Gold’s very sharp drop on Monday and subsequent slight rebound on Tuesday doesn’t change the overall narrative: gold has to drop significantly further for it to climb steadily again.

Gold truly plunged yesterday, erasing practically the entire election-uncertainty-based rally in just one day. I admit that I didn’t expect this decline to be as big on a single day, but the gold market was definitely ready for a decline, and since it got an unexpected boost from Pfizer (the optimistic test results regarding the possible Covid-19 vaccine), gold sank.

This situation emphasizes why it’s often a good idea to stick to one trading position even if it’s possible that one sees a counter-trend move on a more short-term basis.

Of course, there will be some who will say that all the technical work resulting in me expecting gold to slide shortly after the U.S. elections was useless, as gold simply responded to more-or-less random news from Pfizer.

But why did gold decline in light of this news at all? Back in March, gold was declining as Covid-19 cases increased rapidly, so if we’re about to see this trend reversed, shouldn’t gold rally instead?

And even if one agrees that the Covid-19 vaccine is fundamentally bad for gold (and it is, as it decreases the demand for safe-haven assets, since the situation is seemingly getting back to normal), then why did gold decline almost $100 in a single day, instead of declining $4, $7, $15, or any other – insignificant – number of dollars?

And why did gold end the session lower without a visible rebound, even though the general stock market erased most of its intraday gains before the session was over ? Given the above, it seems the market realized that initial testing is far from being proof that the vaccine is indeed safe (for long-term use as well), and even further away from being introduced. If people realized that they got ahead of themselves with regard to stocks, then why didn’t the same happen with regard to gold?

With all these questions in mind, things are no longer as simple as they might have appeared at first sight.

I’ll tell you why – because the vaccine announcement was just an additional trigger that wasn’t even necessary for gold to decline. The trigger’s presence caused gold to decline more than it would have otherwise, however without it, gold would have declined anyway, due to all the technical reasons.

I featured multiple reasons in yesterday’s analysis, and I encourage you to read it, if you haven’t had the chance to do so, and today, I would like to show you one thing that might be too obvious for one to notice.

It’s about gold’s, silver’s, and miners’ relative performance to what happened in the US Index, and the general stock market since early September.

The USD Index moved close to its September low, while the S&P 500 moved to its September high. Did PMs and miners exhibit similar strength? No! Gold closed about $150 below its September high, silver closed about $5 lower, and the GDX closed about $4 lower.

Gold ended yesterday’s session close to $1,850, and based on what I wrote yesterday, it seems that the USD Index is on the verge of moving much higher, which will likely trigger more declines in gold. And indeed, since gold just moved to its September lows yesterday and ended the daily decline there, it will now likely take a breather (it moved about $10-$20 higher today, which is negligible compared to yesterday’s slide) and then I expect to see a breakdown. This breakdown would be likely to lead to gold declining to about $1,700 – in tune with what I’ve been writing for weeks. I expect gold to rally back up (above $2,000 and beyond) only after declining significantly. And this decline is likely already underway.

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Following the close of the U.S. presidential election and latest post-election euphoria, miners posted slight gains on Thursday and Friday, gains which are likely to be short-lived and followed by a sustained decline, if the history charts are any indication.

When compared to small breakouts over the declining resistance line in August, September and October as well as the small gains and sudden drop by the Gold Miners Bullish Percentage Index back in 2016, the most recent gains by miners are negligible and only predict an eventual and further trend downwards.

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 has caused the Gold Miners Bullish Percent Index to move up once again for a few days. It then declined once again. We saw something similar also this time. In this case, this 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. Given the situation in the USD Index, it seems that we’re seeing the same thing also this time.

Please note that back in 2016, after the top, the buying opportunity didn’t present itself until the Gold Miners Bullish Percent Index was below 10. Currently, it’s above 70, so it seems that miners have a long way to go before they bottom (perhaps a few months – in analogy to how gold declined in 2016).

On Thursday and Friday, miners moved and closed slightly above their 50% retracement of the preceding decline, the declining resistance line based on the August and September highs, and the October highs. The breakout was tiny, so it would require a confirmation. I expect to see its invalidation instead, especially given today’s pre-market decline in gold and the very bullish medium-term outlook in the USDX. In fact, at the moment of writing these words, the GDX ETF is down by over 4% in today’s trading on the London Stock Exchange.

Even if miners didn’t form a top on Friday, they are likely very close to it, as they once again rallied in the manner that is similar to other sessions that we marked with blue ellipses on the chart. The daily upswing on relatively strong volume that was preceded by a price gap is bullish in theory, but in practice this meant that a downturn was just around the corner 4 times out of 4, when we saw such a combination in the last few months. Consequently, the implications are not really bullish here.

In particular, what we saw in mid-September appears similar to what we see right now. Back then, the GDX ETF was also after a small breakout above its short-term, blue support line and the 50-day moving average. A relatively sharp short-term decline followed at that time, and the same seems likely also this time.

Also, let’s not forget that the GDX ETF has recently invalidated the breakout above the 61.8% Fibonacci retracement based on the 2011 – 2016 decline.

When GDX approached its 38.2% Fibonacci retracement, it declined sharply – it was right after the 2016 top. Are we seeing the 2020 top right now? This is quite possible – PMs are likely to decline after the sharp upswing, and since there are only several months left before the year ends, it might be the case that they move north of the recent highs only in 2021.

Either way, miners’ inability to move above the 61.8% Fibonacci retracement level and their invalidation of the tiny breakout is a bearish sign.

The same goes for miners’ inability to stay above the rising support line – the line that’s parallel to the line based on the 2016 and 2020 lows.

Last week, miners have once again moved back to the upper border of the rising long-term trade channel, but they failed to rally above it. This means that the bearish indications based on the above chart remain up-to-date.

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Przemyslaw Radomski, CFA
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Gold miners declined, which might have been the confirmation of the top or the final pause before the miners rally and form the top. In light of what we indicated yesterday, the latter seems more likely (the analogy to the previous post-presidential-election performance) and based on today’s pre-market rally in gold and silver.

My comments on the above from yesterday remain valid. On Thursday, after gold’s significant Wednesday decline, I’ve indicated the following:

Miners have been undermining gold, which is bearish, and they have also broken below the recent lows, which is also bearish. Moreover, miners have just declined on strong volume after opening the day with a price gap, which at first sight, is bearish.

The theory is that such sessions are particularly bearish, as they supposedly show the bears' strength. But, before applying any trading tip into practice, it’s important to check if it had indeed worked on a given market, especially in the recent past. And the aforementioned did work… In the opposite way!

For the third time, miners are declining substantially during one day on a strong volume. We saw the same thing happening in mid-August and late-September. None of them were followed by lower miner prices. Instead, we’ve witnessed corrective upswings that didn’t change the overall downtrend.

So, from here on in, will miners rally or decline? Overall, the very near term (until the elections in the U.S. and a day-two after that) is unclear. At this point, a temporary rebound here would not surprise me at all, and if we see one, I expect it to be followed by a major slide. That’s precisely what happened right before and after the elections in 2016.

Yesterday, I added that the summary above remained 100% valid. Miners moved higher, and given today’s pre-market move lower in gold, it seems that they will decline today. However, given how quickly things are changing regarding the political outlook, it wouldn’t be surprising to see a quick turnaround in gold and a daily rally before it finally plunges. So, it’s not a sure bet that miners formed their top yesterday.

Indeed - it seems that we’re about to witness a daily rally in the gold miners today.

Back in 2016, right after the U.S. presidential elections, miners corrected to almost 38.2% Fibonacci retracement level based on the preceding decline, moving briefly above their 50-day moving average. This time, in 2020, both levels are close to each other as well, with the retracement being slightly higher.

Tuesday’s move to $39.62 was below both levels. If the GDX is to move above the 50-day M.A. once again, at least temporarily, it would have to exceed $40.02. Back in 2016, the GDX declined from about $25 to about $20 (20% decline) in a few days. Could this happen again? It seems quite possible.

Given gold’s and silver’s pre-market rally (and the firm performance in the general stock market so far this week), it seems that miners could quickly move above their Tuesday high above $40.02 and top somewhere between $40.02 and $40.50 (approximately).

The 20% decline from $40 would imply a move to about $32, which is the upper border of our target area and the February high.

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In Monday’s analysis, I wrote that the market situation is likely to become more specific right before, during, and perhaps shortly after the U.S. presidential elections. And by “specific”, I mean that the markets could begin moving against their previous trends.

Well, that’s precisely what we’ve witnessed so far. The overnight volatility is significant as the markets try to estimate the election outcome, with the odds keep changing quickly. Let’s start today’s market examination with the USD Index.

Yesterday, I indicated that I wouldn’t be surprised to see a corrective move lower that would trigger a brief move higher in the precious metals and mining stocks. I’ve also indicated that such a move would only be temporary, and most likely, it won’t last more than several days.

That’s what we have witnessed. Indeed, the USD Index has moved lower, almost touching the previously broken red resistance line. Yes, it rallied back up but then declined once again in today’s pre-market trading. Given the current political uncertainty, this is a relatively normal post-breakout behavior. The key point is that the USDX didn’t invalidate the short-term, let alone the medium-term breakout. This means that – as I indicated yesterday – these moves are not a game-changer, but instead, they are a relatively normal uncertainty-based phenomenon.

Gold moved higher yesterday, which erased those gains in the last few hours. So, is the uncertainty-based rally already over? It’s unclear. Given how great the uncertainty is, and regardless of the outcome, it’s likely to be taken to the Supreme Court (or at least heavily protested), the uncertainty might not disappear today.

And what about gold miners?

Miners rallied, almost touching their declining resistance line and the 50-day moving average.

On Thursday, after gold’s significant Wednesday decline, I’ve indicated the following:

Miners have been undermining gold, which is bearish, and they have also broken below the recent lows, which is also bearish. Moreover, miners have just declined on strong volume after opening the day with a price gap, which at first sight, is bearish.

The theory is that such sessions are particularly bearish, as they supposedly show the bears' strength. But, before applying any trading tip into practice, it’s important to check if it had indeed worked on a given market, especially in the recent past. And the aforementioned did work… In the opposite way!

For the third time, miners are declining substantially during one day on a strong volume. We saw the same thing happening in mid-August and late-September. None of them were followed by lower miner prices. Instead, we’ve witnessed corrective upswings that didn’t change the overall downtrend.

So, from here on in, will miners rally or decline? Overall, the very near term (until the elections in the U.S. and a day-two after that) is unclear. At this point, a temporary rebound here would not surprise me at all, and if we see one, I expect it to be followed by a major slide. That’s precisely what happened right before and after the elections in 2016.

The summary above remains 100% valid. Miners moved higher, and given today’s pre-market move lower in gold, it seems that they will decline today. However, given how quickly things are changing regarding the political outlook, it wouldn’t be surprising to see a quick turnaround in gold and a daily rally before it finally plunges. So, it’s not a sure bet that miners have formed their top yesterday.

Back in 2016, right after the U.S. presidential elections, miners corrected to almost 38.2% Fibonacci retracement level based on the preceding decline, and they moved briefly above their 50-day moving average. Both levels are close to each other this time as well, with the retracement being slightly higher.

Yesterday’s move to $39.62 was below both levels. If GDX is to move above the 50-day M.A. once again, it would have to exceed $40.02, at least temporarily.

Back in 2016, GDX declined from about $25 to about $20 (20% decline) in few days. Could this happen again? It seems quite possible. This time, GDX is close to $40, so if it declined 20%, it would trade at about $32, which is the upper border of our target are and the February high.

There’s one more thing that tells us that while we might have seen the top yesterday, it was not necessarily the case.

Namely, silver didn’t outperform gold yesterday, and miners were not week relative to it (on a day-to-day basis). These are signals that very often herald short-term turnarounds.

Their absence in yesterday’s trading is a clue pointing to the possibility that PMs and miners will move higher before topping. To be clear, we’re not talking about weeks here, but rather days, or perhaps hours. If silver comes back up strongly today while miners underperform, it will be an apparent signal that the short-term top is already in. Of course, the above is not a sure bet, as PMs and miners could decline right away based on their medium-term breakdowns, but it’s not 100% clear that yesterday was the ultimate short-term top.

Thank you for reading our free analysis today. Please note that the following is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim target for gold that could be reached in the next few weeks. We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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