDX ETF cliff, how far could we fall?

Well, there are three reasons why the GDX ETF might form an interim bottom at roughly ~$27.50 (assuming no big decline in the general stock market):

1. The GDX ETF previously bottomed at the 38.2% and 50.0% Fibonacci retracement levels. And with the 61.8% level next in line, the GDX ETF is likely to garner similar support.
2. The GDX ETFs late-March 2020 high should also elicit buying pressure.
3. If we copy the magnitude of the late-February/early-March decline and add it to the early-March bottom, it corresponds with the GDX ETF bottoming at roughly $27.50.

Keep in mind though: if the stock market plunges, all bets are off. Why so? Well, because when the S&P 500 plunged in March 2020, the GDX ETF moved from $29.67 to below $17 in less than two weeks. As a result, U.S. equities have the potential to make the miners’ forthcoming swoon all the more painful.

As another reliable indicator (in addition to the myriads of signals coming not only from mining stocks, but from gold, silver, USD Index, stocks, their ratios, and many fundamental observations) the Gold Miners Bullish Percent Index ($BPGDM) isn’t at levels that trigger a major reversal. The Index is now approaching 47. However, far from a medium-term bottom, the latest reading is still more than 37 points above the 2016 and 2020 lows.

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, with sentiment still relatively elevated, it will take more negativity for the index to find the true bottom.

The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of 2020. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place.

But has it already run its course?

Well, in 2016 and early 2020, the HUI Index continued to move lower until it declined below the 61.8% Fibonacci retracement level. The emphasis goes on “below” as this retracement might not trigger the final bottom. Case in point: back in 2020, the HUI Index undershot the 61.8% Fibonacci retracement level and gave back nearly all of its prior rally. And using the 2016 and 2020 analogues as anchors, this time around, the HUI Index is likely to decline below 231. In addition, if the current decline is more similar to the 2020 one, the HUI Index could move to 150 or so, especially if it coincides with a significant drawdown of U.S. equities.

Circling back to the NASDAQ Composite, the unwinding of excessive speculation could deliver a fierce blow to the gold miners. Case in point: when the dot-com bubble burst in 2000, the NASDAQ lost nearly 80% of its value, while the gold miners lost more than 50% of their value.

Please see below:

Right now, the two long-term channels above (the solid blue and red dashed lines) show that the NASDAQ is trading well above both historical trends.

Back in 1998, the NASDAQ’s last hurrah occurred after the index declined to its 200-day moving average (which was also slightly above the upper border of the rising trend channel marked with red dashed lines).

And what happened in the first half of 2020? Well, we saw an identical formation.

The similarity between these two periods is also evident if one looks at the MACD indicator. There has been no other, even remotely similar, situation where this indicator would soar so high.

Furthermore, and because the devil is in the details, the gold miners’ 1999 top actually preceded the 2000 NASDAQ bubble bursting. It’s clear that miners (the XAU Index serves as a proxy) are on the left side of the dashed vertical line, while the tech stock top is on its right side. However, it’s important to note that it was stocks’ slide that exacerbated miners’ decline. Right now, the mining stocks are already declining, and the tech stocks continue to rally. Two decades ago, tech stocks topped about 6 months after miners. This might spoil the party of the tech stock bulls, but miners topped about 6 months ago…

Also supporting the 2000 analogue, today’s volume trends are eerily similar. If you analyze the red arrows on the chart above, you can see that the abnormal spike in the MACD indicator coincided with an abnormal spike in volume. Thus, mounting pressure implies a cataclysmic reversal could be forthcoming.

Interestingly, two decades ago, miners bottomed more or less when the NASDAQ declined to its previous lows, created by the very first slide. We have yet to see the “first slide” this time. But, if the history continues to repeat itself and tech stocks decline sharply and then correct some of the decline, when they finally move lower once again, we might see THE bottom in the mining stocks. Of course, betting on the above scenario based on the XAU-NASDAQ link alone would not be reasonable, but if other factors also confirm this indication, this could really take place.

Either way, the above does a great job at illustrating the kind of link between the general stock market and the precious metals market that I expect to see also this time. PMs and miners declined during the first part of the stocks’ (here: tech stocks) decline, but then they bottomed and rallied despite the continuation of stocks’ freefall.

Even more ominous, the MACD indicator is now flashing a clear sell signal. And because the current reading is analogous to the one that preceded the dot-com bust, the NASDAQ Composite – and indirectly, the PMs – continue to sail toward the perfect storm.

Gold

Despite Friday’s (Apr. 16) intraday bounce ushering gold back above its late November 2020 low, the momentum faded into the close. And because daily closing prices hold much more weight than intraday volatility, the yellow metal’s inability to hold above its late November 2020 low in terms of the daily closing prices signals that the bearish implications of the breakdown remain intact. Moreover, despite jumping above the upper trend line of its roughly one-and-a-half-month channel, the victory does not override the yellow metal’s inability to hold its November 2020 low or bounce above its April 2020 intraday high.

Please see below:

In addition, gold’s stochastic oscillator is mirroring the behavior that we witnessed in early 2021. If you analyze the bottom area of the chart above, you can see that the indicator recorded three material moves higher (triple top) before gold eventually rolled over.

In particular, the first sell signal occurred slightly below the 80 level, the second was above it, and the same was the case with the third one. The stochastic indicator is already above the 80 level right now, so it seems natural for one to expect a top any day – or hour – now.

Since back in early 2021, the stochastic indicator moved to new highs – and so far it hasn’t – and since the USD Index might even move slightly lower before finding its short-term bottom, gold could move slightly higher on a temporary basis, before topping. Perhaps (there are no certainties on any market, but this seems quite possible in the near term) it would be the round nature of the $1,800 level and the 300-day moving average that’s very close to it that would trigger a reversal and another massive decline. From the medium-term point of view, another $20 rally doesn’t really matter. It’s the few-hundred-dollar decline that’s likely to follow that really makes the difference.

Thus, if history rhymes once again, another sharp reversal could be in order either immediately or soon.

For context, I wrote previously:

It seems that gold is moving in a way that’s somewhat similar to what we saw between mid-April 2020 and mid-June 2020. It’s trading sideways below $1,800 but above ~$1,660. Back in 2020, the range of the back-and-forth movement (size of the short-term rallies and declines) was bigger, but the preceding move was also more volatile, so it’s normal to expect smaller short-term volatility this year (at least at during this consolidation).

Why is this particularly interesting? Because both consolidations (the mid-April 2020 – mid-June 2020 one and the March 2021 – today one) could be the shoulders of a broad head-and-shoulders pattern, where the mid-June 2020 – early-March 2021 performance would be the head. The breakdown below the neck level – at about $1,660 – would be extremely bearish in this case, because the downside target based on the pattern is created based on the size of the head. The target based on this broad pattern would be at about $1,350 (I marked it with a thin dashed red line on the chart below – you might need to click on it to expand it for this line to become visible). Is this level possible? It is. When gold soared above $2,000, almost nobody thought that it would decline back below its 2011 highs (well, you – my subscribers – did know that). Gold below $1,500 seems unthinkable now, but with rallying long-term rates and soaring USD Index, it could really happen.

“Ok, but what price level would be likely to trigger a bigger rebound during the next big slide?”

Well, the 76.4% Fibonacci retracement level (it’s visible as the 23.6% Fibonacci retracement level on the above chart as inverting the scale is used as a workaround) also coincides with gold’s April 2020 low. Taken together, an interim bottom could form in the ~$1,575 to $1,600 range.

For context, back in early March, the yellow metal continued to decline after reaching the 61.8% Fibonacci retracement (visible as 38.2% Fibonacci retracement) level, while in contrast, the miners began to consolidate. Gold finally bottomed slightly below the retracement – at its previous lows. This time around, we might witness a similar event. And while the story plays out, the miners’ relative strength should signal the end of the slide (perhaps with gold close to 1,600), while gold will likely garner support sometime thereafter (at $1,575 – $1,580 or so).

Remember though: this is only an interim target. Over the medium term, the yellow metal will likely form a lasting bottom in the ~$1,450 to $1,500 range.

And why is that?

Well, if you analyze the long-term chart below, you can see that the yellow metal has invalidated the breakout above its 2011 high. More importantly though, with its rising support line (on the right side of the chart) also coinciding with the 61.8% Fibonacci retracement level and the 2019 and 2020 lows, ~$1,450 to $1,500 is the most prudent medium-term price target.

Conversely, if the 2008 analogue repeats – and a crisis of confidence erupts across U.S. equities – the PMs could move substantially lower. When combining an equity shock with a USD Index resurgence, the yellow metal could bottom at roughly $1,400 (or even ~$1,350). Similarly, while the MACD indicator (on gold’s 40-year chart near the top of today’s edition) signals a bottom in the ~$1,200 to ~1,350 range, to be perfectly clear, ~$1,450 to $1,500 is the most likely outcome.

If you analyze the red arrow in the lower part of the above chart (the weekly MACD sell signal), today’s pattern is similar not only to what we saw in 2011, but also to what we witnessed in 2008. Thus, if similar events unfold – with the S&P 500 falling and the USD Index rising (both seem likely for the following months, even if these moves don’t start right away) – the yellow metal could plunge to below $1,350 or so. The green dashed line shows what would happen gold price, if it was not decline as much as it did in 2008.

As it relates to the chart below, relative to 2011-2013, today’s price action is a splitting image. For starters, gold invalidated the breakout above its 2011 highs. Invalidations of breakouts are sell signals, and it’s tough to imagine a more profound breakout that could have failed.

Silver

After attempting, and failing, to reclaim its 50-day moving average, silver remains stuck between a rock (its 200-day MA) and a hard place (its 50-day MA). Moreover, the last time the white metal bounced around these two levels, the eventual damage left silver licking its wounds for several months.

Case in point: if you analyze the red box below (on the left within the shaded area), you can see that silver’s self-similarity pattern continues to unfold. In 2020, a sharp move higher was followed by a sharp move lower, a slight move higher, then a medium-term collapse. And because the first three waves have already occurred in 2021 (next to the second red box on the right), all that’s left is to hammer the final nail in silver’s coffin.

Please see below:

As further evidence, back in March 2020, silver declined, then rallied up to its 200-day moving average and then continued to rally until it rallied approximately as much as it had rallied before reaching this moving average. The white metal then proceeded to peak right below its 50-day MA. In similar fashion, the current rally ushered silver back above its 200-day MA (and then some – as much as it had rallied before reaching this moving average). However, the 50-day MA still lies in wait. As a result, silver’s precipice could be fast approaching.

Furthermore, if we zoom in on the white metal’s price action in 2008, you can see that an immaterial bounce also occurred right before silver fell off a cliff.

To explain, I wrote on Mar. 17:

The final corrective upswing of early 2020 took place in very late February and early March, while the two – normal – tops that created the red-line rectangle formed more or less at the turn of the year and in late February. This year, it’s all taking place at almost exactly the same time of the year.

If this self-similar pattern is indeed materializing, then the implications are very bearish, and we can expect a major downturn any day or week now.

Let’s be realistic - so far, the analogy might seem too unclear to be viewed as a reliable base for making a silver forecast.

But what if… What if there was a very similar pattern in the past that also preceded a massive decline? This would greatly increase the reliability of the above self-similarity.

There was indeed such a pattern!

That’s what silver did in 2008 before it declined.

The August 2007 – March 2008 rally (please note the interim top in November 2007 that was followed by a zigzag decline, more or less in the middle of the rally) is similar to the March 2020 – August 2021 rally (please note the interim top in June 2020 that was followed by a zigzag pattern, more or less in the middle of the rally).

Afterwards, we saw a double top in both cases that was followed by a sizable slide. Then silver formed a specific U-shaped broad top, where the final top was below the initial one (exception: in this case the forum-based rally took silver slightly above the previous high, but due to the specific / random nature of the move, it “doesn’t count” as something that invalidates the analogy).

After the top, silver declined, and the final corrective upswing took place approximately between the 50- and 200-day moving averages.

Please note that in both previous (2008 and 2020) cases silver then truly plunged, and it kept on declining until it moved below the 2.618 Fibonacci extension based on the initial downswing. The above charts illustrate that by showing the first decline at the 38.2% retracement (1 / 0.382 = approximately 2.618). Applying the same to the current situation (the initial decline took silver from below $30 to below $24) provides us with the minimum decline target at about $13.50. Will silver really decline as low? In my view, it’s imperative to watch other markets for indications as they might have more reliable targets (for instance gold), but I wouldn’t say that this target (or lower price levels) is out of the question. Of course, that’s just on a temporary basis – silver will likely soar in the following months and years (after this decline).

Before summarizing, please note silver’s tendency to decline sharply in March – that’s what happened in 2008 and 2020. Even if the entire self-similar pattern doesn’t continue, based on this seasonality, silver is likely to decline soon, anyway.

Highlighting the effect of WallStreetBets’ #SilverSqueeze, the SLV ETF’s volume spikes in 2020/2021 were nearly identical to the surges that we witnessed ~10 years ago. If you analyze the chart below, you can see that the massive inflows at the end of 2012 were not the beginning of a medium-term upswing. In fact, they coincided with silver’s final bounce before the white metal suffered a major decline.

Please see below:

To explain, I wrote previously:

If you analyze the volume spikes at the bottom of the chart, 2021 and 2011 are a splitting image. To explain, in 2011, an initial abnormal spike in volume was followed by a second parabolic surge. However, not long after, silver’s bear market began.

SLV-volume-wise, there's only one similar situation from the past - the 2011 top. This is a very bearish analogy as higher prices of the white metal were not seen since that time, but the analogy gets even more bearish. The reason is the "initial warning" volume spike in this ETF. It took place a few months before SLV formed its final top, and we saw the same thing also a few months ago, when silver formed its initial 2020 top.

The history may not repeat itself to the letter, but it tends to be quite similar. And the more two situations are alike, the more likely it is for the follow-up action to be similar as well. And in this case, the implications for the silver price forecast are clearly bearish.

Based on the above chart, it seems that silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.

Similarly, silver’s inverse price action also has bearish implications. Nearly identical to the inverted formation that emerged from 2006 to 2009, today’s chart looks eerily similar to its predecessor.

While it’s more of a wild card, the above pattern shows that silver’s 2020 top plots nearly identical to the inverse of the 2006-2009 performance. I copied the 2006 – 2009 performance right below the regular price movement and I inverted it, and I also copied this inverted pattern to the last few years.

The similarity is quite significant. And whenever a given pattern has been repeated, the odds are that it could also repeat in the not-too-distant future. Of course, there is no guarantee for that, but once the same market has reacted in a certain way to a specific greed/fear combination, it can just as well do it again. And these similarity-based techniques work quite often. So, while it’s not strong enough to be viewed as a price-path-discovery technique on its own, it should make one consider some scenarios more closely. In particular, this means that the declines in the prices of silver, gold, and mining stocks could be bigger and take longer than it seems based on other charts and techniques.

The above is also in tune with the implications of the sell signal from the MACD indicator on the monthly gold chart.

The only thing that comes to my mind, which could – realistically – trigger such a prolonged decline would be a major drop in the general stock market. Given what I wrote above, the latter is quite possible, so I’ll be on the lookout for confirmations and invalidations of this scenario.

If history rhymes, silver could be in for a profound decline over the next few months (beyond my initial target). Moreover, the development would increase the duration of a precious metals’ bear market (also beyond my initial forecast).

After all, gold did invalidate its long-term breakout above the 2011 highs and the way gold reacted to a small upswing in the USD Index was truly profound…

Gold Stocks’ Very Long-term Chart

Moving on to the HUI Index (a proxy for gold stocks), the benchmark’s stochastic oscillator has now diverged from the late-2008 analogue (by moving above 50). However, the positivity is more semblance than substance, as the HUI Index’s 2008 plunge was of a much greater magnitude than the recent swoon. As a result, the miners’ current upswing is simply the eye of the storm – a period of calm before the heavy winds return. In other words, the analogy remains intact but to a slightly different period – to the mid-2008, when the stochastic indicator also moved above 50.

To explain, back in 2008, investors frantically bought mining stocks believing that the worst was over. However, after storm clouds formed once again, the HUI Index suffered an epic collapse.

And today? Well, the situation is no different.

To be perfectly honest, given the HUI Index’s verified breakdown below the neckline of its bearish H&S pattern – which didn’t occur until later in 2008 – the miners’ outlook is actually more bearish now than it was then. Thus, it’s likely a matter of when, not if, the next climax unfolds.

Please note that the 2007 – 2008 and the 2009 – 2012 head and shoulders pattern didn’t have the right shoulders all the way up to the line that was parallel to the line connecting the bottoms. I marked those lines with green in the above-mentioned formations. In the current case, I marked those lines with orange.

Now, even though the above wasn’t the case, in both cases, the final top – the right shoulder formed close to the price where the left shoulder topped. The left shoulder that formed in early 2020 topped at 303.02.

Consequently, it wouldn’t be surprising to see a move to about 300 in the HUI Index, despite all the bearish indications that I outlined so far today.

Yes, I realize that this is not a pleasant piece of news, as we would all prefer to have the market move in our preferred direction right away, but this time it seems that the wait will be – in my opinion – extremely worth it.

For more context, I wrote previously:

The three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And now we’re seeing this pattern all over again.

The above picture should make it clear why I was putting “at least” in bold, when describing the targets based on the head-and-shoulders patterns.

In all three cases, the size of the decline exceeded the size of the head of the pattern. This means that the $24 target on the GDX ETF chart is likely conservative.

Can we see gold stocks as low as we saw them last year? Yes.

Can we see gold stocks even lower than at their 2020 lows? Again, yes.

Of course, it’s far from being a sure bet, but the above chart shows that it’s not irrational to expect these kind of price levels before the final bottom is reached.

The dashed lines starting at the 2020 top are copies of sizes of the declines that started from the right shoulder of the previous patterns. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their 2020 high. However, if they develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.

I know, I know, this seems too unreal to be true… But wasn’t the same said about silver moving below its 2015 bottom in 2020? And yet, it happened.

While describing gold’s very long-term chart, I wrote that based on gold’s MACD indicator, the situation is also similar to what happened in 2008. The above chart shows some additional similarities. Let’s consider the sizes of moves between the 2004 bottom (one could argue that this is when the several-year-long rally started) and the 2008 top, between the initial 2006 top and the 2008 top, and between the very beginning of the final rally – at the end of the fake sharp downswing and the 2008 top.

I marked all of them with dashed lines and I copied them to the current situation. By “current” I mean what happened recently and in the previous years – to the situations that seemed analogous to the ones described above. For instance, the near-vertical 2020 downswing that was followed by a big rally that ended with a big head-and-shoulders top seems similar to what happened in mid-2007.

As one might expect, these dashed lines don’t point to the same price top. No wonder – the history doesn’t repeat itself to the letter, as the circumstances are not identical.

But…

What is remarkable is that on average, these dashed lines did a great job at approximately (!) pinpointing the end of the entire rally and the start of the next massive move lower. One of these three dashed lines is several months too early, one is several months too late, and one is almost exactly pointing to the 2020 top.

This makes the current situation even more similar to what happened in 2008, which has profoundly bearish implications for the entire precious metals sector. I provided more details of this analogy in the Feb. 17 Gold & Silver Trading Alert (please be sure to read the part about similarities to 2008 in the HUI Index, if you haven’t done so already).

And continuing to rhyme, the gold miners are still following the 2008 analogue (even more than the 2013 analogue). If you analyze the dotted red line above (on the right side of the chart), it shows just how quickly the miners could decline should the 2008 analogue play out in full. However, to fully align with 2008, there is still plenty of room to move lower. There are likely to be very brief corrections along the way, just like there were corrections during the 2008 slide, but overall, it seems that the mining stocks are headed much lower and the buy signal from the stochastic indicator should be viewed as very short-term phenomena only.

As for the role of equities, I wrote previously:

A move of this magnitude most likely requires equities to participate. In 2008 and 2020, the sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500. However, with the words ‘all-time high’ becoming commonplace across U.S. equities, the likelihood of a three-peat remains relatively high.

With that said: how will we know when a medium-term buying opportunity presents itself?

We view price target levels as guidelines and the same goes for the Gold Miners Bullish Percent Index (below 10), but the final confirmation will likely be gold’s strength against the ongoing USDX rally. At many vital bottoms in gold, that’s exactly what happened, including the March bottom.

Turning to cross-asset correlations, gold, silver and the HUI Index’s 10-day correlations remain largely intact. Still, exhibiting strong negative relationships with the U.S. dollar, their recent behavior is akin to what we should expect over the medium term. As a result, the USD Index’s ascension will likely haunt the PMs over the course of the next several months.

For more context, I wrote previously:

Since gold, silver, and mining stocks have been strongly negatively correlated with the USD Index in the medium term, it seems likely that they will be negatively affected by the upcoming sizable USDX upswing.

…Until we see the day where gold reverses or soars despite the U.S. currency’s rally.

If that happens with gold at about $1,700, we’ll have a very good chance that this was the final bottom. If it doesn’t happen at that time, or gold continues to slide despite USD’s pause or decline, we’ll know that gold has further to fall.

Naturally we’ll keep you – our subscribers – informed.

To move forward, how does the GDX downside target compare to gold’s downside target? If, at the same time, gold moves to about $1,700 and miners are already after a ridiculously big drop (to $31-$32 in the GDX ETF, or lower), the binding profit-take exit price of your GDX ETF will become $32.02 (those with higher risk tolerance might lower it to $31.15 or so, but moving it lower seems just too risky).

At this time, the final GDX target (the one that would correspond to gold at $1,500 or so) is still unclear. The $17 - $23 area seems probable, especially if the general stock market slides once again. It’s too early to say with any significant level of certainty. Gold is providing us with a clearer final target, so that’s what we’ll focus on. And most importantly – we’ll focus on gold’s performance relative to the USD Index.

Overview of the Upcoming Part of the Decline

1. It seems likely to me that the corrective upswing was already completed last week or that it will be completed this week. Consequently, it seems that the next big move lower is already underway or about to start.
2. After miners slide once again in a meaningful and volatile way, but silver doesn’t (and it just declines moderately), I plan to switch from short positions in miners to short positions in silver (this could take another 1-2 weeks to materialize). I plan to exit those short positions when gold shows substantial strength relative to the USD Index, while the latter is still rallying. This might take place with gold close to $1,450 - $1,500 and the entire decline (from above $1,700 to about $1,475) would be likely to take place within 1-12 weeks and I would expect silver to fall hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold – after gold has already declined substantially) is likely to be the best entry point for long-term investments in my view. This might happen with gold close to $1,475, but it’s too early to say with certainty at this time. In other words, the entire decline could take between 1 and 12 weeks, with silver declines occurring particularly fast in the final 1-2 weeks.
3. If gold declines even below $1,500 (say, to ~$1350 or so), then it could take another 10 weeks or so for it to bottom, but this is not what I view as a very likely outcome.
4. As a confirmation for the above, I will use the (upcoming or perhaps we have already seen it?) top in the general stock market as the starting point for the three-month countdown. The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector would be likely to bottom about three months after the general stock market tops. If the mid-February 2020 top was the final medium-term top (based on NASDAQ’s top, then it seems that we might expect the precious metals sector to bottom in mid-May or close to May’s end. If, however, the upcoming (unless we just saw one) top in the S&P 500 is the key one, then it seems that we’re at least ~3 months from the final bottom.
5. The above is based on the information available today and it might change in the following days/weeks.

Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.

Summary

To summarize, the PMs’ medium-term decline is well underway, and based on the recent performance of the USD Index, gold and mining stocks, it seems that the corrective upswing is close to being over. Based on gold’s triangle-vertex-based reversal, it seems that we saw the initial top on Thursday (Apr. 8), and it seems that we will see the final top very soon. It could be the case that gold tops close to $1,800 while the USD Index bottoms at its short-term 61.8% Fibonacci retracement, and mining stocks move close to their May 2020 high. This kind of performance (move back to the previous highs – the left shoulder of the big head and shoulders pattern) in the latter is what triggered truly epic declines in both: 2008 and 2012. And let’s keep in mind that history tends to rhyme.

In addition, because we’re likely entering the “winter” part of the Kondratiev cycle (just like in 1929 and then the 1930s), the outlook for the precious metals’ sector remains particularly bearish during the very first part of the cycle, when cash is king. 

The confirmed breakout in the USD Index is yet another confirmation of the bearish outlook for the precious metals market.

After the sell-off (that takes gold to about $1,450 - $1,500), we expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money last March and it seems that we’re about to make much more on this March decline, but you have to be healthy to enjoy the results.

As always, we'll keep you - our subscribers - informed.

By the way, we’re currently providing you with a possibility to extend your subscription by a year, two years or even three years with a special 20% discount. This discount can be applied right away, without the need to wait for your next renewal – if you choose to secure your premium access and complete the payment upfront. The boring time in the PMs is definitely over and the time to pay close attention to the market is here. Naturally, it’s your capital, and the choice is up to you, but it seems that it might be a good idea to secure more premium access now, while saving 20% at the same time. Our support team will be happy to assist you in the above-described upgrade at preferential terms – if you’d like to proceed, please contact us.

To summarize:

Short-term outlook for the precious metals sector (our opinion on the next 1-6 weeks): Bearish

Medium-term outlook for the precious metals sector (our opinion for the period between 1.5 and 6 months): Bearish initially, then possibly Bullish

Long-term outlook for the precious metals sector (our opinion for the period between 6 and 24 months from now): Bullish

Very long-term outlook for the precious metals sector (our opinion for the period starting 2 years from now): Bullish

As a reminder, Gold Investment Updates are posted approximately once per week. We are usually posting them on Monday, but we can’t promise that it will be the case each week.

Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

Moreover, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don’t promise doing that each day). If there’s anything urgent, we will send you an additional small alert before posting the main one.

Thank you.

Sincerely,

Przemyslaw Radomski, CFA
Founder, Editor-in-chief