Why are mining stocks defying the gold slump?
Today’s gold price analysis will be a bit shorter [EDIT: I ended up writing a regular-length analysis.] as everything is developing pretty much in tune with my previous expectations – you’ve been prepared for what’s happening. There is one specific question that I’d like to comment on, though, and it’s about mining stocks.
Namely, why did they move higher yesterday, even though gold didn’t do much.
There are three possible reasons, and most likely all of them are partially responsible. The key context is that yesterday was the first session after the weekend, so it was the first chance that the mining stocks got when they could react to the weekend news and the optimistic views on the situation in Iran. Yes, they are shooting at each other, but the politicians are talking about progress in peace talks.
On a side note, can you imagine that one person hits someone else and then – in a courtroom – they explain that it was an attack done in… self-defense? And yet, that’s what the media are reporting just to keep the illusion of progress in peace talks, while both sides continue to disagree on key points, and while the shooting (and mine-laying) continues.
Moving back to mining stocks and the reason for their short-term rally:
1. Crude oil is a proxy for mining stocks’ costs, and crude oil declined visibly this week. Lower costs = bigger profits, hence bigger valuations.
2. Silver moved higher yesterday and GDXJ includes not only gold stocks but also silver stocks (approximately 20% of the ETF).
3. It’s a technical rebound within the range of what can be considered normal – please note both orange rectangles on the above chart.
As far as the first and second points are concerned, I think that ultimately miners will follow gold’s and silver’s lead lower. Additionally, I think that crude oil will move back up when it turns out that the deal is not signed after all.
As for the third point – given today’s pre-market moves lower in gold and silver futures, it seems that mining stocks could erase yesterday’s declines quite quickly.
Gold futures look like they are about to move to new May lows any hour now.
Silver is declining decisively as well (more fundamental comments are available in the latest Silver Structure video on YT), and given that its more volatile than gold, we could expect both markets to move to new monthly lows, and then to new yearly lows – relatively soon. Of course, miners would be likely to slide as well.
And it’s already starting to happen.
The best thing is visible on the USD Index chart, though.
The thing that you can see on the above chart is…
Nothing.
The USD Index is currently doing absolutely nothing – still preparing for another wave up after its breakout.
And yet – gold and silver verified their breakdowns and now continue their slide, anyway!
This is extremely bearish, because when the USD Index finally does move higher, the precious metals sector is likely to truly collapse.
Crude oil is testing its 38.2% Fibonacci retracement as well as the previous low once again. The triangle-vertex-based reversal is due in a few days, so perhaps that’s when we’ll see a major bottom.
The most important thing, though, is that neither gold nor silver had to wait for this (or for the rally in the USD Index) to decline visibly. This is in perfect tune with what I wrote yesterday:
Please keep this in mind, because its important context for the recent move back up to the rising resistance line. This move is small, quiet and easy to ignore. Technically, it’s important. Will this lead to a sharp slide, like what we saw in April 2013? It doesn’t have to happen right now, but it’s likely to happen within the following weeks or months, and the following days are one of the periods when this could realistically materialize.
My point here is that a pause is not the reason to drop one’s guard. It’s precisely this kind of no-volatility environment that can results in the biggest price moves.
“American forces hit missile launch sites in Iran and boats trying to place mines, US Central Command said in a statement.”
That’s not how two sides of a real deal interact. That’s how two parties interact if they want to stab each other in the back.
If the negotiations fail – like they did in all previous cases – we might get our trigger.
If it’s not that – something else will trigger it.
Perhaps no trigger was needed after all.
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Thank you.
Sincerely,
Przemyslaw K. Radomski, CFA