Alessio Rastani analyses the gold price drop and what it signals for the weeks ahead
Alessio Rastani, trader and market analyst, gives a solo update on the gold price decline.
Summary
Alessio Rastani revisits his earlier warnings about gold's parabolic rally, noting that gold has now erased all those gains and broken below the key $4,000 support level. He argues that price is driven not by fundamentals such as inflation or geopolitical events, but by human emotion and social mood. Using the monthly chart, he draws parallels with gold's behaviour following parabolic rallies in 2011 and 2020, both of which saw sharp drops to the 21-month EMA followed by strong but ultimately corrective bounces before further declines. He concludes that while there is no confirmed bottom yet, a strong bounce is probable in the coming weeks — but warns that the structure of that bounce will be critical in determining whether gold resumes its uptrend or crashes to significantly lower levels.
Key Takeaways
FULL TRANSCRIPT
Introduction and recap of earlier warnings
Alessio Rastani: Hi, hope you're well. A quick update on the gold situation. So many of you have been asking me for an update on gold, so I think it's a good time to actually dig into this chart and explain what likely is happening here. I'm also going to dig into the chart of gold on the monthly time frame and explain the significance of, for example, what happened to gold back in 2020 and also back in the year 2011. These are important examples we'll have a look at in this video.
Beginning first of all with this daily chart of gold. The first thing I want to mention is this: if you've been watching our videos in the past, and also our member videos, then you probably know that I've been warning about the situation on gold when it was rallying in a parabolic fashion. We warned several times that the situation was extremely dangerous and that gold could either see a top with a reversal in trend, or indeed some kind of a correction — a major drop in the price. But of course, as you probably remember, a lot of people at the time just did not want to believe it.
For those of you who haven't seen those videos, let me just play a very short clip of what we said back in January and also in February.
Clip from earlier videos
"Usually when price extends beyond a certain percentage beyond this 200 daily moving average, that typically indicates extreme overstretched and overbought conditions, which usually precedes a major retracement and correction. I think that the parabolic stage of gold has ended and that we're potentially going through a consolidation and pullback phase — a corrective phase — likely towards the average here, towards 4,000 and 3,800. And by breaking the support here, that would increase downside risk for a potential C-wave decline into this region here. But it's also probable the C-wave could extend into the 200 simple moving average — that green line that we see there on the chart."
Gold breaks below $4,000
Alessio Rastani: Thanks for watching that. As you recall, back in the member videos we warned several times that the situation on gold with the parabolic rally was extremely dangerous, and indeed that we could see a likely drop — even a drop below $4,000 to about $3,800 approximately. And indeed we can see that gold finally managed to break that support level near $4,000 and has now dropped below it. Now it may see a bounce in the short term — we shall see.
Also, if you recall back in the summer when gold was rallying, I made another video and said, "Look, I don't think this rally is the start of an uptrend." I said the rally was most likely a correction before we see another drop down to lower levels. Personally, I think this rally we're seeing — this recent rally in the price of gold — is what would typically be called a reversion to the mean. The balance of probability still favours more downside to come in the next several months, because gold has now broken this near support level and is now below the trend line. That has increased the potential for more downside risk to retest that low made just near or under $4,000, and potentially may even extend lower — in other words, take that level out.
So, as you can see, gold has finally dropped down to our key levels below $4,000, taking out that support level. By the way, I'm not trying to tell you I got everything right — no, I did not. Sometimes the warning signals of a top came a bit early. Nevertheless, as you can see, pretty much all those gains that gold made, as we warned at the time, have been given back. Gold has essentially erased and wiped out all those gains on its way higher, and has finally managed to drop below $4,000 as we had anticipated.
Why gold dropped despite bullish fundamentals
Now, many people out there are confused by this drop in the price of gold. They're thinking, "How can gold drop given the fundamentals? Surely, given inflation and the Iran war, that should support gold going higher." And they're wondering why gold has dropped.
Because, as I'm sure you already know if you watch my previous videos, what drives the price of any market — doesn't matter if it's gold, Bitcoin, or stock markets — is not fundamentals, but actually human emotion and psychology. In other words, the emotion and the psychology of market participants. What really drives price is social mood: fear, greed, optimism, pessimism, euphoria, panic, and things like that. But as I've said many times, the majority of people out there — I would say 99% of people — refuse to accept this. They want to believe the illusion that what drives price is fundamentals and things like that. Anyway, doesn't matter.
Monthly chart analysis — the 21 EMA and historical parallels
Let's dig into the monthly chart of gold, which is really fascinating and interesting, because we can see that gold has finally dropped down to the monthly 21 EMA — the 21-month exponential moving average, that blue line right there. So far it's holding it; we shall see if it lasts.
Now, why does this matter? Because if you look at previous examples of when gold has become parabolic — for example, the previous time when this occurred, a massive parabolic rally like the one we saw this year, was back in 2020. Gold rallied really hard, but notice what happened. At the time, we also warned of a drop down to some key levels, for example the 21 EMA. Notice what happened: after it dropped down to that 21-month average, gold essentially held that level and then bounced quite strongly. So it dropped down sharply to the 21 EMA, and then what did it do? A very strong bounce which retraced almost 50% of that previous decline — before then dropping back down again. And notice what happened: another rally from the same approximate level, the 21 EMA, and then eventually crashed down to significantly lower levels.
If you also look at the previous parabolic rally which occurred in 2011 — very similar situation. It dropped down to the 21 EMA on the monthly chart, held that level beautifully, and produced a very strong bounce. That bounce, even though it was pretty strong and retraced about 50% or 61.8% of the previous drop, nevertheless did not succeed, and then crashed to new lows.
One thing to remember is this: typically, when these rallies fail, they are corrective rallies. In other words, the rally is composed of an overlapping three-wave structure. As we know, corrective rallies usually do not succeed in starting a new uptrend.
What to expect in the coming weeks
If we go back now to the chart of gold on the monthly time frame, we can see again that gold has dropped down to the 21 EMA, which we expected. So here's the thing — you're probably wondering what that means. It means the probability is increasing that in the next several weeks we may actually see a very strong bounce, similar to the ones we saw in 2021 and also in 2011. After big drops down to the 21 EMA, we typically see a strong bounce, and sometimes those bounces can retrace about 50% of the previous drop.
Now, we have to be careful here, because as yet there is no sign of a bottom on this drop. So if we go to the daily chart — at the moment, on the right-hand side, there is no significant sign of a bottom on this decline, and that is important to appreciate, because there is still a risk that gold may continue to drop lower. However, even if gold does continue to drop further — which is possible — I think in the next several weeks there is a strong probability we could see a very strong, powerful rally in the price of gold. That's something to bear in mind.
Again, we have to be careful because we don't want to catch a falling knife. At the moment there is no sign that this drop or decline has ended. It may continue to push further lower. But given what we're seeing on that monthly chart — given the fact that we're down to support levels — I think sometime in the next several weeks, as we head towards December and indeed the end of December, it's quite likely we're going to see a very strong bounce, a very strong rally.
The critical question: corrective or impulsive rally?
If the next bounce is corrective in structure — for example, if it's composed of three waves, or if it's overlapping in structure on the lower time frames such as the hourly chart or the daily chart — if it's overlapping and corrective, then that is a very negative sign for gold. It's a very bad sign, because if the bounce or rally is corrective, that means that rally may fail and likely drop down to new lows, and indeed crash down to much lower levels.
However, if gold rallies impulsively — in other words, in five waves which are not overlapping — that could be a very positive and good sign for gold for the next several years. It may actually indicate that gold could potentially continue the uptrend to much higher levels.
So again, let's wait and see what kind of structure we get in that next bounce, that next potential rally.