Gold’s To-Date Progress off its December 2015 Lows & Why $1,375-$1,475 Should be a Worst-Case Outcome for the Current Rally

Over the past year we’ve built a catalog of work on the site calling for a major low in gold.

Within that body of work we attempted to form high-probability downside price targets for the metal that would offer attractive opportunities to begin amassing long positions for the rally we anticipated.

In a post on 9/29/15 we derived one such downside price target, combined it with the downside price targets from a few previous posts, averaged them all out and then concluded with the following commentary:

Thus, in putting the two [previous] posts together and averaging all the various price targets ($1,050 and $1,024 averages from this table on 9/10; chart support of $1,035 from 9/10, min of $1,035 and average of $1,079 from this post) I get a downside price target of $1,047.

Regardless, we’re at the point where we’re splitting hairs here in trying to define precisely where “the” low in gold will ostensibly occur.”

It turns out that the metal’s ultimate intra-day low to-date off its 2011 highs occurred a few, brief months later on 12/3/15 at precisely $1,046 – our “average” downside price target of $1,047 was pretty close.  On a closing basis its low occurred on 12/17/15 at $1,051.

But that’s history.  Let’s check in on what’s happened since then.

As of today’s strong move to $1,263 the metal has managed a 20% rally off its 12/17/15 closing low.  Here’s what it looks like on the analog we first presented on 2/2/16 when we suggested it was now worthwhile to begin contextualizing any rally in the context of paths taken off other historical lows.  The black line is the rally off the Dec-15 low.

2016-03-03 Gold - Rallies Off Major Lows - Analog - Daily

So far, I like the way the current rally looks vs. the others.  It’s been fairly well behaved and its recent ~three-week consolidation into today’s fresh, new rally high of $1,263 was fairly low-VOL compared to some of the other moves that started out similar to the current one such as Feb-85 (green) and Mar-93 (purple) and looks similar to consolidation moves that took place at the ~+15%-20% juncture on the two biggest rallies off the Aug-76 (blue) and Jun-82 (red) lows, especially the former.

Here’s what it looks like vs. the latter two rallies.  I’ve annotated the consolidations off the initial highs of the moves off the Feb-76 and Dec-15 rallies with dotted blue lines; note how both form soft flag patterns. Also, note that once both the 1976 and 1982 rallies cleared the ~+17% mark off their respective lows, or what we managed to accomplish today, both ended up taking off to reach the +35% (1976) to +55% (1982) mark before beginning a new consolidation/correction period.

2016-03-03 Gold - Rallies Off Major Lows - Current vs. 1976 and 1982 - Analog - Daily

To further assess gold’s progress off its Dec-15 low let’s look at Fib retracement levels.  Each of the color-coded charts below corresponds to the same colored rallies in the first analog in this post.

Note that the worst-case outcome across every rally gold has ever experienced off a major swing low, whether that low turned out to be a temporary cyclical one or a longer-term secular one, was for the metal to retrace a minimum of 38.2% of its total bear market losses which is the amount of the losses it retraced off its 1980 high into its 1982 low, or the red line in the two analogs above.  Simply retracing 38.2% of those losses amounted to a trough to peak rally of ~65% off those 1982 lows.

Outside of the rally off the 1982 lows, every other rally off a major low has seen gold retrace anywhere from 38.2%-50% of its losses off a previous swing high if they were merely cyclical counter-trend moves in an ongoing bear market (1985 low, 1993 low, 1999 low); in the case of the 1970 and 1976 lows gold didn’t really encounter any sort of correction until it reached the 50% retracement level and thereafter both went on to eclipse former highs in short order as they were secular bull moves.

2016-03-03 Gold - Rallies Off Major Lows - Retracements- Daily

Which brings us to the current rally underway.

Despite being +20% off the Dec-15 low, gold only managed to get above its initial 23.6% retracement level for the first time today.  Should it retrace the minimum 38.2% that it’s done historically, it’d need to reach $1,375; a more typical retrace b/t 38.2%-50% would see it reach $1,375-$1,475, or $1,425 at the mid-point.

Again, these are minimum to average-expected moves; as I have detailed on the site, there is every reason to believe gold’s all-time high has yet to be seen with 2011 merely the warm up into a potential move to $8,000.

2016-03-03 Gold - Rallies Off 2015 Low - Retracement- Daily

In concluding, it’s too early to tell if this is merely a cyclical rally in an ongoing bear for gold or new, sustained rally that will see it eclipse its 2011 highs onto making new ones.

That said, history does seem to suggest that even in a worst-case outcome of this being a cyclical rally in an ongoing bear, there seems to be reasonable amounts of upside left into the $1,375-$1,475 area before one needs to think about capturing P&L on existing longs.