Tuesday's premarket trading is interesting for precious metals investors. The U.S. Dollar Index is basically flat, but silver jumped up almost 30 cents, showing strength. Gold is up as well.
The above relative price moves confirm that the precious metals sector really wants to move higher in the short term, and that until it does, daily declines will be limited.
Let's take a look at the chart of the U.S. Dollar Index.
Courtesy of StockCharts.com
What's likely to happen next? The U.S. Dollar Index is likely to verify the breakout above the previous highs. The support levels are between 100 (a round number) and 100.60 (the intraday high from December 2015 high), which is a quite wide area, so the specific target is unclear. Thus, it doesn't seem that we can base our entry point in metals and miners on the U.S. Dollar Index alone. We can, however, look for confirmations from the precious metals themselves once the dollar is within the target area.
Two very important confirmations would be: the miners' underperformance and silver's very short-term outperformance. Another thing would be gold moving a bit above its 300-day moving average (for instance to $1,250 an ounce).
Courtesy of StockCharts.com
In addition to moving to the previous 2016 lows, gold moved to the 300-day moving average and the declining red support line -- the upper border of the previous trading channel. Consequently, it's no wonder that we saw a pause here. Does the above imply that a big turnaround will be seen shortly? Not necessarily. The analogy to 2013 remains in place, so we could see some strength, but it's likely to be limited. In the case of gold, we can expect a rally that is similar to the rally that took place at the end of 2012 and in early 2013. Back then gold moved a bit above the 300-day moving average and to a round number ($1,700 an ounce). At this time, an analogous move would take gold to about $1,250. $1,300 could also be seen, but we don't view it as likely -- the move higher would be too big to be similar to what happened in early 2013, and it doesn't seem that the U.S. Dollar Index would decline significantly enough to trigger such a big rally in gold.
While we're at gold's long-term chart, let's take a moment to once again briefly go through the "Why isn't the bottom already in?" question. In short, because the gold market was not hated enough back in late 2015. Major tops and major bottoms are formed when everyone and their brother gets on a given side of the market. At the top, everyone wants to buy. At the bottom, everyone wants to sell and thinks that the price will fall much further. We've been monitoring surveys, predictions, headlines, website traffic, popularity of gold-related search terms in search engines and it doesn't seem that gold is really hated enough for this to be the final bottom. Naturally, local tops and bottoms need to take place every now and then regardless of the bigger trend, as no market can move up or down in a straight line. There were local bottoms in 2013, in 2014 and in 2015. Why would the December 2015 bottom be the bottom if it weren't accompanied by extreme pessimism?
Some may say that the size of the rally that followed confirms that it was indeed the final bottom. We disagree. There were two very good reasons for this temporary upswing to be bigger than the previous ones. The NIRP remarks that were not followed by any NIRP-related action and the Brexit surprise (Brexit hasn't really happened up to this day). If these events hadn't happened, gold's rally would have probably been no different than the previous local rallies that we saw in 2013, 2014 and earlier in 2015.
So, if the final bottom is not yet in, then where is gold likely to bottom? This is where technical levels come into play. We have two target areas. One is close to the $1,000 level, and the second one is close to the $900 level. These targets will be updated as we move closer to them, but that's what appears most likely at this moment. Why the former? A combination of a declining medium-term support line and $1,000 as a very round number provides good support. Why the second? There is one reason, but it's an extremely important one: the 61.8% Fibonacci retracement level. The Fibonacci retracement levels have proven to be a very useful tool in case of the precious metals market and the 61.8% retracement is one of the most important, classic ones. The other two (out of three): the 38.2% retracement and the 50% retracement were already broken, so now the 61.8% retracement becomes a natural, very important target. The important thing is that as long as this level is not broken decisively and the breakdown is not confirmed, from the technical point of view, the entire 2011 -- 2016/2017 decline will simply be a big correction after the 2000-2011 rally, and not a beginning of another bear market.
In sum, we are likely to have good technical and fundamental reasons to think that gold will move much higher in the coming years, but we also have good technical reasons to think that gold will move lower in the following months. As far as the short term is concerned, it still seems that we could see higher prices, with $1,250 an ounce as a target for a top in gold as the U.S. Dollar Index verifies its recent breakout. It seems likely that the above would create a good opportunity to re-enter speculative short positions and further increase our profits, but it's too early to say so today. We will keep monitoring the market for confirmations and report to our subscribers accordingly.
The above estimations are based on the information that we have available Tuesday. We will be monitoring the market for opportunities and report to our subscribers accordingly. If you'd like to join them, we invite you to subscribe to our Gold & Silver Trading Alerts today. If you're not ready to subscribe today, we invite you to sign up to our free gold mailing list. You'll receive our Gold & Silver Trading Alerts for the first seven days as a starting bonus.