The Near-Term Moves in Gold and Breathtaking Context for Gold Stocks
Another day, another slide, another yearly low – that’s the current theme for junior miners. Is the day of reversal coming?
I started my analysis yesterday with an overview of the relative performance of gold, silver, and mining stocks. Those comments remain up-to-date.
In short, while gold is moving back and forth, the GDXJ (a proxy for junior miners) is moving to new lows. In other words, junior miners clearly underperform gold.
Whenever miners refuse to decline while gold declines, it’s a bullish indication. Right now, we have the opposite of that.
Silver is now moving lower. However, it outperformed gold in a clear manner last week, so one could say that silver did flash its classic sell signal (short-term outperformance of gold).
Let’s zoom out a bit and see how these markets performed along with the USD Index in the last couple of weeks.
Back then, I emphasized the importance of the weekly reversals that we saw across the precious metals market and in the USD Index. I wrote the following:
In my view, the real interest rates are up and about to soar higher, the USD Index has most likely bottomed, and the precious metals have topped in a spectacular manner. The rally in gold, silver, and miners was indeed sizable, but… It’s over.
What’s next? Something exciting or something scary – depending on how positioned and informed one chooses to be.
Hopefully, what happened since that time was exciting for you and not scary (as it likely was for precious metals permabulls) – the precious metals prices tumbled while the USD Index soared.
Every week since that time (including this one that isn’t over yet) has meant lower prices for gold, silver, and mining stocks and higher values for the USDX.
However, since no market moves up or down in a straight line, there will be corrections – and it seems that the precious metals market is ripe for a corrective upswing. If not right away, then soon. In fact, the latter is more likely.
Looking at gold, we see that it’s trading back and forth close to its 38.2% Fibonacci retracement level, while the RSI indicator (upper part of the chart) is still visibly above 30.
The latter tells us that gold might need to decline some more before the reversal and a more meaningful correction take place. So, it points in the same direction as the miners’ underperformance of gold that I discussed earlier.
It’s not the RSI on its own that makes this indication so important, but rather the combination with the signal from miners and the fact that the current situation in gold is similar to what we saw in April/May 2022.
Since the price moves have been similar for weeks (the size of the short-term rally that preceded the top, the RSI’s position at the top, etc.), it’s quite likely that they will continue to be similar in the near future. Back in May 2022, gold kept on declining (with unimportant breathers along the way) until the RSI moved to the 30 level. Since it’s not there yet, gold might need to decline some more.
Of course, the above means that silver and mining stocks are likely to decline, too. In fact, miners are likely to decline more.
There’s also a very interesting situation in the general stock market that could impact the situation in the precious metals area – especially for junior miners.
The S&P 500 approached its medium- and short-term support lines as well as the psychologically important 4,000 level. The S&P closed slightly below the latter, but it was too near this level to view this breakdown as confirmed.
If stocks move higher right away, it could trigger a rebound in the precious metals market, as they (PMs and stocks) rallied and declined together.
On the other hand, if stocks break lower here, PMs could follow and finish their decline based on that. In other words, stocks’ decline could be the final push that gold, silver, and miners get in order to move to their short-term bottoms.
The comments that I made yesterday regarding the timing/targets for mining stocks, remain up-to-date.
But… Let’s keep in mind that it’s all just about the short term. The big picture is much, much, much more important right now, and the really big picture is as extremely bearish as it gets.
World stocks are repeating their 2008 performance with a slight difference – this time the initial decline from the similar price levels was bigger. The subsequent corrective upswing was bigger too, but these moves were proportional – in both cases (now and in 2008), stocks corrected about 61.8% of the initial decline.
And then it happened.
Not just in stocks but also in other assets, including gold, silver, and mining stocks. In particular, silver and gold stocks were truly hammered.
The lower part of the chart features the XAU Index, a proxy for both gold stocks and silver stocks.
First of all, this comparison of mining stocks and other stocks could appear shocking, and rightfully so.
The XAU Index is well below its… 1995 highs (yes, miners are really so weak), while world stocks are much higher.
The second shocker is how far and how fast miners declined in 2008. Starting with the final corrective upswing, the mining stocks index declined by a breathtaking 69.2%!
Less than a third of the starting value.
It took just a few months for this decline to materialize.
So far this year, the XAU Index has declined by 18.7%, counting from the yearly high to yesterday’s intraday low.
And so far this year, the GDXJ ETF has declined by 19.3%, using the same measurements.
As a result, the performance of both may be roughly comparable, or — more likely — junior miners may decline more due to their closer link to the general stock market. This means that based on the above-mentioned analogy to 2008, we can’t rule out a decline by about 70% (or more!) in the GDXJ starting at the recent short-term high ($41.16).
Shaving off 70% of that value leaves us with $12.35 as the possible downside target for the GDXJ ETF.
Impossible? It has already happened! (In the XAU, as the GDXJ wasn’t trading at that time yet).
So, yes, the outlook for the mining stocks is truly extremely bearish for the following months. However, in the very near term, it seems that we might see a corrective upswing, and this move might be worth trading. The emphasis is on “might” – I’ll send out an intraday Alert to my Gold Trading Alerts subscribers if there’s a good opportunity to adjust the trading position or simply go long.
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Przemyslaw K. Radomski, CFA