The Reality Behind Miners’ “Strength”

Gold's recent huge-volume reversal suggests a significant shift in sentiment, possibly marking the end of its recent rally.

On April 15, I wrote the following:

Gold’s huge-volume reversal is definitely THE news that got the spotlight last week. What does it mean?

It most likely means that “this is it”. This was the final top for the price of gold for at least some time. At least that’s what the huge-volume sessions meant previously, especially when gold was similarly overbought as it was recently.

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I marked those periods on the above GLD ETF chart with red – when RSI based on the GLD was over 80 AND we saw a huge spike in the levels of volume, it meant that the big rally in gold price was over.

We saw volume spikes in several other cases, and RSI was very overbought in other instances as well, but it is the combination of both that makes that current case – and its three analogies so special.

RSI well above 70 indicates a red-hot sentiment, and the extremely high-volume level proves that it reached its extreme as so much capital / gold exchanged hands.

Besides, gold didn’t “only” (as if it was a small feat, and it isn’t!) move on huge volume while being extremely overbought. It also reversed on that huge volume, which means that the latter confirmed that reversal.

Indeed, gold (and GLD) is now considerably lower. But is it low enough for a new rally to emerge?

That’s unlikely.

Please note that the declines in gold that followed previous similarly important reversals were much bigger than what we saw recently. Consequently, it’s likely that the decline will continue.

And speaking of declines, the elephant in the room that is being ignored by almost everyone is the situation in world stocks.

Incorrectly so, because it has very important implications on the current outlook for mining stocks and the way in which the recent price moves in the miners should be viewed. This is where context really matters.

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World stocks moved to their all-time high, which already worked as the ultimate resistance that stopped the rally, not just in stocks, but also in the miners (lower part of the chart).

And just as the miners topped along with stocks at those levels, the same thing is likely happening now.

Based on the most recent decline in world stocks (and RSI based on it), it seems that the slide has already begun.

The above 30-year chart also does a great job at putting the recent rally in the mining stocks into perspective. Can you see how little miners rallied in 2024 compared to where they were moving previously? And that’s what happened with gold rallying to new all-time (nominal) highs. Miners are truly extremely weak, and when stocks finally slide in a major way, miners are likely to decline in a really extreme way.

The thing that I want to emphasize today is the timing of miners’ reaction to world stocks’ slide after their major tops.

We had two cases (marked with an orange rectangle) when world stocks had topped at the levels at which they topped recently, and there is one very important thing that those situations have in common.

In both previous cases (2008 and 2022), when the decline in stocks started, mining stocks faked strength.

The miners followed stocks much lower, declining in an extreme manner, but it didn’t happen without a fake rally beforehand.

Consequently, the recent “strength” in the mining stocks is not something that invalidates the current bearish outlook for them – it’s a natural part of the huge bearish pattern.

Besides, if you compare how GDXJ has recently fared relative to other stocks, you’ll see that the situation became excessive from the short-term point of view, and that the trend has likely already reversed.

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In RSI terms, juniors haven’t been this overbought… Ever. I mean ever since the GDXJ was launched. The RSI was as high only right after the GDXJ started trading, but it was only due to the way RSI is calculated, so it doesn’t count at all.

Compared to all real cases, the situation is now more excessive, even than it’s been at the 2016 and 2020 tops!

This is ridiculous…ly bearish. The sentiment extremes are exactly the moments when one should be focused on being positioned to benefit from a move to the other side. This time everyone and their brother appears to be bullish, so it’s a price decline that most likely presents the great opportunity now.

Also, even when the ratio was not as extremely overbought (RSI was “just” at the red, dashed line), those cases were still great times to be entering short positions in the GDXJ in 4 cases out of 5.

With the situation being so extremely excessive, it’s now very likely that the bullish cycle is indeed coming to an end in the case of the mining stocks (and in case of the precious metals market in general). We might see another big wave up once gold corrects (or once it declines by a lot, which seems more likely to me), but at this time, it’s very likely that gold, silver, and miners have rallied too far, too fast and are now going to slide.

I’d like to emphasize one more thing about gold stocks and their relative strength in general – also toward gold.

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Mining stocks’ reaction tends to weaken before the reversal, but the exact moment of the reversal and its immediate surroundings could be accompanied by a brief return of miners’ leverage. We’ve seen this multiple times in the past and it seems that we’re seeing it once again.

If you focus on the black rectangles, you’ll see that mining stocks are weak when the rally starts to end, but before the slide, they “catch up”. This might be connected to the general rule that the laggards and overall weak stocks catch up with the leaders (or even surpass them) when the investment public buys. And that happens close to market tops.

So, once again, no, what we saw recently in mining stocks is unlikely a sign of true strength. The situation creates an enormous opportunity, but it’s not about going long mining stocks – at least not yet.

It seems that the major tide is here in the case of currencies (USD/YEN!), stocks (tech stocks, broad market), bitcoin, and precious metals. It also seems that junior mining stocks provide an excellent opportunity right now, and I invite you to subscribe and read all key details in my premium Gold Trading Alert (along with trading details). Subscribe today.

Thank you.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief