Can it really get worse than in 2008?
Let me start today’s analysis with a question from one of my subscribers:
PR, Previously it appears there were two major potential influences that could cause future valuations of gold mining stocks to decline:
· Gold price declining
· Stock market declining
A third influence has appeared:
Price of oil. Miners, especially remote located mines, use a lot of oil related products to mine. A big increase in the price oil will severely affect miner's earnings/share. Therefore, exerting downward pressure on the stock price of miners.
Previously you’ve mentioned that the drop in gold and miners' price will stabilize and the general stock market will keep correcting lower.
At this time it seems, if the price of oil stays substantially increased, then once gold stabilizes (doesn’t move lower), miners will continue to correct further to the down side.
What are your thoughts on the effects of substantially increased oil prices with respect to miners’ correction and specifically their correction low?
(…)
Precious metal miners will correct downwards when the stock market declines because they too are stocks. But it would seem precious metal miners will correct downwards to a lower point than previously anticipated, because of the significant increased cost of producing an ounce, (severely affecting their earnings per share), due to the high price of oil.
My take is that in order to estimate what could happen, it’s good to find a comparable period in history to use as the basis, and then to apply the differences between situations.
In our case, I think the link to 2008 would be most useful. Let’s dig in.
Gold, silver, mining stocks, the general stock market all fell together – for a while.
Then gold recovered strongly, while stocks continued to decline.
The rebound in silver and mining stocks was present and aligned with gold’s timing, but it was somewhat muted.
The important detail here is what I marked with a red rectangle. Namely, when stocks finally bottomed (a few months after gold did), mining stocks outperformed gold. Silver did not – at least not then.
The USD Index rallied pretty much just as long as the stock market declined. PMs bottomed before those two markets turned around. Miners (GDX) still declined from about $50 to about $15…
This is something that I think is the basis of what we are to expect in the following months.
Now, let’s add the currently unique circumstances to that:
1. Silver’s ongoing deficit and possible severe disruptions on the physical market.
2. War with Iran that can keep crude oil prices high for a long time, not just temporarily.
The first one suggests that silver could soar based on physical factors, not necessarily technical ones. Or – more likely – that it could recover sooner as bigger declines in silver prices could be used by investors and industrial users (plus governments) to stockpile the physical metal at favorable prices. Implication for us: we don’t short silver beyond the current hedge.
The second point is more interesting for the sake of today’s discussion. Back in 2008, crude oil soared above $100 and stayed there for several months. It started to decline only after the stock market had already declined visibly and when the USD Index started to rally.
The combination of declining economic activity and higher USD values affected the demand side of the oil market. The same is likely going to be the case in the future, however…
In the current case, we might at the same time continue to get supply disruptions in crude oil as the war with Iran continues and the Strait of Hormuz remains closed. Additionally, please note that the USD Index has already started to rally and crude oil is NOT declining despite that.
The pressure valve in the form of lower demand of crude oil might not work as well because supply will still be suppressed. This means that the pressure on the stock market – and mining stocks – would be even bigger than it was in 2008.
Why? Because of rising costs.
This would make cutting rates challenging for the Fed as it doesn’t want the inflationary spiral to get out of control.
What would that imply for gold, silver, and mining stocks?
For gold – not that much.
For silver – increased chance of a temporary decline to or below $50 due to correlation with stocks.
For mining stocks – even greater chance for much lower prices. Not just through correlation with stocks, but through direct impact on mining companies’ profitability.
This makes the current case for having short positions in mining stocks even stronger.
Technically, miners have just confirmed the completion of the head-and-shoulders top.
Do you see this intraday comeback to the previously broken neck level of the head-and-shoulders pattern and the subsequent decline? That’s how the H&S pattern – the one that I described several days ago – was just verified.
Today’s flat performance of mining stocks is not neutral. Because of this intraday action is very bearish, and it serves as the final warning sign for those that are still waiting on the sidelines.
The USD Index moved slightly above 100, but the session is not yet over. Besides, we just saw a weekly close above 100 – highest since May 2025, so I doubt that the USDX will be really weak here.
Crude oil is also moving back and forth, but without visible topping signs. After correcting the sharp upswing, the rally seems to continue at the early-March pace.
The move higher here is likely to continue and the same goes for the rally in the USD Index. The opposite, however, is likely for stocks, the precious metals sector, commodities and bitcoin.
Much more follows in the full version of this analysis – in today’s Gold Trading Alert. Check out the current promo – you’ll like it.
Thank you.
Przemyslaw K. Radomski, CFA
Founder
Golden Meadow®