The last few weeks have been a roller coaster ride for gold. A breathtaking rally to new highs followed by a bone-crunching decline in double quick time. The volatility could spook an average investor. But as Colonel Hannibal Smith (Liam Neeson) often advocates in the Hollywood blockbuster The A-Team – “no matter how random things may appear, there is always a plan!” Nothing happens in financial markets without a reason, and the reason is always financial. The wild ride in gold is going as per plan. The plan is to shake off weak hands and accumulate gold on declines.
On 1 October 2024, we wrote that a decline in gold and silver prices would be a welcome development.
Sure enough the upward momentum snapped and gold fell from its peak of $2,790 per ounce reached on 30 October 2024 to $2,537 on 14 November 2024.
While the 9% fall in a fortnight may be jarring for many new investors who have jumped late on the bandwagon, it need not be so. The most critical outcome determining variable in combat is the element of surprise. Many a battle has seen reversal of fortunes of armies enjoying pole position because they were taken by surprise. Trading is the warfare of a passive variety. We traders use keyboards and mice instead of swords and shields. But the outcome is equally brutal for the loser.
An earlier article had prepared readers for this element of surprise.
Read here: How low could gold go?
The recent dip in gold price to the $2,537 per ounce mark has not even tested the first 31.8% Fibonacci support level of $ 2,482 mark. That could mean bulls are unwilling to let prices fall significantly and are initiating buys on all noticeable declines. That is the scenario as of today. Any geopolitical development like a ceasefire in Gaza and Ukraine war or any other development that indicates inflation or smaller rate cuts can trigger another decline in gold.
If this sounds like there are too many variables (think of it as a machine with too many moving parts!), it’s because that’s what it is. Take a look at the monthly chart below for more clarity:
Technicals: Gold has broken out of a resistance zone that held the price back for four years. That indicates the tussle between bulls and bears has been simmering intensely for this four-year period. Since bulls have accumulated gold on declines and absorbed all supply that sellers had to offer, the price vaulted higher.
The point of breakout has been taken at $1,985 per oz as the starting point of plotting a Fibonacci retracement ruler and the peak of October 2024 as the endpoint. The Fibonacci retracement ruler then estimates the approximate levels where prices can encounter support in case of declines. We find there is no change since the earlier piece on 5 November 2024.
Here are a few simple hacks to making outsized returns from the coming rally in gold –
⦁ Buy only in delivery mode (ETFs, e-gold or bars and coins). Avoid derivatives like the plague! Derivatives involve financing (interest) costs that far exceed the FD (bank fixed deposits) rate of interest by a huge margin. If you work for the financiers, when will you make take home profits?
⦁ Split your allocated amount for gold into three or four parts and deploy a small amount at the present levels. Allocate a progressively larger amount on deeper declines if/when they occur. That will ensure you get a favourable average buying cost that is closer to the current prevalent price.
⦁ Give President Trump approximately three months in the White House. If he announces a clear policy on adopting crypto currencies and/or launching CBDC (central bank digital currency), accelerate your gold purchases.
⦁ If the lower specified support levels are not tested at all and the price shows signs of taking off, it would mean safe haven buying is accelerating and stronger hands are resorting to “flight to safety.” Follow their lead and buy into the momentum rally.
⦁ All purchases must be made with a view to look beyond 2024. Maybe even 2025. As the gravy dressing from over five dozen economies that held elections in 2024 comes off, gold will see its best days unfold. Fiat (paper) currency is going to be an inefficient store of value, forget about beating inflation. Gold and silver are likely to be the fulcrum which will provide a defensive shield to serious investors beyond 2025.
Go ahead and start making small purchases right away, leaving room for buying on dips. The long-term bullish story, the “big picture” of gold, is very much intact.
For more such analysis, read Profit Pulse.
Note: We have relied on data from www.tradingview.com throughout this article. Only in cases where the data was not available, have we used an alternate, but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your investment advisor. This article is strictly for educative purposes only.
Vijay L Bhambwani is the author of the first official commodities trading guide in India. He designs statistical and behavioural trading models for his family owned prop trading outfit. He stays at South Mumbai and trades markets since 1986. He tweets at - @vijaybhambwani and has a video blog at www.youtube.com/vijaybhambwani
Disclosure: The writer and his prop trading organisation have no exposure to gold derivatives contracts discussed here as per SEBI guidelines
