Gold Stocks Outperform Gold and You Know What It Means
Miners strength relative to gold means that the precious metals sector is about to move higher. But how high?
As I wrote in my yesterday’s analysis, it’s a tough call to say how high gold might go once Israel’s military operation fully starts, but as far as the GDXJ ETF is concerned, the situation is clearer.
In fact, GDXJ’s moved higher meant that what I wrote yesterday remains up-to-date as the market just agreed with me. Consequently, I will quote yesterday’s analysis, while providing brief updates, whenever warranted.
Gold closed Monday’s session slightly lower and it closed yesterday’s session just slightly higher, while mining stocks closed slightly higher on Monday and they closed visibly higher yesterday. This is bullish as miners tend to underperform gold right before the top and that’s not what we saw during yesterday’s session.
The implication here is that precious metals’ rally is probably not over just yet.
Besides, as you can see on the above chart, gold corrected a bit after reaching its declining resistance line that’s particularly strong – it’s based on four previous tops. Consequently, seeing a corrective decline here was normal.
Still, when investors get really concerned and want to buy safe-haven assets (gold!), even such a strong technical resistance is likely to be broken.
I wrote about the reasoning behind the likely upswing and… Why it’s likely to be short-lived in yesterday’s analysis, so I don’t want to get into details today. To make a long story short, though, that’s how gold previously reacted after the war broke out in Ukraine, and how gold performed right after peak concern/interest in the “war” phrase in Google. Gold rallied in the immediate aftermath and then declined or continued its previous trend. In both cases, this implies lower gold prices after a quick run-up.
While gold paused at its declining resistance line, the GDXJ ETF – a proxy for junior mining stocks – moved visibly higher.
Based on its triangle-vertex-based reversal point, the GDXJ is likely to reverse its direction late this week or early next week, and while the upside target for gold remains rather unclear, it seems that mining stocks might top a bit below $36, as that’s where its resistance lines cross.
What’s likely to happen now? The fear / concern / expectations are already enormous, and gold price is already after a rally. Did it top already? Most likely not (and it’s good that we took profits from our previous short positions in miners before gold truly shot up), as the momentum was extremely strong, however, it seems that we’re not far from the top.
The previous trend in gold was to the downside, which means that after the short-term top, gold price is likely to decline once again – and the same is likely for silver and mining stocks.
How soon can the reversal take place? Probably several days or no longer than 2 weeks after the actual attack. Both could happen as early as this week.
All in all, it seems that we’ll be able to return to the short position in the junior miners at higher prices, thus increasing the overall profitability of this decline. Perhaps as early as this week.
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Przemyslaw K. Radomski, CFA