Did You See How Juniors Rallied? Me Neither.
Forecasting gold price is often a difficult thing to do – but this time, mining stocks’ performance makes it easy.
Mining stocks tend to underperform gold before declines (in the final part of the rally or early during the decline), and they tend to be strong before rallies (in the final part of the decline or early in the rally).
What we saw yesterday leaves nothing to imagination as the indication coming from the mining stocks’ relative performance was crystal clear.
Gold price moved higher yesterday, and you can see it in the upper part of the above chart. More precisely, you can see GLD ETF’s price performance there.
I’m using the GLD ETF instead of gold price futures in order to have an apples-to-apples comparison with other parts of the market – in particular with the GDXJ ETF, a proxy for junior mining stocks.
While GLD was up by $1.33, the GDXJ ETF was actually down slightly. This is not natural because, ultimately, precious metals mining stock’s revenues (and thus profits) depend on the prices of metals (like gold) that they are either mining or are hoping to find, develop, and mine / sell in the future. Markets are forward-looking, so expectations of future profits from gold sales definitely depend on the price of gold.
At least, it should.
The thing is that sometimes it doesn’t. When that happens, there’s usually some sort of reason for it, and that reason is usually the stage of a bull market or bear market that the precious metals market is in, in general.
The fact that junior mining stocks ended yesterday’s session lower, despite a move higher in gold (and GLD), is simply a bearish sign. It’s a sign warning of an upcoming sell-off.
We’ve seen it work on multiple occasions. For example, in early February 2023. While the GLD ETF moved above the previous short-term high, the GDXJ ETF didn’t. What happened next? The entire precious metals sector moved lower, and the GDXJ declined from about $40 to below $33.
Consequently, the implications are clearly bearish.
The additional bearish confirmation comes from the GLD ETF itself, and it’s about the price-volume dynamics. GLD moved higher on volume that was relatively low yesterday. This indicates that this is not a real move up, but rather a pause or a part of a counter-trend rebound. And yes, the implications are bearish.
The above paints a very bearish picture for the short term. Let’s keep in mind that it comes on top of other bearish indications that we saw recently – for example, the all-important weekly shooting star reversal candlestick that we saw in gold.
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Przemyslaw Radomski, CFA