If you believe in gold acting as a form of insurance against irresponsible government (and/or greater geopolitical uncertainty) – then your resolve is about to be tested.

Gold and silver are copping a belting lately… and it’s likely there’s more to come.

But before we look at the tape, it’s fair to say that many thought 2017 would be ‘friendlier’ for gold – especially with the election of one (very unpredictable) Donald Trump.

As for as geopolitics is concerned – it’s hard to remember a time when things have been more uncertain.

However, six months into the year and the gold trade has not proven to be profitable (despite a strong lead in January).

If we broaden our lens, gold has been out of favour since late 2012…

Whilst we are going back 5+ years – we suggested to readers that it was time to walk away from the table at a price of around $1,700 per ounce.

The tape is below:

Gold Longer Term

Gold has not recovered since 2012

Our logic was simple enough – the weekly intermediate trend had turned bearish.

It’s consistent with how we approach all charts – whether it be gold, the Australian dollar or the price of your favourite stock. The rules are the same.

As it turns out – the bearish trend for gold remained steadfast all the way to late last year. As I often remind readers – trends like this can last for years.

We don’t pretend to guess – we just stick with them.

Now don’t get me wrong… gold has its role in today’s monetary system. And always will.

We are a long-term believer in holding some physical gold as insurance.

But we don’t intend to ‘get rich’ from it.

For example, it’s not too indifferent to the insurance you take out on your car, your income and the roof over your head and its contents. You are not expecting to profit from those insurance policies either (assuming you are honest) – but it’s important you have them in the event of unexpected loss.

Despite gold performing this function (in this case against irresponsible government and the debasement of fiat money) — I know better than to argue with the price action.

It’s been a horrible 5+ years for gold traders / investors.

They can’t take a trick… and on the surface… you would think the ‘political’ climate would be ideal for gold. Not the case.

As I will show in a moment – things seemed to be recovering late last year when gold finally signalled a shift in sentiment.

But the bullish mood didn’t last…

Such is the nature with trends. That is, some will last many years (as we are seeing with the S&P 500 and the downturn in gold from 2012) – and some will ‘whipsaw’ and give what we call “false signals”.

Gold (and silver) are giving us plenty of the latter… so let’s take a look why we think it’s better to sit to the side (for now).

Gold: $1,200 its Litmus Test

Gold has had better weeks (and months!)

For example, the week ending July 7th was its worst showing since May 5th when the price fell from $1269 to $1226.

Gold closed at $1,209 on Friday – a level not seen since the week of March 17

Gold: Weekly July 08 2017

We last looked at gold here (June 26) — we concluded with:

The outlook for commodities (including precious metals) isn’t overly encouraging.

Now whether that’s a function of lower global growth expectations – or traders pricing in the prospect of a much stronger US dollar – we don’t know.
It really doesn’t matter.

What’s important is the direction of the tape in the weekly timeframe.

Gold has its nose in positive territory – however it’s hard to see what will push the yellow metal past $1,300 in the near-term.

What’s needed for both gold and silver is a much weaker US dollar. That’s your bottom line.

However, with the Fed set to maintain their path to rate normalisation (combined with a smaller balance sheet) — it’s hard to see how the world’s reserve is going to sell off in any meaningful fashion.

From mine, there are far better trades out there than precious metals

Indeed there were (or are!)

Our suggestion to look elsewhere proved wise. The tape didn’t lie.

Whilst gold did issue a bullish signal at the end of March – it was met with stiff selling pressure at the 61.8% zone of our distribution (ie $1,300). This is what we expected.

Since being rejected at $1,300 – we have seen five straight weeks of selling.

The litmus test for old-man gold will be $1,200. That’s the bottom of our current distribution.

Note: if you did enter long on the last buy signal (ie ~$1,250 ) when the weekly trend turned bullish – you are still in the trade as your stop would be just below the last major low (ie around $1,180)

It’s very important gold holds this level otherwise it’s likely to plummet back to the lows of around $1,120.

Let’s continue to avoid gold in the near-term… until we gain more clarity.

Silver: Getting Ugly

If we thought the setup for gold was less than positive… you don’t want to look at silver.

As readers know – we were already bearish.

We made the observation a couple of weeks ago that hedge funds were piling into the metal at prices above $16.50 (note: there were also short gold). We were not convinced as the tape suggested otherwise.

Repeating our last observation from June 26:

So far hedge-funds have been wrong with their recent (long) bets… and the tape has proven to be correct (for now).

Nothing has changed in my book … as things still look to be headed lower (along with most other commodities).

I think what we are likely to see is a move down towards the mid-point of the distribution or around $15.80.

This is where silver should find support.

If it doesn’t catch a bid in that zone – then there’s a strong chance it will fall to the bottom of the structure or around $14.00 (a level we last saw in December of 2015).

Turns out $15.80 lasted about two seconds!

Silver – Weekly – July 08 2017

The metal has fallen straight down to $15.42 and looks certain to continue its path lower.

The trend for silver has been bearish since the first week of May – therefore it should be no surprise to see lower prices.

Those trying to catch the proverbial falling knife have been caught (again).

Trading tip: if you are going long into a trade (eg buying stock) where the weekly intermediate trend is bearish – probabilities suggest you are more likely to lose.

From here, expect silver to work its way down to around $14.00 (perhaps not in a straight line) where it should find a bid. That will test the resolve of the silver bulls… and whether they have the gumption to step up to the plate.

Putting it All Together…

Sometimes the best trade is no trade at all.

This is how I view precious metals given what I see with the tape.

Things will certainly get more interesting if we see silver fall to $14.00 and the level of $1,200 break for gold.

That’s your test.

In the current climate (eg Trump, North Korea, disintegration in Washington DC etc) — gold bugs have been resolute in their defence of the metal.

So why isn’t the price above $1,500? Above $2,000?

And why can’t gold fall all the way below $1,000 should the US dollar rally in light of more rate hikes? It could.

For now my bias is towards the downside…

Now that’s not to say the weekly trend could turn next month… it could. But for now – probabilities do not favour going long.

… trade the tape

When investing in shares, you can lose you some or all of your money. The potential gains on my blog are based on investing in Australian and US markets and don’t include taxes, brokerage commissions, or other fees. It’s important you seek independent financial advice regarding your particular situation. For any investment, never invest more than you can afford to lose, and keep in mind the ultimate risk is that you can lose whatever you’ve invested. If in doubt – always seek independent financial advice.

2 thoughts on “Gold’s Resolve to be Tested”

  1. Hi Adrian,
    In your first chart the sell signal at $1750 came in 2013
    In April 2012, how do differentiate that apparent sell signal from the other one in 2013?
    My understanding of charts is limited so I’m looking to expand my knowledge
    Thanks
    Tony

    1. Hi Tony.

      Both were shifts in weekly intermediate trends.

      For eg; April 2012 was the indeed the first trend shift.

      However the tape whipsawed (ie turned bullish in Sept 2012) which is sometimes the case.

      Some traders may have entered the trade long again – only to exit again early 2013 for a small loss.

      Whether you took the first (or second) sell signal would not have made much difference.

      cheers
      adrian

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