Gold: First Steps Down in the Short Term

Yesterday’s (Jun. 2) and today’s sessions were quite rich in signals for gold, silver, and mining stocks, but only if one knows where to watch.

Gold: First Steps Down in the Short Term - Image 1

Gold closed ~$5 higher yesterday, and this move took place on relatively low volume. In fact, gold hasn’t rallied on volume this low since Apr. 26. This is a bearish sign for the short term, and indeed after the Apr. 26 session, gold moved lower in the following days.

And, right on cue, gold was about $15 down in today’s pre-market trading. While this decline might seem surprising to some, it’s actually a perfectly natural thing for gold to do right now.

The low-volume daily rally was only a confirmation, as we knew that Tuesday’s daily reversal was critical all along – based on the triangle-vertex-based reversal we recently saw. Combination of this with highly overbought RSI, a sell signal from the stochastic indicator, and, most importantly, the analogies to how the situation in gold developed in 2008 and 2012, provides us with an extremely bearish outlook for gold.

Many other factors are pointing to these similarities, and two of them are the size of the correction relative to the preceding decline and to the previous rally. In 2012 and 2008, gold corrected to approximately the 61.8% Fibonacci retracement level. Gold was very close to this level this year, and since the history tends to rhyme more than it tends to repeat itself to the letter, it seems that the top might already be in.

In both years, 2008 and 2012, there were three tops. Furthermore, the rallies that took gold to the second and third top were similar. In 2008, the rally preceding the third top was bigger than the rally preceding the second top. In 2012, they were more or less equal. I marked those rallies with blue lines in the above chart – the current situation is very much in between the above-mentioned situations. Also, the current rally is bigger than the one that ended in early January 2021 but not significantly so.

Since I realize that it’s most difficult to stay on track right at the top, let me remind you about two key facts:

  1. We have open-ended QEs – money is being pumped into the system at an unprecedented pace, even when stocks are well beyond their all-time highs. The world has been in a pandemic for over a year, and the economies were hit hard. And yet, gold – the king of safe hedges – did not manage to soar above its 2011 highs and then stay above them. Given how extremely positive the fundamental situation is, gold’s reaction is even more extremely bearish. This market is simply not ready to soar without declining significantly first. The bull market and bear markets move in stages, and the final slide was postponed multiple times, but it’s clear that gold is not ready to soar to new highs without completing this final stage – the downswing.
  2. Remember what happened when gold previously attempted to break above major long-term highs? It was in 2008 and gold was breaking above its 1980 high. Gold wasn’t ready to truly continue its bull market without plunging first. This downswing was truly epic, especially in the case of silver and mining stocks; and now even gold’s price patterns are like what we saw in 2008.

My previous comments on the analogies to 2008 and 2012 remain up-to-date:

Gold: First Steps Down in the Short Term - Image 2

Back in 2008, gold corrected to 61.8% Fibonacci retracementbut it stopped rallying approximately when the USD Index started to rally, and the general stock market accelerated its decline.

Taking into consideration that the general stock market has probably just topped, and the USD Index is about to rally, then gold is likely to slide for the final time in the following weeks/months. Both above-mentioned markets support this bearish scenario and so do the self-similar patterns in terms of gold price itself.

What would change my mind with regard to gold itself? Perhaps if it broke above its January 2021 highs and confirmed this breakout. This would be an important technical indication on its own, but it would also be something very different from what happened in 2008 and 2012. If that happened along with strength in mining stocks, it would be very bullish. Still, if the above happened, and miners didn’t react at all or they declined, it would not be bullish despite the gains in the gold price itself.

Gold: First Steps Down in the Short Term - Image 3

The March 2021 low formed well below the previous low, but as far as other things are concerned, the current situation is similar to what happened in 2012. 

The relatively broad bottom with higher lows is what preceded both final short-term rallies – the current one, and the 2012 one. Their shape as well as the shape of the decline that preceded these broad bottoms is very similar. In both cases, the preceding decline had some back-and-forth trading in its middle, and the final rally picked up pace after breaking above the initial short-term high.

Interestingly, the 2012 rally ended on huge volume, which is exactly what we saw also on May 19 this year. Consequently, forecasting much higher silver or gold prices here doesn’t seem to be justified based on the historical analogies.

The thing I would like to emphasize here is that gold didn’t form the final top at the huge-volume reversal on Sep. 13, 2012. It moved back and forth for a while and moved a bit above that high-volume top, and only then the final top took place (in early October 2012). 

The same happened in September and in October 2008. Gold reversed on huge volume in mid-September, and it was approximately the end of the rally. The final top, however, formed after some back-and-forth trading and a move slightly above the previous high.

Consequently, the fact that gold moved a bit above its own high-volume reversal (May 19, 2021) is not an invalidation of the analogy, but rather its continuation.

There’s one more thing I would like to add, and it’s that back in 2012, gold corrected to approximately the 61.8% Fibonacci retracement level – furthermore, the same happened in 2008 as you can see in the below chart. Consequently, the fact that gold moved above its 50% Fibonacci retracement doesn’t break the analogy either. And even if gold moves to $1,940 or so, it will not break it. It’s not likely that it is going to move that high, as in both cases –in 2008 and 2012 – gold moved only somewhat above its high-volume reversal before forming the final top. So, as this year’s huge-volume reversal took place close to the 50% retracement and not the 61.8% retracement, it seems that we’ll likely see a temporary move above it, which will create the final top. And that’s exactly what we see happening so far this week.

The lower part of the above chart shows how the USD Index and the general stock market performed when gold ended its late-2012 rally and was starting its epic decline. In short, that was when the USD Index bottomed, and when the general stock market topped.

Also, please note that while it might seem bullish that gold managed to rally above its declining black resistance line recently (the one based on the 2020 top and the 2021 top), please note that the same happened in 2012 – I marked the analogous line with red. The breakout didn’t prevent gold from sliding. When the price reached the line, we saw a short-term bounce, but nothing more than that – the gold price fell through it in the following weeks.

Gold: First Steps Down in the Short Term - Image 4

Meanwhile, the USD Index has just confirmed its short-term breakout, suggesting that the analogy to 2016 and the similarity to how it bottomed (triple bottom with lower lows) in mid-2020 remains intact – and so does the bullish outlook for the universally-hated-and-massively-shorted U.S. currency.

The USD Index reversed yesterday in a supposedly bearish manner, but today’s pre-market price action shows that it was just a fake reversal. It seems that a major bottom in the USDX is already in, as the breakout above the declining short-term resistance line (that started with the April top) was verified. And with the outlook for the USD Index being bullish, the implications for the precious metals market are bearish.

Silver and Mining Stocks

Having said that, let’s check what silver and mining stocks did.

Gold: First Steps Down in the Short Term - Image 5

In short, silver didn’t do anything important yesterday, so my previous comments on silver’s reversal remain up-to-date:

Silver has barely moved in terms of the closing prices. However, it has rallied significantly on an intraday basis – more than gold did; and the volume on which it happened was more notable than the one in gold.

In other words, silver did exactly what it tends to do at market tops. And we can say the same thing about the mining stocks.

Gold: First Steps Down in the Short Term - Image 6

Gold miners moved higher, but the move took place on relatively low volume, and it was barely noticeable ($0.05 move higher), so it was nothing to write home about. Miners refused to follow gold to new highs, but they seem likely to follow it lower as soon as they get a good trigger for it (a decline in gold). Actually, gold stocks can decline even without a decline in gold, at least initially – that’s how the 2012-2013 decline started, after all.

The clearest of the recent signs coming from mining stocks is the fact that gold rallied by almost $30 last week, and the HUI Index (flagship proxy for gold stocks) went down slightly. This is extremely bearish.

Having said that, let’s take a look at the markets from a more fundamental angle.

Slowly but Surely

With all eyes focused on Friday’s (Jun. 4) U.S. nonfarm payrolls report, the U.S. Federal Reserve (FED) quietly announced on Jun. 2 that it will conduct a "gradual and orderly" unwind of its corporate bond facility. Translation? $8.6 billion worth of corporate bond ETFs and $5.2 billion worth of corporate bonds (tallied as of Apr. 30) are about to hit the open market. Moreover, while the dollar amount is immaterial and unlikely to cause a stir, it’s important to remember that the journey of a thousand miles begins with one step (Lao Tzu).

Please see below:

Gold: First Steps Down in the Short Term - Image 7Source: U.S. FED

To that point, with liquidity being drained from the system on a seemingly daily basis, the announcement is likely just the tip of the iceberg. Case in point: Maryland was the latest U.S. state to eliminate enhanced unemployment benefits (effective Jul. 3), and as of Jun. 2, at least 25 states have opted out of the program.

Please see below:

Gold: First Steps Down in the Short Term - Image 8

And why is this so important?

Well, with employment the last piece of the U.S. 10-Year Treasury yield and the USD Index’s bullish puzzle, outperformance on Jun. 4 could be the spark that lights the pair’s fire. However, to curb expectations, note that the changes don’t take effect until mid-to-late June or early July. Thus, while the Jun. 4 print may not capture the building momentum, a material shift is likely to occur in the coming months.

Please see below:

Gold: First Steps Down in the Short Term - Image 9

To explain, the red line above tracks the U.S. nonfarm payrolls, while the green line above tracks the U.S. job openings tallied by the U.S. Bureau of Labor Statistics (BLS). If you analyze the relationship, you can see that the latter is often a strong predictor of the former. Moreover, while some cite COVID-19, unfair pay and lack of childcare options (all valid concerns) as reasons for high U.S. unemployment, the gap on the right side of the chart signals that when the U.S. government pays individuals more than their employers, the incentive to find work completely evaporates.

Gold: First Steps Down in the Short Term - Image 10

The Unemployment Paradox

To explain, the black bars above represent employees’ standard wages, while the pink bars above represent their consolidated earnings when collecting enhanced unemployment benefits. As you can see, citizens that earn minimum wage are much better off by not working, while preschool teachers are also wealthier by not attending class.

However, with half of U.S. states already ending enhanced unemployment benefits and the federal government officially shuttering the program on Sept. 6 (expected), it won’t be long until the nonfarm payrolls reconnect with the BLS job openings once again. Furthermore, with both the U.S. 10-Year Treasury yield and the USD Index waiting for the signal, if the U.S. labor market improves, the FED will face even more pressure to taper its asset purchases.

Case in point: while FED officials have turned increasingly hawkish in recent weeks – combined with the fact that another $448 billion of reverse repos were sold on Jun. 2 – FED Governor Lael Brainard told the Economic Club of New York on Jun. 1 that inflation has risen “somewhat higher” than she expected. Moreover, while her assertion that the FED would remain "steady" is a subtly hawkish shift from her prior use of "patient," notice the only rebuttal that’s left on her list?

Gold: First Steps Down in the Short Term - Image 11Source: Reuters

On the flip side, Philadelphia FED President Patrick Harker said during a virtual Women in Housing and Finance event on Jun. 2 that “I think it is appropriate for us to slowly, carefully move back on our purchases at the appropriate time. When that is, that is something we need to start discussing.”

But why all of the trepidation?

Gold: First Steps Down in the Short Term - Image 12Source: Bloomberg

The bottom line?

If the standard is to “communicate very early, very often what we’re going to do,” then the FED is already in the seventh inning of a nine-inning ballgame. For example, as can be seen in the Dallas FED’s Texas Service Sector Outlook Survey released on Jun. 2, another round of ‘all-time highs’ was part of the latest print.

Please see below:

Gold: First Steps Down in the Short Term - Image 13Source: Dallas FED

On top of that, with the FED also releasing its Beige Book on Jun. 2 – which is published eight times per year and includes anecdotal information on the current economic conditions – the report signals that inflation is unlikely to abate anytime soon.

Gold: First Steps Down in the Short Term - Image 14Source: U.S. FED

And while it’s more for context and not about exact data, BlackRock CEO Larry Fink – the head of the world’s largest asset manager – said on Jun. 2 that investors are underestimating the inflationary risks.

Gold: First Steps Down in the Short Term - Image 15Source: Bloomberg

What Can the S&P 500 GSCI Tell Us?

Furthermore, I’ve mentioned on several occasions that the pricing pressures are a function of cost-push inflation and not demand-pull inflation.

To explain the difference, I wrote on Apr. 27:

It’s important to remember that two different paths can lead to the same destination. On one side of the road, you have demand-pull inflation: this occurs when unemployment is low, prosperity is high, wages are rising and corporate profits follow suit. On the other side of the road, cost-push inflation occurs when demand is soft, but rising input costs lead to price hikes by corporate executives. Think about it: when faced with a dilemma of accepting lower profit margins or raising output prices, which path do you think they’ll choose?

Expanding on that point, with the S&P Goldman Sachs Commodity Index (S&P GSCI) exiting its consolidation phase and hitting a new high on Jun. 2, the thesis lives on. For context, the S&P GSCI contains 24 commodities from all sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals.

Please see below:

Gold: First Steps Down in the Short Term - Image 16

To explain, the green line above tracks the S&P GSCI’s current rally off of the bottom, while the red line above tracks the S&P GSCI’s rally off of the bottom in 2009-2010 (following the Global Financial Crisis). If you analyze the middle of the chart, you can see that the S&P GSCI has completely run away from the 2009-2010 analogue. For example, at this point in 2009-2010, the S&P GSCI rallied by 73% off of the bottom. However, as of the Jun. 2 close, the S&P GSCI has now rallied by 133% off of the April 2020 bottom. The key takeaway? If commodities are surging now, imagine the optimism once the reopening unfolds.

To that point, when the end of enhanced unemployment benefits bolsters nonfarm payrolls and reduces the labor gap, cost-push inflation and demand-pull inflation could combine to create the perfect storm. Case in point: while U.S. Personal Savings declined from more than $6 trillion in March to more than $2.8 trillion in April (and has been highly volatile), the current figure is still well above its historical norm.

Please see below:

Gold: First Steps Down in the Short Term - Image 17

And circling back to the Beige Book, the unleashing of pent-up demand should add even more inflationary pressure.

Gold: First Steps Down in the Short Term - Image 18Source: U.S. FED

The Shelter CPI

In addition, rent inflation has been a drag on the Consumer Price Index (CPI). With the year-over-year (YoY) percentage change in the Shelter CPI declining for 13-straight months and the month-over-month (MoM) percentage change in the Shelter CPI remaining roughly flat for seven months (prior to March and April’s prints), the weakness reduced the overall CPI. However, if you exclude the one-time jump in 2017, April’s 0.40% MoM increase in rent inflation was the highest since 2006.

Please see below:

Gold: First Steps Down in the Short Term - Image 19

To explain, the red line above tracks the YoY percentage change in the Shelter CPI, while the green line above tracks the MoM percentage change in the Shelter CPI. If you analyze their behavior, you can see that the YoY figure has only moved slightly higher. However, with MoM rents rising at a torrential pace (follow the green arrow), the COVID-19 grace period is officially over. And with rising rents likely to put upward pressure on the CPI in the coming months, taper-talk should grow even louder over the summer.

As another point of reference, American Homes 4 Rent – a publicly-traded real estate investment trust (REIT) that owns 53,984 properties across 22 states (as of Mar. 31) – revealed in its first-quarter regulatory filing that the firm achieved “10.0% rental rate growth on new leases” in Q1 and “11% rental rate growth on new leases” in the month of April.

Please see below:

Gold: First Steps Down in the Short Term - Image 20Source: American Homes 4 Rent 8-K

If that wasn’t enough, the U.S. cities that were hurt the most during the pandemic now have rents rising at a much faster pace MoM than the Shelter CPI.

Gold: First Steps Down in the Short Term - Image 21

Let’s Check Europe News - Italy

Finally, while the USD Index remains stuck in consolidation mode, the greenback is still materially undervalued. With FED officials reluctantly turning hawkish and the spread between U.S. and Eurozone inflation rates widening even further, Bloomberg’s Spectrometer signals that the European Central Bank’s (ECB) Jun. 10 policy meeting will likely disappoint the euro bulls.

Please see below:

Gold: First Steps Down in the Short Term - Image 22Source: Bloomberg

To explain, the graphic above separates ECB doves from ECB hawks. And with the tilt favoring the former, Bloomberg estimates that the ECB will continue its PEPP purchases at a “significantly higher pace” (ECB’s words) for at least another quarter.

As further evidence, notice how Italy (Europe’s third-largest economy) has become increasingly reliant on central bank support?

Gold: First Steps Down in the Short Term - Image 23

To explain, the various bars above depict the rolling 12-month change in ownership of Italian government debt. If you analyze the movement of the black line, you can see that Italy’s total debt is clearly at an ~11-year high. More importantly, though, if you zero in on the green bars on the right side of the chart, you can see that Banca d’Italia is the only entity that’s buying Italian bonds. And with domestic and foreign institutions unable to absorb the supply if the ECB tapers, does that route seem likely in the near future?

Even more interestingly, the tops in the green bars (second half of 2011 and second half of 2016) more or less corresponded to tops in gold.

Gold: First Steps Down in the Short Term - Image 24

Moreover, with the largest-ever core inflation differential between the U.S. and the Eurozone signaling further weakness for the EUR/USD, investors are buying hope and selling reality right now.

Please see below:

Gold: First Steps Down in the Short Term - Image 25

To explain, the dark blue line above tracks the EUR/USD, while the light blue line above tracks the Eurozone-U.S. core inflation spread. For context, the lower the value, the more the U.S. is outperforming. To that point, a lower Eurozone-U.S. core inflation spread often leads the EUR/USD by five months. And with the inflation spread likely to widen even further over the summer, a move lower in the EUR/USD should help bolster the USD Index over the medium term.

In conclusion, the PMs remain on the wrong side of history and their recent strength has been underpinned by historic imbalances across the U.S. Treasury market. And with vaccinations progressing, enhanced unemployment benefits ending and the S&P GSCI continuing its upward momentum, all of the ingredients signal that more inflationary pressures are likely in the coming months. Moreover, with strengthening nonfarm payrolls likely to force the FED’s hand over the medium term, the awakening of the bond market should open up plenty of old wounds for the PMs – at least in the short/medium term.

Overview of the Upcoming Part of the Decline

  1. It seems likely to me that the current corrective upswing is very close to being over, given gold’s similarity to what happened in 2012, USD’s similarity to 2016 and the situation in the general stock market.
  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 general stock market puts the final top in the first half of May (which seems quite likely given NASDAQ’s top in late April), then we might expect the precious metals sector to bottom sometime in August.
  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.


To summarize, even though it doesn’t seem to be the case based on this month’s price change in gold, it seems that the yellow metal’s days are numbered. This is based not only on the excessively oversold USD Index and its 2016 self-similar pattern but also on what’s happening in the stock market, silver’s recent outperformance and price levels reached throughout the precious metals sector. From the long-term point of view, the current situation seems similar to what we saw in the second half of 2012, and in 2008. While the very near term remains unclear, the outlook for the next several weeks and months remains very bearish.

After the sell-off (that takes gold to about $1,350 - $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 this March, and it seems that we’re about to make much more on the upcoming decline, but you have to be healthy to enjoy the results.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $24.12; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged) and GDXD (3x leveraged – which is not suggested for most traders/investors due to the significant leverage). The binding profit-take level for the JDST: $39.87; stop-loss for the JDST: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the GDXD: $94.87; stop-loss for the GDXD: none (the volatility is too big to justify a SL order in case of this particular trade).

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):

Silver futures upside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,512.

Gold futures upside profit-take exit price: $1,512.

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash

Insurance capital (core part of the portfolio; our opinion): Full position

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).

Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.

Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.

As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.

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

As a reminder, 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.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief