Gold Stocks Already Hint at What’s Next

It’s the Fed interest rate decision day, and the markets are holding their breath, awaiting the uncertain.

However, charts already suggest the answer.

Actually, the markets are quite “certain” of what the uncertain is going to be. 99.9% of market participants expect the rates to be raised by 25 bps, which means that when the Fed delivers this decision, nothing is likely to happen.

The markets could move based on what Powell says during the press conference, though, as that’s what’s likely to impact the market’s expectations. And markets – being forward-looking – move on expectations.

The current expectations are quite dovish, as the market expects the Fed to hike rates in March (by another 25 bps) and then keep them there – that’s what appears to be the most likely scenario based on the CME FedWatch Tool. And the market anticipates that rates will begin to fall in November.

Given that inflation remains high, it appears that the surprises will be on the hawkish side.

As far as the charts are concerned, we see only a little new development on the markets, as they pretty much nullified yesterday’s pre-session decline. Still, looking at the gold price and gold stocks and comparing where they both are provides us with bearish indications.

Even though gold futures invalidated a move above the 2011 high in intraday terms, they closed close to $1,945. This means that they remain near their recent highs.

Interestingly, the silver price has failed to move above the $24 level multiple times, and junior mining stocks are not at similarly high levels.

The GDXJ closed the day below the $39 level, which is well below its recent ~$41 high.

The mining stocks are therefore underperforming gold on a short-term basis as well as on a medium-term basis. After all, the GDXJ didn’t manage to correct 61.8% of its recent decline, while gold moved above its analogous retracement.

The above means that we saw a new bearish signal when taking both into account. However, there are equally bearish indications that we saw previously and that simply remain in place.

Gold’s RSI indicator is above 70, which is a classic signal, and the MACD based on the GDXJ (lower part of the chart) moved below its signal line, which is a sell indication. The same thing happened at the April 2022 top, by the way. Speaking of previous tops…

Even more importantly, the GDXJ’s correction of more than 50% but less than 61.8% of the preceding decline is something that ended two of the recent short-term but big corrections. The first one ended in June 2021, and the second one ended in April 2022. Now it seems that the current one ended in January 2023.

Each of those corrective upswings ended with the RSI near 70, and it’s been trading there for some time before moving much lower. History has a tendency to rhyme, and it appears that we are witnessing another bearish analogy at this time.

Also, have you noticed that the situation in the positions of gold hedgers (as reported by the Commitment of Traders report) is very similar to what we saw in 2012, right before the biggest part of the decline?

Yes, the orange rectangles are 100% identical (copy-paste).

The time between the low in the hedger’s position and the low that marked the start of the massive slide in gold is practically the same as the time between the 2020 bottom in the hedger’s position and the current moment.

Remarkable, isn’t it?

I already wrote previously that the current situation is similar to the 2011-2012 performance, with the exception that this time we saw an extra upswing in the meantime due to the Russian invasion.

The above chart clearly shows that the analogy remains intact, and its implications are very, very bearish.

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