What a Powerful Rally in Gold Price! And the Real Implications?...

More dovish Fed and the promise of cheaper credit-fueled yesterday’s rallies. But will the rally really last?

The history suggests otherwise. We wrote about it on Friday, and I quoted it in yesterday’s intraday Gold Trading Alert, but I’ll quote it once again for clarification:

Debunking Rate-Cut Optimism

The recent narrative uplifting stocks and the PMs is the belief that a pivot is bullish. Conversely, pivots are not bullish, and risk assets often crash when they realize why rate cuts are occurring

Please see below:

What a Powerful Rally in Gold Price! And the Real Implications?... - Image 1

To explain, the blue line above tracks the S&P 500, while the green line tracks the federal funds rate (FFR). If you analyze the horizontal gray lines, you can see that the last three times the Fed cut the FFR, the S&P 500 was already sinking or was approaching a cliff. 

Therefore, while it may seem like new highs are inevitable for all assets, the recent optimism is more of a ‘buy the rumor, sell the news’ type trade. In other words, investors will likely bail on the S&P 500 and the GDXJ ETF when the Fed actually cuts rates. To that point, with oil prices resuming their crash, it’s a bad look for global growth when crude oil falls below $70. 

Overall, the fundamentals continue to unfold as expected, with higher rates weighing heavily on the U.S. economy. And while the ‘bad news is good news’ trade remains intact, history shows it should end with sharp drawdowns of the S&P 500 and the GDXJ ETF, and a meaningful rise in the USD Index. 

In yesterday’s intraday Alert, I added:

Again, the immediate-term reaction is one thing, as people reacted emotionally to more dovish approach. We also saw an immediate-term rally in 2019, but then a decline materialized, anyway.

So, no, the current move higher doesn’t change the outlook. The big move is still likely to be to the downside. I know that it might be difficult to think so while gold jumped over $30, but this really is the case. Remember how difficult it was to doubt gold’s breakout to new highs? On Dec 4, 2023, I wrote that the breakout is likely to be invalidated and followed by a massive slide. I started that day’s analysis with the following sentence:

“During sharp rallies, it’s nearly impossible to convince investors that this move is about to end. And yet, that’s exactly what is likely.”

That was the top.

And this sentence applies also today. The breakdown below the rising support line in gold was not invalidated and the next big move is likely to be to the downside.

Now, after I wrote the above, gold futures moved even higher according to one data source, and they moved back down according to a different data provider. The chart below shows the latter approach.

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Given this lack of clarity, it’s best to rely on a chart that features data from a different market (not a futures market). Let’s take a look at the GLD ETF. This ETF is the most popular proxy for gold, so it will definitely do while determining what changed and what didn’t.

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Yesterday’s rally was big as gold almost erased the previous two-day decline. Almost, because the GLD ETF closed below its Dec. 7 close. This means that the upper border of the Price gap that started on this day wasn’t reached – the resistance it provides remains intact.

The same goes for the rising support lines, which have now turned into resistance lines.

The solid line is based on the previous intraday lows, and the dashed line is based on the previous closing prices. GLD didn’t move to, let alone above, any of them. This means that the breakdown below those lines was not invalidated, and thus, the bearish implications of the breakdown remain up-to-date.

I realize that a big daily upswing is something that catches everyone’s eye and makes them immediately follow the momentum, but this is not necessarily the most profitable thing to do. This approach was not what led to us having a winning streak of 11 closed (unleveraged) trades. It was paying attention to historical analogies, ignoring the emotional buying/selling, and patience.

Speaking of historical analogies, let’s take a look at silver and yesterday’s rally. I’m going to use the SLV ETF as a proxy.

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Silver soared by over 4%, and the rally was sharp. It took place at a strong volume, so many traders – especially those new to the silver market – probably view this as a bullish sign.

In the case of many other markets, a big rally on strong volume would indeed be a bullish sign. Silver is different, though.

The white metal is not only known for fake breakouts (and the last – failed – breakout above the January highs proves it once again) but it’s also known for fake rallies in the middle of big moves lower.

I marked similar rallies with red ellipses, and I marked huge-volume rallies with dashed lines.

As you can see, even the high-volume rallies turned out to be fake moves most of the time. So, was yesterday’s move higher in silver really bullish?

No, it wasn’t.

Oh, and you know what is “definitely” a true move? A decline in the USD Index… At least, that’s what many people would likely say after seeing a sizable daily downswing.

What a Powerful Rally in Gold Price! And the Real Implications?... - Image 5

In reality, what happened is similar to what happened at the beginning of 2022, which was actually the start of a massive, medium-term upswing.

The USD Index was just extremely oversold, and it invalidated a tiny breakdown below its 61.8% Fibonacci retracement. This was likely to trigger a big move higher, not a small one. Consequently, what we see now is likely just a correction within a powerful upswing, not the start of another big decline.

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Junior miners – the GDXJ ETF – rallied sharply as well. They also did so on a very strong volume.

In the case of this ETF, the link between big-volume rallies and local tops is not as clear as it is in the case of silver, but it’s still present. I marked the similar cases with arrows and in 6 out of 9 such cases, big-volume rallies marked local tops, or those tops followed very soon. Only in 3 out of 9 cases, big rallies followed.

Interestingly, all those three bullish cases were preceded by declines that were much bigger than what we saw recently. This suggests that the bullish analogies are not the correct ones. The bearish ones are.

What’s next? While the next 1-3 days are a bit unclear, the entire roadmap that I featured for the GDXJ ETF in my previous Gold Trading Alert remains very much up-to-date.

Thank you for reading. I hope you enjoyed today’s free article. Its full version - today’s Gold Trading Alert - is much bigger than what you read above, and it includes not only the initial downside target for the GDXJ (level from which juniors could rebound) but the entire price path that the GDXJ is likely to take (with specific target areas (for declines and rallies). I encourage you to subscribe and read those premium details today.


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