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Gold weakness suggests even lower prices ahead

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J.C. Parets is the founder and president of New York based hedge fund Eagle Bay Capital, LLC. You can find his smart commentary at AllStarCharts.com.

As we start this holiday shortened week, Gold is quietly breaking down from a fairly clean symmetrical triangle. These types of patterns tend to resolve themselves in the direction of the underlying trend. In this particular time frame, we’re leaning on the downtrend from the March highs. A confirmed break should lead to another 100 points to the downside.

Here is the chart that I’m focused on. We’re looking at a daily line chart going back to the lows in December. After a nice rally to start the year, Gold prices rolled over hard and it appears that this downtrend is continuing to begin the week:

The closing lows in March just below 1280 is the level that I’m watching closely. As long as prices are below that, this is a short with a target down to December’s lows in the 1180s. This is the first target, but  triple bottoms are very rare. If we get down there, this would be the 3rd test of key support. In my experience, these 3rd tests often lead to a 4th or 5th support test that eventually break down to fresh lows:

From a risk management perspective, we really only want to be short below the March lows. As long as prices are above that, I would continue to view this as range bound. To invalidate this entire bearish thesis, I would want to see prices break above 1310 which would create the first series of higher highs. Above 1310, things could get interesting to the long side. But as we sit here today, I would view this as the lower probability outcome. Lower prices are definitely more likely.

Another problem that I see in precious metals is the underperformance of Silver. If there was real risk appetite for precious metals, one would expect the more volatile, more speculative metal to outperform. But we’ve seen the exact opposite. Look how we’re already flirting with this “triple bottom” in Silver while gold is still a ways away. If Silver breaks down here, which looks likely, I would expect Gold to follow soon:

These recent developments make perfect sense to me. I’ve been very vocal about how I feel about US Dollars. For the last few weeks, I’ve been in the camp that we’re in the early stages of a big US Dollar rally. I love the extreme bearish sentiment levels that we’re coming off in USD. The unwinds of these extremes can create powerful moves. A Dollar rally would put a lot of selling pressure on the metals.

From where we sit today, I would expect Gold and EURUSD to continue lower. We have our levels and we will maintain the thesis until the data changes.