Rally in the Mining Stocks? More Like a Pause…
Gold is trying so hard to move above $2,000… The dramatic attempt gets many heads turning, but… It doesn’t look good.
It doesn’t look good because gold is pretty much the only part of the precious metals market that’s been moving much higher recently. $2,000 is slightly above gold’s 2011 high… In nominal terms. In real terms, gold is not even close to its 2011 high despite the wars in Europe and the Middle East.
Silver is not even half as expensive as it was at its 2011 top. And mining stocks? Ridiculously weak. They are not only below their 2011 and 2008 highs. They are below their… 2004 high! In nominal terms! That’s how weak they really are.
Does the above chart feature a huge rally? No, it looks like a huge correction after a huge decline.
The green area that ended the rally that started in 2008 is similar to the green area that we see now, that likely ends the rally that started in early 2016.
Back in 2013, gold stocks were similarly weak. And then they plunged in a spectacular manner – even without big help from stocks. When they did get that bearish push from stocks – in 2008 – their decline was truly gargantuan.
The above HUI Index (a proxy for gold stocks) chart can help to put the recent price moves into proper perspective.
And… What happened recently?
Pretty much nothing. The HUI Index is consolidating after the breakdown below the rising purple support line based on the 2016 and 2018 bottoms. This line stopped the 2020, 2022, and the previous 2023 declines. Given those invalidations, the lack of invalidation right now – given gold’s move above $2,000 can be viewed as a sign that this time is already different.
And you know what happened in 2008 and 2013 after analogous breakdowns? That’s right, gold stocks declined in a profound manner.
Of course, if one focuses on just the day-to-day price swings, it’s easy to forget about the really big picture that the above chart shows.
For example, yes, the GDXJ closed a little above the previous November high. What did it change? Once again – nothing. This small move above the previous high was not confirmed, and what didn’t happen is actually more important.
What didn’t happen was that the GDXJ didn’t move back above the rising blue resistance line. In other words, yesterday’s upswing was nothing more than yet another verification of the breakdown below this line!
So, it’s the case that yesterday’s rally was not only meaningless from the long-term point of view but also from the short-term point of view.
The next big move is very likely to be to the downside.
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Przemyslaw K. Radomski, CFA