Gold: Patiently Waiting for... Nothing / Commodities / Gold and Silver 2018

Goldstarted the month with an upswing, silver soared and… Silver stocks declined. Yes,you read that right. Big upswings can be bullish developments, but it’sdefinitely not true in all cases. For instance, in this case, one could saythat while it’s true that gold moved higher, it failed to move to thelate-March high, let alone break above it. Why is gold not moving decisively inany direction? What’s it waiting for? Was gold’s early-April rally just a lateApril fool’s joke?

Let’sstart with the shocker – silver stocks (charts courtesy ofhttp://stockcharts.com).

The TinyDecline

Thedecline in the SIL ETF that we’re using as a proxy for the silver miners wasn’tsomething huge. SIL declined by only 2 cents. But the discrepancy between thefact that they declined at all and silver’s big daily gain, is a big warning sign for anyone who decidedto trust yesterday’s strength. Naturally, silver miners should confirm the moveof the underlying metal – but they didn’t. The general stock market can beresponsible for a part of the underperformance, but not for its entirety.

SILmoved briefly above the 50-day moving average and declined shortly thereafterThat’s the third time this year that we’re seeing this kind of action. Bothprevious cases were followed by declines, so the implications here are alsobearish. It’s also worth noting that the volume that accompanied the intradayreversal was relatively big – it was biggest in a week.

Silver’sDaily “Strength”

Thewhite metal moved sharply higher during yesterday’s session. In fact, it movedto the late-March high erasing two previous daily declines during just one day.But, unless you are new to our analyses, you know that silver’s big daily rallies are often fake moves and they are goodentry moments for short, not long positions. This is especially the case, whensilver outperforms the rest of the precious metals sector. Was this the case?

Definitely.

Gold’sExtra Pop-up

Goldmoved higher, but it didn’t close at its late-March highs. It ended yesterday’ssession about $10 lower. Consequently, silver has indeed showed strength, whichmakes yesterday’s session a bearish sign. That’s yet another daily sign ofsilver’s strength that we saw in the past several weeks. The bearish outlook istherefore more and more confirmed.

Inthe previous alerts, we discussed the triple tops in gold and we wrote thatthey were followed by one final extra pop-up before the decline. Yesterday’supswing would perfectly fit that pattern, which is another reason to continue predicting lower gold prices. The pattern simply continued,and the implications didn’t change – they remain bearish.

This isBoring! Why Would Gold Ever Decline?

Theback-and-forth movement may seem tiring and boring, even exhausting – and it’sperfectly understandable. But, please keep in mind that there’s usually calmbefore the storm and biggest moves tend to be followed by biggerconsolidations. The market clearly wants to move lower, but the surprising news(like trade conflict with China) kept delaying the start of the big slide. Howdo we know? Because, if the precious metals market really wanted to soar, itwould have soared – it had all the fundamental reasons it needed and USDwell below the 2015 and 2016 lows. Yet, gold failed to rally above the previoushighs, while silver and mining stocks are not even close to the analogoushighs.

Therefore,the decline was simply delayed – it was not cancelled. The bearish outlookremains intact, but one needs to be patient to fully profit from it. Naturally,this doesn’t imply blindly sticking to a position (that would be the case ifsomeone was simply stubborn and not changing their mind was more important thanfinal profits) – it doesn’t mean exiting the position every time wind blows theother way (just for the sake of making something – that may be the goal of somebrokers as it would benefit them – not necessarily the investor). For us – since we care about yourinvestment success – it means analyzing news and market’s reactions as theycome and comparing them to what a bullish and bearish market would do. Sofar, we keep receiving bearish confirmations, to the outlook remains bearish.Your patience will likely be well rewarded.

Whilewe’re at it, we would like to discuss a question that we are asked every nowand then regarding gold’s big moves. It goes like this “What needs to happenfor gold to move to $XYZ?”.

Ourreply is almost always “nothing”, to which we usually get “huh?” as a replyalong with a raised eyebrow. Then we elaborate.

Yousee, in real, non-market life, when you have an object that’s not moving andyou’re not doing anything with it, it tends to stay in its place. It’s soobvious that you might be wondering why we’re mentioning this at all. Now, ifsomething is moving at a constant speed and there are not obstacles, it willcontinue to move at the same speed as along as nobody interrupts it. That’sNewton’s first law of motion, by the way.

It’sextremely easy to extrapolate what’s obvious in real life to the markets. Butthat’s not how markets work. The laws that apply in physics, don’t have toapply in case of the markets. Why? Because the markets are not only driven byfacts – they are driven by investors’ emotions. Emotions can trigger moves thatare opposite of what should be taking place and they are responsible for awhole series of non-logical developments. Speculative manias, for example.

Don’tdespair – there’s still something that we can use to estimate market’s “defaultmode”, but it’s not as simple as the law of inertia.

There’sanother rule regarding the market that may be just as obvious as theabove-mentioned physics law: markets move from being overbought to oversold andvice-versa. Simple as that – in the above context it can also be understoodthat there is an inherent cyclicality in the market andthat’s what we should view as the default.

Directconsequence of market’s long-term cyclicality is the fact that if nothinghappens, the market will not stay in place – it will follow its cycle. Whetherthat will be a move up or down depends on the stage of the cycle that themarket is currently in.

Incase of gold and the current situation, it’s been in a down cycle since the2011 top and we know this, because during the 2015 bottom gold wasn’t hatedenough and precious metals investors (here: those who either consider purchasesor are already invested) were not bearish – they were eager to buy more andexpected higher gold prices. This is documented by the surveys and confirmed bylong-term technical signs and analogies. Therefore, since gold didn’t trulybottom yet, it’s down cycle remains in play. So, what needs to happen for gold to move lower? Nothing. Gold ismoving back and forth because new bullish fundamental developments keep poppingup. But the amount of bullish news will eventually equal 0 and as soon as itdoes, and the market has “nothing” bullish to rally on, the price is likely toresume its default move – which is currently down. If we see bearish news, goldis likely to slide quite sharply.

Afterthe final and scary bottom, gold’s default mode will become a rally and then it’slikely to trade sideways in light of bearish news – but it seems that we arestill months before the start of this stage.

Low-volumeRally in the Miners

Wealready wrote that silver stocks declined a bit yesterday, but the miningstocks sector as a whole moved higher. The move was not significant, though.GDX didn’t move to new short-term highs and it didn’t manage to close the dayabove the 50-day moving average. Just like it was the case with silver, GDXalready attempted to move above this MA twice this year and both cases werefollowed by declines. The implications are bearish.

Thefact that mining stocks moved higher on relatively low volume confirms thebearish outlook. The volume was smallest in a week and definitely smaller thanthe volume that accompanied the preceding decline.

TheHUI Index didn’t manage to move to its 50-day moving average, but it movedtemporarily above its rising, medium-term resistance line and reversed shortlythereafter, finally closing right at this level. This attempt of gold shares to break above thisline was therefore invalidated even sooner than the late-March one. Theimplications are bearish, and they are further confirmed by the fact that theentire session took form of a reversal candlestick called the shooting star.

USDQuietly Confirms Short-term Breakout

Thelast two sessions were quite boring in case of the USD Index, but theimplications quickly become bearish, once one realizes that these two sessionstook place right after a breakout. Yesterday’s close above the declining,short-term resistance / support line was the third close after the breakout –the one that confirmed it. Higher valuesof the USD are now very likely.

Itmay be a bullish sign for the precious metals sector that yesterday’s rally init took place without a big (only a relatively small one) decline in the USDIndex. However, we don’t buy into this bullishness just yet. It was just asingle-day phenomenon and today’s pre-market action seems to confirm our view.At the moment of writing these words, gold is down by $4.30 while the USD Indexis down by 0.15. If there were trulybullish implications of yesterday’s session, gold should have gone higher onceagain. It didn’t, which – along with other bearish signs discussed today –suggests that yesterday’s gold-USD link was rather accidental.

Summary

Summingup, precious metals’ back and forth movement is likely just a delay within abig cyclical decline and something that’s likely to be over soon. What needs tohappen for gold to move lower? Nothing. Gold is moving back and forth becausenew bullish fundamental developments keep popping up. But the amount of bullishnews will eventually equal 0 and as soon as it does, and the market has“nothing new” bullish to rally on (the long-term fundamentals will not beaffected – we mean the news only), the price is likely to resume its defaultmove – which is currently down. If we see bearish news, gold is likely to slidequite sharply.

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Thank you.

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Toolsfor Effective Gold & Silver Investments - SunshineProfits.com
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All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.

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