The Tricky Rally in Gold Stocks – Don’t Be Fooled

Gold price and gold stocks soared... Only to disappoint. What was the nature of this rally?

It was only two months ago - in April - when everyone and their brother were convinced that gold stocks are going to soar? They laughed at my warnings that this kind of sentiment is what accompanies tops, not buying opportunities.

The RSI was just pointing to GDXJ being most overbought IN YEARS. Literally.

The Tricky Rally in Gold Stocks – Don’t Be Fooled - Image 1

That was the top – probably the yearly top and the start of an enormous decline.

What happened last month clearly confirmed the above scenario.

A bit over a week ago, I wrote the following about the above chart:

Now, the GDXJ just touched its rising red support line that’s based on two important bottoms, and at the same time, the GDXJ-based RSI (based on daily prices) just moved slightly below 30. Both are good reasons to expect a near-term rebound in this ETF.

So, a rebound appears to be in the cards. However, whether this rebound is anything significant is a completely different matter.

You see, there were times when the GDXJ moved much higher based on the RSI at 30, and there were times when it moved back and forth and then plunged once again.

The thing is – out of the recent declines, the current move lower is most similar to what we saw a year ago, more-or-less at the same time of the year. In fact, even this most recent “seasonality” suggest that this analogy is most useful here.

If you look at late-April and early-May 2022, you’ll see that what happened was quite misleading for those that tried to take advantage of the supposed rally. The RSI was very close to 30 at the beginning, and GDXJ’s value was very close to its 200-day moving average (the red line) – just like what we see right now.

All that happened then was a relatively small upswing that was then followed by another huge wave down.

Since this is a quite likely outcome, the question is, if it’s worth to risk missing the decline in order to try to catch a dollar or two on the upside.

I might have considered this, if it wasn’t for the debt ceiling issue.

In my view, we’re likely headed toward the obvious – that it will be raised and that there won’t be any U.S. default. And then, as the tensions subside, we might see some sort of relief rally in stocks, but gold price could decline. After all, why own a safe-haven asset if the risk of the default was neutralized? Of course, there are many other reasons, but since this risk is lower, the willingness to purchase gold is also likely to be lower (and the willingness to sell it is likely to be higher).

As we move toward the above, all sorts of information could hit the market, so it might become “obvious” to the investors that “it’s all good” any day now.

In short, we have indeed seen the above taking place.

There was a corrective upswing, but not a significant one.

Of course, one might argue that the daily rally that we saw last week was significant on its own, and that true. However, given that it was immediately followed by a sizable daily downswing and gold is down in today’s pre-market trading, too, it means that it would have been very difficult for anyone taking advantage of this rally to get back into the short position or at least exit the long position profitably.

It seemed more realistically doable to just focus on the bigger picture rather than to try to time the intraday price swings.

The marvelous thing that happened due to last week’s sharp daily upswing is that the GDXJ corrected 38.2% of its recent decline, and at the same time the GDXJ-based RSI indicator moved to 50 (approximately). That’s exactly what the GDXJ needed at the same time, last year in order to truly slide in the following weeks.

And you know what? Gold miners didn’t even care that the general stock market moved so much higher on Friday, and they declined, nonetheless. It’s incredible just how weak mining stocks are at this time.

And yes, this creates a tremendous opportunity that many will notice only after it’s too late to take advantage of it.

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