How I predicted the peak in the gold market in early August.
Bijgewerkt: 11 okt 2020
This is the first article in a series where I will explain how I timed the gold market throughout the last three years.
In the first two articles, I’ll explain how it was possible to identify the top in the beginning of August 2020 and why a huge buying opportunity in gold is coming along.
The following chart shows that both gold and silver peaked, after an exponential increase, on 7 August 2020.
Analysis Sunday 26 July 2020: 10 trading days before the peak
Every Sunday I analyze the markets. Below is part of my analysis of Sunday 26 July 2020. (I’ll use the original graphs from back then)
This was the first weekend where I started to worry about a possible peak in the gold market. (I bought my gold miners in the second half of March 2020)
The rise in the price of silver began to take on exponential proportions. The price action was completely different from anything we had seen since early 2016. This was a first warning sign that we might be nearing a major turning point.
When I looked at the weekly RSI, I saw that it was just as overbought as at the two previous peaks in silver in the summer of 2016 and at the end of August 2019. (see the red lines on the chart below)
One of the mistakes I have seen over the last few years with a lot of investors, is that they don’t go back far enough in history to check how good their indicator really is.
When you look at the weekly RSI of silver during the 2001-2011 bull market, you’ll see that at the end of 2010, it was as extreme as at the end of July 2020 (the horizontal black line indicates the RSI level at the end of July 2020).
However, where this signal gave a very good sell signal during the last 3 years, we see that at the end of 2010, this signal stayed overbought for a very long time.
We had the first indication that a possible peak was forming. However, a historical analysis also showed that it was possible that this was just the beginning of the move in silver.
When using an indicator like the RSI, it is important to look at it on different time frames.
After studying the RSI on the weekly graph, I continued by analyzing the RSI on a daily time frame.
On the next chart we see that the daily RSI as well was at a point that indicated both the peak in 2016 and 2019.
It was now interesting to have a look at how the daily RSI behaved at the end of 2010 when the weekly RSI remained at these high levels.
In the chart below, we can see that the daily RSI did not really provide an accurate sell signal like it did in 2016 and 2019.
When I looked at the monthly RSI of gold, it was clear we were getting to extremely overbought levels that historically led to corrections of 24% (2006) and 33% (2008).
SentimenTrader shared the following statistic on July 24:
They show how since 1980, every time gold had a very big run (this time a rise in the price for seven consecutive weeks), it always experienced negative returns the following month.
At the moment of my analysis, the gold price was around 1895 USD.
This data from Sentimentrader meant that while gold could still increase in value, it would be totally normal if it would later on get back to this 1895 level.
Below we see the enormous speculation that was taking place at the end of July in the silver market. (we saw similar readings in the gold market)
This kind of speculation was similar to the peak in the silver price in 2011. Note that we didn’t see this in the second part of 2010 when the weekly RSI was very overbought and stayed this way.
This was a clear indication that the scenario where the weekly RSI on silver would stay high for several months, was very unlikely.
Source: Troy Bombardia, @bullmarketsco (twitter)
The following chart shows that gold closed, on a weekly basis, above its all-time high from 2011. The weekly RSI wasn’t overbought yet which implied that a further increase (for a few weeks) was possible.
Let’s recapitulate: 10 days before the peak we saw extreme signals on the daily and weekly RSI of silver. The monthly RSI of gold was also giving a big warning signal.
Extreme speculation, which we only saw at the 2011 peak, was showing up in the options market.
However, gold had only just broken out above its former all-time high on a weekly timescale.
I was starting to get very concerned about the situation but was perfectly aware that the price of gold and silver could keep on rising.
This is also what the historical analysis of the RSI for the 2009-2011 period showed. Because speculation and sentiment was already getting extremely bullish, I didn’t think we could keep on increasing for several months. A few weeks however was perfectly possible.
My literal conclusion was: “The analysis of the monthly RSI shows that we are going to see a big corrections. The analysis also shows that gold can keep on rising for a few weeks.
The question is thus if we will see a correction starting from current levels, where after we will see the further breakout (above the 2011 all-time highs).
Or, are we going to see a move above 2000 USD, followed by a decline, which will be a retest from the breakout.”
(Notice the words ‘retest from the breakout’, this will be important later on)
Analysis Tuesday 28 July 2020: 8 trading days before the peak
In two days, gold rose 80 USD to reach a price of 1975 USD (intraday).
While the weekly chart of gold had broken out last week, gold had now also reached a new all-time high on the daily chart, above the intraday highs of 2011.
The second scenario I highlighted two days earlier was now taking place.
After silver, gold started its parabolic rise. In the past, I had built a model on the basis of gold’s volatility, to identify possible stress points. The model was now giving a clear warning signal (see red lines on the chart below).
This model also gave a warning sign in February 2016 and June 2019 (in both cases gold consolidated sideways for several weeks). It also gave a warning signal in November 2016, right after Trump won the elections and everyone seemed to be convinced that gold could only go up in value. The last warning signal took place right before the crash in March of this year.
It was very clear we were in the blow-off phase for gold and silver. I had no idea where it would end. I was however convinced that this was not sustainable and that a big correction would follow.
Analysis Sunday 2 August 2020: 5 trading days before the peak
More and more signals where showing that this move in the precious metals wasn’t sustainable. The next chart shows that investors couldn’t be fast enough to buy gold.
Buffett would say: “Be fearful when others are greedy”.
Source: Alex Barrow, @MacroOps
Analysis Tuesday 4 August 2020: 3 trading days before the peak
In my analysis from July 26, I already laid out the two possible scenarios for gold:
Scenario 1: we would see a correction from the then prevailing level, the real breakout would follow later
Scenario 2: we would see a rise to +2000 USD, after which the expected correction would follow. This correction would probably be a retest from the breakout.
When it was clear 2 days later that gold continued its rise, I was already preparing myself for when I would be buying the next big bottom.
At this moment, most gold analysts I follow where only looking at the clear blue skies. I was already thinking a few months further out into the future…I was selling my complete position in the gold miners and was already trying to identify when the next big buying opportunity would come along.
What do I mean by a retest from the breakout?
In 2011 and 2012, gold peaked three times around the 1800 level.
As soon as this level was cleared, the exponential advance started. The 1800 level was thus a very clear resistance.
Gold clearly had no longer any resistance. To get an idea how gold would behave in the coming weeks, I looked at the price action in gold expressed in the Euro and British Pound. In these currencies, gold was already at an all-time high.
I immediately noticed that after the breakout to new all-time highs, in both cases, we saw a retest.
In the chart below we see the gold price in Euro’s. After the breakout above the blue line (the blue line indicates the 2011 highs in gold), prices increased 14%. The move wasn’t sustainable and a sharp correction to the former resistance, which was now support, followed.
The gold price expressed in the British Pound was showing the exact same pattern. After the breakout from the blue line, the price increased 15%. The move wasn’t sustainable and a sharp correction followed. This correction was a retest from the breakout. As soon as it was completed, gold started rising again.
It was pretty clear to me. Since July 26, we started to get very strong warning signs of an approaching peak in the gold- and silver market. Extreme overbought indicators and extreme bullish sentiment (and speculation) were clearly visible.
I knew that the gold price in the Euro and the British Pound, both saw a retest of this former resistance. Now that the gold price in USD had risen this sharply, it was pretty obvious that the dollar gold price would be following the same pattern.
Analysis Sunday 9 August 2020: the peak, in retrospect, took place on Friday 7 August
On Friday, gold had reached the 2080 USD level (intraday). This exponential increase was completely unsustainable. Gold was now 4 standard-deviations above its 200 week moving-average.
In the last 30 years, we only saw this two other times. The first time was in January 2003, the second time in Mai 2006. In both instances, a sharp decline of more than 15% followed. (source: Alex Barrow, @MacroOps)
What strengthened my view was that during the last few days of the exponential increase in the gold price, the mining shares (GDX and GDXJ) were not doing that great at all.
This was no surprise since the gold miners had reached their first big resistance level. I already identified this resistance level in my analysis from April 26.
When you do an investment, it is important to know beforehand when you are going to sell so that you can control your emotions. When I bought my gold miners in the second half of March, I already knew what my price target was. When 4 months later gold was above 2000 USD, all technical and sentiment indicators were giving big warning signals, and my price target was achieved, it wasn’t so difficult for me to control my emotions and sell.
As I explained earlier, I already knew at the end of July when I was selling my gold miners, around which level I was going to get back in. I’ll explain this in my next article.
Everything was in place for a significant top in the gold- and silver market:
-extreme overbought signals on the daily, weekly, and monthly RSI
-extreme overbought signals on the basis of the standard-deviation and my volatility model
-extreme greed from investors which we could see in the options markets and in fund flows
-price targets that I had identified months before, were finally reached (I’ll show this in detail in my next article)
-the price action in gold expressed in the Euro and the British Pound gave a strong warning that a retest from the breakout would take place
And then came the icing on the cake: the mainstream media that suddenly started to promote gold and stated that the rise had only just started.
Source: Teddy Vallee, @TeddyVallee (twitter)