These days it appears that most investors are bullish on precious metals gold and silver. But I’m going to go against the grain and say that we are two days to a week away from a pop and drop in the price of gold. That’s right, I think we’re about to see an intermediate top in the precious metals sector.
Here’s why:
Amex Gold Bugs Index (HUI)
HUI tracks a basket of gold companies and can be used as a leading indicator for gold bullion at times. This index tends to lead the price of gold before rallies and also during declines. I have seen it lead by a few hours and even up to seven days. I find it outperforms when gold is about to rally, and underperforms when gold is topping or about to start another move down.
It looks as though we are forming a triple-top, which also happens to be at a previous 2009 resistance level. Each time this level has been reached, sellers take control and send the market sharply lower. There have been several long upper wicks formed in the past few sessions telling me that buyers are pushing the price up, but sellers hit the sell button pulling the market right back down. If this triple-tops plays out, I would expect a multi-month correction to take place.
The U.S. Dollar ETF
From the chart of the PowerShares DB US Dollar Index Bullish (NYSE: UUP) we can see that the U.S. dollar looks to have found support at the March/April lows and has put in a very solid rally. If the chart pattern is correct, then it looks as though the dollar will break out to the upside and run to $24.75 area. The relationship between the dollar and the precious metals sector is generally inverse, meaning if the dollar rallies both gold and stocks should fall.
Gold Bullion ETF
The chart of gold has identical patterns no matter if it’s the SPDR Gold Trust ETF (NYSE: GLD) or spot gold price, so this analysis goes for both ETF. The past two times gold rallied for this length of time without any sizable pauses we saw the price of gold drop $70 per ounce, and $140 per ounce, which is equivalent to a $7-$10 drop on GLD, a decent size move.
The chart is screaming that a nasty correction is about to occur any day now. With gold testing the June highs I feel its only days away. What I am looking for is a pierce of the June high. That will suck in the rest of the bulls as they jump on the bandwagon, and cause all the shorts to cover their positions. This causes a pop, and once buying starts to dry up, the big money will start to sell down the price to trigger the stops and start a multi-day waterfall sell-off.
With the declining volume as the price grinds its way higher, it tells me fewer individuals want to buy in at these high prices. Once the price starts to slide it will cause the stops to triggered. And because there have not been any substantial pullbacks along the way, there is a larger number of stops sitting in the market waiting to get hit.
In short, I feel precious metals are on the verge of a sharp correction that may only last a few days, but the drop will be substantial. I still think we could see a few more up days or sideways session before this happens as the June high for gold bullion should be penetrated before the market truly reverses back down.
Anyone long gold, silver or precious metal stocks should be thinking of tightening their stops, and gold bugs should mentally prepare themselves for a correction.
I hope my report helps shed some light on the market for you. My trading alerts and frequent updates are reserved for subscribers, so if you would like more trading analysis, updates and trades please join me at: www.thegoldandoilguy.com.
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