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Gold: Have we seen the bottom?

Bijgewerkt op: 11 apr. 2021

Please read the Disclaimer before reading this article.


Three weeks ago (October 11, 2020), I wrote an article in which I explained in detail when the next buying opportunity in gold would come along.

A lot has happened since then.

The first week after my article was published, the gold price declined 40 USD in two days but the gold mining shares barely budged (purple line on the chart below represents GDX).

This was seen by a lot of analysts as a positive sign. The mining shares didn’t seem to believe the decline in the gold price and were indicating that it was probably a false move. A breakout was imminent, they thought.

Unfortunately, after these 2-3 days of relative strength in the mining shares, they declined sharply when the gold price remained stable in the following days.

Relative strength turned into relative weakness very quickly.

The week after that, gold seemed to be breaking out (once again) above its downtrend line.

Again, a lot of analysts were turning bullish. Relatively speaking, the mining shares were now much lower compared to the last time gold stood at that level.

I think it is rather funny that the week before, relative strength made them bullish and one week later, the relative weakness wasn’t given any attention.

A lot of gold analysts aren’t consistent at all and just want to call the bottom. They will be wrong 10 times but once they are right, they’ll let you know for a long time how correct they were in their calls...

A quick word on psychology.

I was of course following the gold market every day and saw the relative strength in the mining shares. I was thinking about the possibility that we wouldn’t go any lower and that I would be buying at higher prices than anticipated. There was some doubt coming into my analysis: should I act or should I wait?

Of course, the answer was rather simple, I should wait.

As explained previously, I only buy when there is a clear bottoming formation at the targets that I've set several months ago, or when the market starts moving up and I get a buy signal.

There was no clear buy signal so I did nothing (we came very close though).

The reason I tell this is because you can have the best analysis in the world; if you don’t have the emotional and mental strength to follow a plan, you will never be successful in the market.

As William Eckhardt (the right hand of the famous trader Richard Dennis) said:

“Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important. This is not rocket science. However, it’s much easier to learn what you should do in trading than to do it.”

Another point I would like to make is that it is not necessary to buy at the bottom. I like to invest the way Jesse Livermore and Mark Minervini do it (with regards to timing).

Either I buy when there is a clear bottoming formation, or I buy when a trend is clearly in place and prices are likely to go higher from the point where I step in. So I like to buy at a point when the market will move quickly once I bought. I don’t like to be in a stock that will do nothing for several weeks. I prefer to stay in cash and buy at a slightly higher price several weeks later when the price action is indicating the action will start. (This is of course in the case that I can't identify a clear bottom. When there is a clear bottoming formation, I won't wait and I'll buy at the bottom.)

This requires a lot of patience and psychological strength to stick to your plan. The upside is that you don’t have to be in a stock that does nothing for several weeks because this may cloud your judgment.

(Please not that Livermore and Minervini would never try to call a bottom, they would buy at what they call a 'pivotal point', the point where the price action is going to start.)

The timing element, buying a stock at the time when strong price action will likely begin, was very important to Jesse Livermore.

Livermore: “Whenever I have had the patience to wait for the market to arrive at what I call a ‘pivotal point’ before I started to trade; I have always made money in my operations. Why? Because I then commenced my play just at the psychological time at the beginning of a move.”

Current situation

So, where are we now?

There are a lot of things I like about the current situation.

The current correction has taken enough time to say that a bottom could be (very) close.

Both the daily and weekly RSI are at levels that indicated major bottoms in historical gold bull markets. Remember the 50-55 level for the weekly RSI that was important? We are currently at +- 53,5.

If I look at sentiment indicators, they also show that bullish sentiment has deteriorated enough to indicate an important bottom.

Finally, both GDX and GDXJ have reached very important support levels. GDX retested the breakout above its multi-year resistance level in June and rallied sharply after that. GDXJ is doing the exact same now.

So, there are a lot of positive things going on in the gold market. However, there are also a few things that I don’t like.

First of all there is the price pattern in gold. Normally, gold forms a round bottom at the end of its correction after which prices can start to rise again.

If we look at the current price action, it seems to be the opposite of a round bottom.

Another factor that I don’t like is the fact that even though GDX and GDXJ have reached their targets, gold hasn’t.

As explained in a previous article, I think gold in USD will follow the same path as gold in the Euro and GBP did. In these currencies, after the breakout above all-time highs, they retested this level, after which the price increased sharply again.

For gold in USD, this retest level is around 1800. We currently stand at 1880.

Two weeks ago, I wrote an article on the US Dollar. From a technical standpoint (certainly on a short-term basis), the dollar looked horrible. But as I explained, you need more than just technical analysis.

Several fundamental models I follow on the dollar were showing that we would see a short to medium-term countertrend (upwards) move.

Price action this week seems to indicate that this will indeed be the case.

Speculative positioning also indicates that we should see some more dollar strength. This will probably not be that supportive for gold.

Source: Julien Bittel, @BittelJulien, Pictet Asset Management

Let’s summarize the positive points and the points that make me doubt whether it is time to go all-in or not:

Reasons to go all-in on the gold mining shares:

GDX and GDXJ have reached their targets and are now at very strong support levels.

The correction took time-wise long enough.

Sentiment (I use the daily sentiment index) is now at levels that are supportive of a


The weekly RSI for gold is now at a point that supports a strong move upwards.

Reasons that make me doubt:

Gold could continue its decline to the 1800 support level.

When I look at the fundamental models and the speculative positioning in the US Dollar,

it's rise is probably not yet over.

No clear short-term bottoming formation in the mining shares.

No clear bottoming formation in gold and its daily RSI. (the lack of a round bottom I

discussed earlier)

So, what should we do?

For long-term investors who don’t care about the short-term price action, I would be buying the gold mining shares at these levels.

For me personally, I’m still fully in cash and will wait for either a clear bottoming signal or a clear buy signal (at higher prices if my analysis is wrong).

I’ll now describe the ideal situation that I’m envisaging. We know the mining shares are at their support levels but gold isn’t.

So gold needs to fall while the mining shares stay flat. This is perfectly possible.

As I wrote in a previous article, one of the reasons the top in early August was identifiable, had to do with the relative weakness in the mining shares.

The gold price kept rising but the mining shares didn’t do much because they had reached significant resistance. You can see on the following chart that the gold price (at the top of the chart) increased 130 USD while GDX (at the bottom of the chart) rose only 1,3%.

We now have the opposite situation where gold can keep declining while the mining shares stay flat because they have found significant support.

In this ideal scenario, the US Dollar will continue its countertrend rally. When gold reaches the +- 1800 level, the strong US Dollar, that is ready to start declining again, will be the fuel to propel the gold market higher.

This seems a very logical scenario to me and if it plays out, a clear short-term bottoming formation will very likely also be visible in the mining shares and gold itself.

But what if we don’t get this ideal scenario? What if we have seen the bottom and the gold price and mining shares start to rise again? No problem, I’ll buy as soon as I have a buy signal.

And what if gold continues its decline but the mining shares also decline?

The following chart of GDX shows why this wouldn’t be a problem as long as the mining shares show relative strength around their support levels.

(I already wrote about this possibility three weeks ago: "There is a scenario where GDX can go slightly below the 37 level, I’ll monitor this in the coming days and weeks.")

For GDXJ, I think lower targets than my initial 51-52 level are possible.

To explain this, we need to analyze the price action in another gold mining index, the HUI (see chart below).

In May, the HUI index broke out above its long-term resistance level.

However, after 3-4 weeks, the breakout seemed to have failed.

At the same time, GDX was successfully retesting its breakout level (see chart above).

This was very strange price action: GDX was successfully retesting its multi-year breakout and at the same time the HUI index seemed to be failing.

The answer to this apparently strange price action in the HUI index can be found when we redraw the resistance level. It wasn’t a perfectly horizontal resistance level, as was the case with GDX, it was a slightly declining resistance line that we had to draw.

The following chart shows the 3 mining indexes together.

For GDX, I have drawn its horizontal resistance level and for the HUI, I have drawn the slightly decreasing resistance level.

If GDXJ has a slightly decreasing resistance level, and not the horizontal one that we have been analyzing up until now, the target would be 46.


For long term investors, these are ideal prices to get into the gold mining shares.

For me personally, I’ll wait until I have more clear signs the bottom has been reached.

Big picture, I think we will see one more strong move upwards in the gold price after which we probably won’t see a lot of progress for more than a year. Historically, this isn’t abnormal at all.

We will probably reach that significant peak somewhere in the first half of 2021. Gold will then likely consolidate for a long time after which it will go to much higher levels.

Another thing I’m carefully analyzing right now are interest rates. As most of you will know, gold is primarily driven by the trend in the US Dollar and (even more so) by the trend in real rates.

Having an idea what real rates will do is crucial in understanding the movements in the gold price. I’ll write on this topic in a future article.

To conclude, I would like to come back to something I wrote in a previous article: "We all have access to the same data. The trick is to interpret this data correctly. I think this is one of the biggest mistake investors make."

Two weeks ago investors were looking at the relative strength of the mining shares to become bullish. I observed this as well but I didn't let it influence my analysis.

Now I'm forecasting the possibility of relative strength in the mining shares against gold as a possible strong bottoming signal. Why do I use this relative strength analysis now but not a few weeks ago...? Something for you guys to think about...

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