Gold & Silver Stocks are Still… Stocks

I’ve recently written much about the link between now and 2008, and it has profound implications not just on gold and silver stocks but also on other stocks.

In today’s analysis, I will discuss this link (as well as the situation on the stock market) from the point of view of the XAU Index - a long-term proxy for gold stocks AND silver stocks.

Based on what happened in 2008, it seems that stocks are about to move much lower in the following months.

The lower part of the chart features the XAU Index, a proxy for both gold stocks and silver stocks.

First of all, this comparison of mining stocks and other stocks could appear shocking, and rightfully so.

The XAU Index is well below its… 1995 highs (yes, miners are really so weak), while world stocks are much higher.

The second shocker is how far and how fast miners declined in 2008. Starting with the final corrective upswing, the mining stocks index declined by a breathtaking 69.2%!

Less than a third of the starting value.

It took just a few months for this decline to materialize.

So far this year, the XAU Index has declined by 18.7%, counting from the yearly high to yesterday’s intraday low.

And so far this year, the GDXJ ETF has declined by 19.3%, using the same measurements.

As a result, the performance of both may be roughly comparable, or — more likely — junior miners may decline more due to their closer link to the general stock market. This means that based on the above-mentioned analogy to 2008, we can’t rule out a decline by about 70% (or more!) in the GDXJ starting at the recent short-term high ($41.16).

Shaving off 70% of that value leaves us with $12.35 as the possible downside target for the GDXJ ETF.

Impossible? It has already happened! (In the XAU, as the GDXJ wasn’t trading at that time).

So, yes, the outlook for mining stocks is truly extremely bearish for the following months.

Also, speaking of the XAU Index, let’s take a look at its chart.

After all, that’s where I see one of the key developments that happened this week.

How high did the XAU Index correct in a sharp manner back in 2021 before sliding from above 200 to below 40 (eventually, and below 90 in several months)?

It corrected to more or less its 61.8% Fibonacci retracement level. And the initial slide happened after a triple-top pattern.

Interestingly, we see exactly the same thing right now. The XAU Index first declined sharply after a triple-top pattern, and now it has just corrected approximately to its 61.8% Fibonacci retracement.

This is a screaming long-term sell signal.

Also, please note the obvious. The XAU Index is not only below its 2011 high. It’s not only below its 2008 high. It’s even below its 2006 high. Yes, the situation is ridiculously bearish.

Let’s take a look at the markets from a more short-term point of view and from the U.S. perspective.

On a short-term basis, it looks like the small head-and-shoulders formation is finally going to end up being a broader head-and-shoulders formation.

The red, dashed line marks the neck level of the pattern. The right shoulder is likely forming at slightly higher levels, but besides that, the pattern is quite symmetrical.

While the RSI is not at 70, it is at the levels that stopped the March 2022 and the late 2022 rallies.

This, plus declining volume, suggests that the turnaround is either here or very, very near.

Consequently, we might not need to wait another week or two before seeing a top and the subsequent decline in junior mining stocks.

In fact, we might have just seen it, or we might see it within the next couple of days.

Why is this important for gold and silver investors and traders? Because the last two big moves took place more or less in line with each other – in stocks and in precious metals (and miners). The slide in stocks could also trigger something similar in the case of commodities like crude oil. The same thing is likely to happen again this time, especially given what’s happening in the USD Index.

The USD Index is after a sharp corrective downswing that is very similar to what happened in the USDX during the 2008 corrective rally in gold.

Please keep in mind that the USD Index tends to reverse close to the end of the month. I marked the previous such reversals with vertical dashed lines. This tendency is surprisingly (given its simplicity) useful.

And, well, we are still early in April, and we just saw a sign of strength yesterday – this might have confirmed the final bottom for this decline.

All this suggests that the USDX is ready to rally further. The most important details are present on the long-term chart, though.

Let’s zoom out.

The key thing to keep in mind is that what we see right now – along with the most recent very short-term decline – is something that we also saw in mid-2008, right before the USD Index’s sharpest rally in decades. Interestingly, we also saw it in 2011, right before gold’s top.

The preceding bottom was not a single V-shaped low, but rather a bottom that consisted of a few separate bottoms. The final short-term decline started with RSI at about 50. And guess what – the current short-term decline also started with the RSI close to 50.

Consequently, given all the other links to 2008, it seems that a big rally in the USD Index is just around the corner.

The implications are very bearish for the precious metals sector.

Given the situation on the stock market – especially in world stocks – the situation is particularly bearish for junior mining stocks.

Just as the night is darkest before the dawn, it “seems most bullish” right before the biggest slides.

Stay strong.

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Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief