Ready to Profit from Miners’ Slide? It’s High Time to Be.
Surprised? No, you’re not. You read my analyses, and you knew that gold miners are going to magnify stocks decline when it happens.
In my analysis yesterday (written and posted before the markets opened in the U.S.), I wrote the following:
The S&P 500 futures formed a clear shooting star reversal in late July, and it can also be viewed as a failed attempt to move above the mid-July high. Stocks attempted to move above this level also in early August and they failed once again. Today’s early decline suggests that the rally might be over.
Why is this important for mining stocks?
Because they moved lower substantially yesterday, while stocks moved lower just a little. So, if stocks are going to move lower in a really significant manner (and it’s likely to happen either very soon, or soon, anyway), then miners are likely to truly plunge.
And here’s what happened:
Stocks declined by a lot… And by a little at the same time.
By a lot because that was the first really notable decline in a relatively long time. The S&P 500 declined by almost 1.5% after all.
By a little, because when looking at the recent price moves from a broader perspective, it’s clear that so far, the decline is barely visible.
Even if stocks are to decline just like they declined after previous highs that were preceded by extremely overbought RSI, they are likely to slide all the way down to their rising red support line, which is currently at about 4,200. But that would be a very bullish scenario, in my view. Given the increases in interest rates and how much demand needs to be curbed for inflation to really stabilize at lower levels, it makes sense to expect much (not a little) lower stock values.
That’s not even the most important point, though. The most important thing is how mining stocks reacted to S&P’s decline. I wrote that miners are likely to magnify those declines.
Here’s what happened:
Junior miners plunged, declining over 3%. They are not very close to their June low, and they are not that far from their yearly low either.
The GDXJ is just about $2 away from its 2023 lows, and it’s about $9 away from its 2023 high. It’s also lower than it was when the year started.
At the same time, the S&P 500 is very close to its yearly high and well above its yearly open.
Gold price is also closer to its yearly highs than yearly lows and well above its yearly open.
And yet, junior mining stocks are so damn weak!
How can it get any clearer that junior miners want to slide (and make a small fortune for those that are able to notice that and be positioned in advance)?
Let’s compare their performance to what happened in GLD and SLV.
The monthly perspective allows us to see the obvious even better.
Silver is above its June close. Gold is above its June close. But not the GDXJ.
The GDXJ is already below its June close – and this is the case even though the USD Index is not back above its June close.
That’s why we’re not shorting gold, nor are we shorting silver. But we are shorting junior mining stocks – no matter how you look, the bearish confirmations pop-up like mushrooms after heavy rain.
Oh, and speaking of confirmations, did you see what the USD Index just do?
It just jumped above its declining short-term resistance line. This means that we could get a tiny breather here, but it is a powerful bullish sign.
Even though the USDX is after a sizable short-term rally, it didn’t reverse when this line was reached. No. The USD Index moved through it like a hot knife through butter.
Implications? More rallies ahead for the U.S. currency.
And, yes, you guessed correctly, this implies lower precious metals prices. And yes, in particular, junior mining stocks are likely to decline truly profoundly. In fact, if you look at the charts that I provided today prove that miners just can’t wait to slide even more.
This, in turn, means that the huge profits that we recently reaped in the FCX recently are likely to be joined by massive profits from the current short positions in the junior mining stocks and in the FCX. Stay tuned!
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Przemyslaw K. Radomski, CFA