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So, yeah, gold, silver, and mining stocks declined yesterday, and junior miners declined really profoundly.
But I admit the power with which juniors declined yesterday amazed me even more than I thought it would. And I get rarely surprised by the markets.
Why did it have such an effect on me?
Because of how little it took to push the market lower!
Did you see the powerful rally in the USD Index that drove metals’ and miners’ prices lower?
You didn’t see it because it wasn’t there!
Instead of declining, the USD Index actually moved a bit lower, so it didn’t contribute to PMs decline at all!
What was the trigger, then? – One might ask. In reality, markets can move without any specific trigger or event when the technical situation warrants it. Triggers can help to get the ball rolling sooner, though.
In the case of yesterday’s trading, it seems that it was the move in stocks that triggered the declines, but there’s one very interesting aspect of yesterday’s move lower in the S&P 500.
It was small.
Or actually, it was very small.
Hm, no, it still doesn’t cut it. The truth of the matter is…
It was tiny.
Yesterday’s move lower in stocks is barely visible on the above chart. One needs to zoom in to see what stocks really declined.
Even from this point of view, yesterday’s move lower is barely noticeable.
That was not even a full percent move lower. And stocks reversed before the end of the session. Nothing really changed, at least from the day-to-day point of view.
Or did it? I’ll get back to this question later, and now I’ll focus on comparing the above-described “nothing” to what happened in gold, silver, and mining stocks. Let’s start with the former.
Gold declined by over $10, which is not a lot on its own, but it’s a lot given USD’s tiny decline. Gold price is not influenced by the stock market moves to the extent that the mining stocks are, so in this case, it’s the link with the USDX that is most important.
And this kind of dynamic has a huge “SELL!” sprayed in red all over it.
Gold moved lower after moving close to its declining resistance line. I previously wrote that we might get some sort of breather based on the 38.2% Fibonacci retracement being reached but that it’s unlikely to be anything to write home about – and that’s exactly what happened.
Silver – no surprise here – did the same thing. It declined in a more meaningful manner as it’s more correlated with stocks than gold is.
Just like gold, it also bounced off its declining resistance line and now appears back in the decline mode.
And here comes the analytical dessert.
Enter junior mining stocks.
Remember when I wrote that the most recent upswing was most likely fake? The hourly volume clearly indicated that – if one knew where to look that is. But you had the information from me, so it likely didn’t catch you by surprise.
There’s no point mincing words here. Junior miners truly plunged in the last two days.
Now, while gold closed pretty much in the middle between its most recent (late-June – early-July) run-up, the GDXJ ETF closed very close to the lower border of that range.
Juniors are not only sliding here, increasing our profits and making it more likely that we’re getting a good opportunity to go long soon.
They are also weak relative to both: gold and stocks, indicating that this is just the beginning of the really big move!
This is super-exciting because while the writing has been on the wall for a long time, this is a major, clear confirmation that we get on a short-term basis. This kind of confirmation wasn’t necessary, but we do see it.
And you know what? At this pace of decline, it would take GDXJ just a couple of days to make 2023 a down year! All this while gold is about $100 above the price at which it started this year. And while the S&P 500 is almost 15% higher than at the end of 2022.
Juniors. Are. Extremely. Weak.
This creates a tremendous opportunity that will be obvious when looking at it in hindsight. It’s all like one big time-travel to 2008, but we’re before the slide. Very few people are concerned. Most are optimistic and cheerful. The obvious bearish signs are being ignored by the vast majority.
And the stocks’ outlook? I promised that I’ll get back to it. The Fed is most likely to keep raising rates. That’s what they said, and that’s what the data supports. And people appear to be realizing that.
I’m pasting a few titles that I noticed today on Yahoo! Finance.
The battle with inflation will be won only after the Fed succeeds in curbing demand. And this means lower profits for companies and lower stock prices. It’s as simple as that. And it is why Powell has been explaining on numerous occasions that his goal is not to hurt stocks – because he knows very well what needs to happen and what will happen.
And what’s also going to happen when rates increase, and inflation moves lower? The real rates will increase once again! And that’s one of the key fundamental drivers for gold prices. Higher real rates are very bad for gold. With smaller inflation and higher payments on fiat money, the need to own gold is much lower. The same with demand… And prices.
Why would they keep raising interest rates and fighting inflation? Because inflation got political, and voters are really concerned about it. That’s it.
And when the shit hits the fan and stocks do slide – it’s definitely not going to be pretty for the mainstream investor. Initially, the precious metals market – and in particular junior mining stocks! – are likely to take the burden, too. Remember how far miners fell in 2008? Exactly. And junior miners are likely to fall more than seniors due to their link with stocks.
What we saw this week is telling me – no – it’s screaming – that those dynamics are already in play. It’s almost too late to prepare. The best time to prepare was a long time ago (and if you’ve been following my analyses, you are prepared). The second-best time to prepare is today.
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Przemyslaw K. Radomski, CFA