The Perfect Short-Term Confirmation for Gold
Sunshine Profits | Feb 22, 2023 10:56AM ET
Gold stocks just closed at a new 2023 low. Not only that – miners declined more than gold while silver was strong. That’s a VERY bearish combo.h2 Silver Joined the Party/h2
Let’s jump right into the chart that features the 4-hour candlesticks of the VanEck Junior Gold Miners ETF (NYSE:GDXJ) (a proxy for junior miners), the SPDR® Gold Shares (NYSE:GLD) (a proxy for gold), and the iShares Silver Trust (NYSE:SLV) (a proxy for silver). I’m using ETFs in all cases, so that it’s 100% clear that the price performance of all three markets is comparable. After all, continues futures contract sessions don’t end at the NYSE’s closing bell.
Remember how bullish everyone was at the beginning of the year? And when the early-February rally sparked all those “gold to $3,000!” comments? At that time – on Feb. 1 – I wrote the following:
The mining stocks are therefore underperforming gold on a short-term basis as well as on a medium-term basis. After all, the GDXJ didn’t manage to correct 61.8% of its recent decline, while gold moved above its analogous retracement.
The above means that we saw a new bearish signal when taking both into account. However, there are equally bearish indications that we saw previously and that simply remain in place.
We saw the same signal as we’ve been seeing recently – and just as it was bearish back then, it’s also bearish today.
This time, however, the short-term indications are even more bearish!
Simply put, silver joined the bearish party.
Whenever silver’s price rallies on a very short-term basis and gold’s doesn’t, or silver outperforms gold on a short-term basis in a meaningful manner, it’s a bearish indication, and it’s often followed by sizable declines in both markets.
Consequently, we have the bearish combo of weak gold stocks and relatively strong silver.
Oh, and did I mention that miners moved to fresh 2023 lows?
That may seem like a really big deal (and, in a way, it is a big deal), but when you compare the recent downswing to what could be lurking ahead, it becomes clear that “we have seen nothing yet.”
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On the above chart, I used the ARCA Gold BUGS Index (HUI) as a proxy, as it’s been around for a long time, and I want to put the recent move lower into proper perspective.
Gold stocks moved lower in a manner that was almost exactly as fast as what we saw in 2008. The red dashed lines show this similarity, and the green dashed lines show the analogy to the 2013 decline.
Why would those situations be similar?
The technical patterns are similar to a considerable extent (practically the only sizable difference is the early 2022 rally that’s likely based on the Russian invasion), and we even got the same kind of sell signals from the RSI (upper part of the chart) and Stochastic (lower part of the chart) indicators.
h2 The Fundamental Trigger/h2On the fundamental front, we now have a perfectly bearish situation in which real rates are high and rising, and most investors appear to be oblivious to this fact. But the wake-up call will arrive, and when it does, it will likely arrive violently. Remember how the markets reacted to a different fundamental event about 15 years ago? The markets plunged in the aftermath of the subprime crisis. This time, the fundamental trigger is different, but it’s likely to hit just as hard – if not harder.
This means that gold stocks could decline really profoundly in the following months.
Will there be corrective upswings along the way? Of course!
No market moves up or down in a straight line. And trading those might or might not be the best idea. Based on my research, the corrective upswings that happen early in the huge declines could still be considered “tradeable” as they are quite big and they also take a decent amount of time to unfold (not something that changes overnight).
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Disclosure: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
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