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The next big buying opportunity in the gold market.


Please read the Disclaimer before reading this article.


Before reading this article, I recommend you to read my previous two articles:

Gold and my personal story as an investor, an introduction to The Adaptive Investor.

How I predicted the peak in the gold market in early August.

Introduction

In my previous article, I explained how I was able to call the peak in the gold market at the end of July/beginning of August.

In this article, I’ll explain why a new huge buying opportunity is coming in the gold market.

In April, the gold miners (GDX) were finally able to break out above their 7 year resistance.

At the end of April, I had already set a target of 41 for where the move in GDX would probably end. On the weekly chart (see below), this was the first big level op upcoming resistance.

GDX rose a bit further than I thought. However, when you look at the weekly candles in detail, you see that GDX rose during the week, but always closed the week rather weak. This is the weak relative price action I talked about in my previous article. Gold saw an exponential increase in its price but relatively speaking, the miners weren’t doing very well.


When we look at the monthly chart of GDX, we see that the monthly close was exactly below the resistance…


Calling the peak in the gold sector in the beginning of August was thus in fact not that hard to do.

Significant price targets, which were visible months before, were reached. This was accompanied by extreme overbought signals and extreme bullish sentiment.

Let me rewrite this paragraph.

The peak in the gold sector was only ‘easy’ to call if you knew beforehand where you would sell. Most gold analysts I follow were ecstatic in early August.

Because I had already set my price targets in early April, I could control my emotions and sell my position as soon as the warning signals were going off.

As I wrote in my previous article, I was already thinking in early August, when I would start to buy again.

Because I was already making this exercise back then, I would be ready in a few weeks/months when the sentiment would be extremely negative and the moment to buy arrived.

For those who want to know what my next price target for GDX is after the next bottom, see the following chart:


The next big buying opportunity in gold and the miners

To explain where I think the next big buying opportunity in gold will come along, I’d like to discuss the 3 points on the following chart.


After the blow-off top, gold declined 10% in value in the span of 4 days (nr. 1 on the chart).

As I explained in my previous article, this was totally expected.

The RSI on the 4 hour chart was now just as oversold as during the crash in March. A big bounce was thus to be expected and this is what we saw (nr. 2 on the chart).


The consolidation period that followed after this bounce, (nr. 3 on the chart) is crucial to understand.

A very clear support level developed around the 1923 level. This wasn’t surprising.

1923 was after all the former intraday all-time high in the gold price in 2011. Former resistance becomes support, right? Exactly.

The only problem is that this 1923 level was not the ultimate resistance.

90% of gold analysts I follow have made a call during this consolidation above the 1923 level that we had seen the bottom. This often happened when the black or blue diagonal trendline was broken.


There was however not a single indication to believe that we had seen the bottom.

First of all, a correction needs time to do its job. Since the bottom in August 2018, consolidations/corrections in this bull market lasted between 49 and 98 days.

We had just seen the biggest move in gold and silver since the bottom in 2018 and some people were thinking that after the first decline of 4 days, or after 21 days (when the first breakout above the black diagonal trendline took place) the bottom would be in. The chances of this being the case were almost non-existent.


Second, literally almost everyone was looking at the same support level at 1923. As already explained, I understand why everyone was keeping an eye on it, it was however the wrong support level to consider.

The chart below shows the topping formation in gold during 2011-2012. The dotted line shows the intraday all-time high. The middle line shows the highest price on a closing basis. The lowest line shows the real resistance which I already mentioned in my previous article.

(Graph from analysis September 27)


The next chart shows these same lines extended to the current consolidation. We see that gold found support on this dotted line several times.

I thought it was unlikely this was the bottom. Literally everyone was looking at it. When it’s obvious to everyone, it is obviously wrong.

In addition, the real support line was the 1800 level. In 2011 and 2012, gold found resistance here three times. In 2020, in consolidated just below it for several weeks. As soon as it got above 1800, the exponential price increase started.

(Graph from analysis September 27)


The insight that 1800 and not 1923 was the real former resistance, and now support, was confirmed by analyzing the price of gold in the Britisch Pound.

Below I’ve added the same lines on the price chart of gold in British Pounds during the 2011 top, as I did previously for the US Dollar gold chart.

(Graph from analysis September 27)


When we look at how the retest of the gold breakout in the British Pound happened, we can see the similarities with the dollar.

We see that initially the intraday all-time highs (dotted line) provided several times support. This support was however not the real support and eventually the gold price broke this level and continued to decline to the lowest black line that was strong resistance in 2012.

(Graph from analysis September 27)


Third, we see that important bottoms in the gold price usually form when the weekly RSI is between 50 and 55. The weekly RSI was still way too high for significant upside price action to occur again.

(Graph from analysis September 6)


In addition, the gold mines had not yet reached their support level at all. My target for the bottom in GDX was 37.

A lot of people already tried to call for a bottom when prices were in the red circle on the following chart.


For GDXJ as well, most people were way too early. We had to wait for a retest of the breakout. GDX had shown exactly the same pattern in June (see chart above).


I had already identified this 37 price target for GDX and 51 for GDXJ at the end of August.

See the next chart from my analysis at that time.

(Graph from analysis August 30)


The horizontal lines on the chart above are of great importance for the short term timing of the bottom. I won’t explain them in this article because I want to get across the big picture idea. I’ll summarize the big picture buying opportunity with the following three charts.


When these price levels are reached, the euphoria from early August will be completely gone. When everyone is afraid, I’ll be buying.

On September 24, both GDX and GDXJ reached my target. However, I haven’t bought back in yet. There are two reasons for this. The first one is that my short term signals on the 4 hour RSI did not yet give a bottom signal. The second reason is that I think gold can still go lower.

For the long term investor, buying when my targets for GDX and GDXJ are reached again is a very good idea.

For myself personally, I’ll continue to analyze the gold market with the goal to purchase as close to the bottom as possible. There is a scenario where GDX can go slightly below the 37 level, I’ll monitor this in the coming days and weeks.


Conclusion

I would like to finish with some general insights about the way I invest.

Note that I don’t use an overly complex analysis.

I use simple horizontal support and resistance lines with which I can explain almost all price action.

I don’t us 10 different indicators, but only the RSI.

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. They just think an overbought RSI is bearish and an oversold RSI is bullish.

In my previous article I used the extreme RSI indeed as a sell signal. However, most of the time I use an overbought RSI as a sign we haven’t seen the top yet.

The trick is to understand that your interpretation of a certain indicator is dependent on the regime the market is in. In future articles this will become clearer.

Another common mistake is that analysts try to explain every move that is happening. A strong intraday rise (or decline) makes them change their analysis. Where they were using simple trendlines and a RSI indicator the day before, suddenly they are using stochastics, Fibonacci retracements and Elliot wave combined to try and explain the new price action. The price action that wasn’t explainable with their analysis the day before, now suddenly is perfectly understandable.

I use a simple system and rarely deviate from it. Only when certain levels are broken, will I change my strategy. Constantly adjusting your analysis/method because you want to explain every small move only leads to confirmation bias.

The price levels that we now seem to be reaching (or have already reached) for gold and the gold mines, were already set as my target many weeks ago.

Right now, I’m already thinking about where I will be selling my upcoming position in a few months.

By always staying one step ahead of the market, I avoid being guided by irrational behavior at crucial turning points, when emotions are at their most extreme.

After years of analyzing the gold market and a lot of other analysts, I’m convinced that the simplest models work best.

I didn’t use rocket science to predict the peak in early August or to stay in cash throughout the decline when most were predicting a bottom was in.

I use a simple system, think for myself, I don’t let my emotions guide me, and have enough experience to know that most other analysts don’t know anything more than I do.

UPDATE

The purpose of this article and the previous one, was to give a big picture idea how it is possible to lower your risk position when a peak is close (beginning of August) and increase it again after the correction.

Although my price targets in GDX and GDXJ were reached on 24 September, I didn’t buy yet.

As explained, I remained cautious because I did not see a bottom formation in the miners and I thought the consolidation/correction in gold could continue.

The purpose of this article was not to share my short term opinion. However, given the price action of Friday, I’ve decided to give an update on this as well.

Since the peak in early August, I had a long term idea about where the next bottom in gold and the miners would form.

However, I don’t have a crystal ball and I’m not a clairvoyant.

At any point during the correction in gold, I had a plan to buy back if my analysis turned out to be wrong. (That’s why I wrote: ““Only when certain levels are broken, will I change my strategy.”)

As Jesse Livermore put it: “Often, the market will go contrary to what a speculator has predicted. At these times the successful speculator must abandon his predictions, and follow the action of the market. A prudent speculator never argues with the tape, remember: markets are never wrong - opinions often are.”

In my analysis of last week Sunday, I used the following two charts to indicate when I should get in earlier than expected.

Below we see that the former support of 1923 would now probably act as resistance. As soon as we would see a close above this level, this would indicate that the correction was over sooner than anticipated.


The following chart shows GDX on a 4 hour time scale. The upper red line (the 37,11 level) was since the beginning of August my target for a bottom in the gold miners. Most gold analysts have tried to call a bottom somewhere between 39 and 44.

My target was reached on September 24. The only thing we still had to see was a clear bottoming formation around this red line.

The black line was the level I used as a trigger to get back into the market if my analysis would not come to fruition.


On Tuesday we saw a sharp decline in the gold miners, just beneath the black line. This reinforced the importance of the 40 level in GDX (the bottoms in August and September were all around this 40 level).

On Friday, GDX was able to close strongly above this 40 level. This was a first clear signal that the trend was possibly changing sooner than anticipated.


The gold price as well was able to close above its trigger point, the 1923 level.


The big question is whether we’ve seen the bottom.

Let’s say that I follow about 30 gold analysts/traders that try to time the gold market. 25 of them have incorrectly called for a bottom when gold was still consolidating above 1923 and when GDX was between 39 and 44.

Only 5 of them were, just like me, waiting for lower prices.

Since the price action on friday, about 3 of these 5 have changed their opinion and are now also calling that the bottom is in.

Everyone is watching the breakout above the diagonal trendline on the following chart.


The first thing I would like to note is that this is the third time that a bottom is being called because there is a breakout above a diagonal trendline.

The previous two times were clearly not that successful.

The difference however is that this time, both GDX and GDXJ have tested their support levels. The weekly RSI for gold is now also at a level where big bottoms have formed in the past.

Chances of this breakout being a real breakout are thus much higher.

Since the bottom in September 2018, this is the third normal correction in the gold market. The first one ended at the end of May 2019, the second one in December 2019. (I’m not including the collapse in the gold price in March since this was not a normal correction but a liquidation caused by the corona virus uncertainty.)

When gold prices reached the 1850-1860 level two weeks ago, the daily RSI was at the point where the previous bottoming formations in gold started. On the following chart, these points are indicated with a green horizontal line. What followed after these green horizontal lines was a bottoming formation. This is indicated by the black lines, we see that the gold prices stayed flat, forming a bottom, while the RSI was turning up, resulting in a positive divergence.

This time we haven’t seen this bottoming formation.

The current situation therefore looks like March 2019 when a low daily RSI led to a strong bounce but it wasn’t the ultimate bottom.


If we look at that period in detail, we see something interesting.

In early 2018, the gold price was consolidating right below it’s multi year resistance level.

During this consolidation, it formed a clear support zone around 1306. Once it finally broke below this level and backtested it from beneath, the decline tot the September bottom started.

In early 2019, the gold price again found resistance at this point (first black arrow in 2019). Eventually it broke through and backtested this level (second black arrow in 2019), again confirming its significance.

In early March 2019, the gold priced declined hard and the weekly RSI was just as low as it was two weeks ago (the first horizontal green line). A spike followed and it seemed that gold had regained the important 1306 level and that the correction was over. However, gold prices declined and this breakout was a fake one.

The reason (in my opinion) was that there was no clear bottoming formation in gold or the miners. Back then, the miners were acting very strong, giving the impression that they were leading gold. This turned out to be wrong. We had to wait +-7 more weeks for the real bottom to form. The miners that were acting strong declined 10% from that point and, just as gold, started to form a clear bottom.

We see exactly the same today.

Gold seems to have broken out and the miners are, relatively speaking, acting rather strong.

However, neither the metal or the miners have formed a clear bottom…

Could we repeat the march 2019 experience?


Conclusion

Because we haven’t seen a clear bottoming formation in gold or the miners, I think it is possible we go lower again.

However, if it becomes clear that we have seen the bottom, I will not doubt to put my money to work again.

I have no problem putting my opinion aside and adjusting my strategy.

I completely agree with all the gold analysts I follow that the next move in the gold market will be a very big one.

However, from a contrarian point of view, wouldn’t it be beautiful that the analysts that stayed correctly bearish over the last few weeks and now turned bullish, would give the topping signal?

I’m also not convinced that we have seen the top in this temporary dollar rise. I agree that the dollar doesn’t look good technically. But some fundamental models I follow show that the dollar is not yet ready to continue its long term decline. I’ll write more about this in my next article.

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