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Is Gold Really Strong?

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Silver and mining stocks declined for yet another day, but this time gold ended the session with a (slight, but still) gain. How can we interpret the latter? Is it a sign of strength?

In short, not at all. In yesterdays alert we emphasized that golds breakdown was one of the key developments that one should consider while analyzing the precious metals market. The tiny upswing that we saw in gold yesterday was a classic example of a post-breakout pause. Lets take a closer look (chart courtesy of

Short-term Gold price chart - Gold spot price

In yesterdays alert, we wrote exactly the following:

Gold closed yesterdays session below both rising support lines, but the most important thing is that it closed it below the line based on the daily closing prices (its currently at about $1,275) and that the move below it was rather significant.

The breakdown is not yet confirmed, but it appears that it will be confirmed shortly, especially if the USD continues to move higher. The next support is just above $1,200, so thats where gold is most likely headed. As discussed earlier today, the bigger the consolidation, the bigger the move is likely to follow and in this case, it means that gold should move visibly lower, not just several dollars lower. Again, it doesnt seem that the decline is close to being over at least not in terms of price.

Another daily close below both rising support lines is a step closer toward a confirmation of a breakdown and the fact that the volume was low adds to the credibility of the bearish case. The same goes for todays pre-market action. At the moment of writing these words, gold is about $5 lower, so the odds are that the session will end below the rising support/resistance lines once again and that the breakdown will be fully confirmed.

The mentioned lines are clearly visible, so its very likely that this breakdown will be viewed as a key technical development for many traders and that it will result in lower prices relatively soon.

Short-term Silver price chart - Silver spot price

Meanwhile, the price of silver continues to march lower,just as we had expected it to . The one thing that we would like to add today is that silver just broke below its May bottom and since it continues to move lower in todays pre-market trading, it seems that the breakdown will be confirmed.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks continued to decline and underperform gold and it cant be explained by looking at the general stock market it paused yesterday and the past few months saw almost consistently higher S&P 500 levels. The implications of yesterdays session are clearly bearish. Moreover, we realize that we wrote this dozens of times, but its worth repeating once again the extent to which mining stocks underperform gold and the time in which theyve been doing so (months) is a major confirmation of the analogy between the current situation and the pre-2013 slide. The implications are extremely bearish for the following weeks and months Especially that we just saw a major breakdown in the HUI:gold ratio.

HUI:GOLD - Gold stocks to Gold ratio chart

HUI:GOLD - Gold stocks to Gold ratio chart

The breakdown below the 2016 low in the gold stocks to gold ratio was already visible based on Tuesdays closing prices, but it was tiny. It was yesterdays price action that made it clear.

The long-term chart shows that the implications are much bigger than it might appear at first sight. The reason is that there is almost no important support all the way down until the 2015 bottom (below 0.1) with the small exceptions of the 2000 low and the 2014 low.

Interestingly, both mentioned lows took place in the final part of the respective years, which makes it quite likely that we could see a temporary turnaround from those levels this month. If the ratio was to temporarily (!) bottom at about 0.13 and gold was to bottom at about $1,220, then this implies a target for the HUI Index just a little below 160. In yesterdays alert, we wrote about 163 as the likely temporary target based on a dynamic analogy to the size of the decline that we had already seen (by the way, we also discussed the target for silver). The above charts seem to confirm it.

Summing up, it seems that the decline in the precious metals market is not very close to being over in terms of price. We might see a visible corrective upswing next week, but this correction could start at much lower levels based on the breakdown in gold and the way PMs react to the changes in the USD Index. For now, the outlook remains bearish as there are myriads of signals that support a decline in the price of gold in December .

We hope you enjoyed todays analysis, even though it might appear controversial. If youd like to receive follow-ups, we invite you to subscribe to our Gold & Silver Trading Alerts.

Thank you.

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

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About the author

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same. 

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation. 

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions. 

High quality of analytical tools available at are results of time, thorough research and testing on PR's own capital. 

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential. 

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society. He also holds a master's degree in Finance and Banking, and is currently writing his thesis after having finished his PhD studies in Economics. 

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