Amidst plummeting gold and mining stock prices, a hidden connection between gold stocks and the precious metal is unveiled.
That’s what the gold and mining stock prices are saying right now. I provided a LOT of context in Friday’s flagship Gold Trading Alert and I provided even more background in yesterday’s analysis, where I emphasized the importance of looking also at other markets while forecasting gold prices. In particular I focused on the important link between gold stocks and gold.
The prices of the former “should” be clearly linked to the price of gold, because – after all – the mining stocks are producing and selling gold. And if not, then they are looking for gold and investors being forward-looking, already discount the future revenue into the current price. And it works, but not clearly. Many other factors come into play while pricing mining stock share prices; some of them are company-specific, and others are not.
The company-specific risks can be averaged out by having a portfolio that consists of multiple mining companies or by investing in an already diversified ETF, like GDX (senior miners) or GDXJ (junior miners). The non-company-specific things that cause mining stock prices to move in one way or another, and deviate from the gold price, include emotional reasons. The stage of the bull or bear market that the market is currently in will determine if the information coming from the gold market will be amplified or discounted.
Consequently, by looking how at how mining stocks perform relative to gold, we can detect the emotional status of the market and thus greatly increase the accuracy of our price projections. Of course, there are no certainties in any market, but the above helps us push the odds in our favor.
Now, I already wrote about the below chart yesterday, but today, I’d like to emphasize that it has an additional bearish layer that’s visible from a very short-term point of view.
I added the Fibonacci retracement tool to the final part of the chart to show you how much of the recent sharp decline was corrected and what’s the current status.
The key thing is that gold (GLD ETF) is right at its 38.2% retracement, while both: GDX and GDXJ are below their 61.8% retracements.
And if that wasn’t clear enough, please look where both proxies for mining stocks ended yesterday’s session – it was below yesterday’s early (intraday) low. GLD closed above that early (intraday) low.
Now, if there was a severe decline in the general stock market, this would be normal, as mining stocks are, well, stocks. Consequently, every now and then, they get the stock market’s influence. Juniors even more so.
But no. Nothing like that is happening on the stock market – yet.
Therefore, it’s crystal-clear that mining stocks are underperforming gold due to some other reason. And in all likelihood, that reason is that the current big move in the precious metals market is to the downside. That’s what the emotional responses of mining stock investors seem to confirm.
Also, this relative weakness can be seen in how gold is performing relative to one of the key drivers of its price – the U.S. dollar.
In today’s pre-market trading, gold moved lower, and it moved quite close to its recent lows.
At the same time, the USD Index moved higher just slightly – less than gold declined.
This means that gold amplified USD Index’s indication. After all, it makes perfect sense for both to move in the opposite direction – gold is priced in the USD.
This is yet another confirmation of the current bearish case for gold, silver, and mining stocks (the entire sector tends to move lower together).
The situation is most bearish for junior mining stocks, though, which are mostly influenced by the performance of the general stock market.
The bearish case for junior mining stocks is actually even stronger due to those miners’ fundamental reality. And in case of many junior miners, that reality has four ugly letters: d e b t.
Sure, senior mining companies can (and do) have debt on their balance sheets. However, those companies have revenue streams that cover that debt, or at least the interest. Junior miners that are not producing, but just looking for gold (or developing their properties, but not producing) can face the risk of bankruptcy due to high debt cost.
Now, since the market is most likely in the “return to normalcy” stage, and investors still expect the rates to be lowered any day now (in my view very incorrectly so, because inflation is political and other issues at hand are not – at least not to that extent), the above-described effect likely is not fully priced in. In fact, it might not be priced in at all.
Again, markets are forward looking – so if investors expect the rates to be lowered shortly, then they are not projecting rates at higher levels in the future. Therefore, they don’t take the risk of bankruptcies into account – at least not to the extent that they likely should take it into account.
So, as investors start to realize that rates will not be lowered immediately, and not without a severe plunge on the stock market, junior mining stock prices are likely to slide profoundly.
In my view, there is a tremendous opportunity in taking advantage of lower junior mining stock prices in the following weeks and months. If someone allowed one to travel back to 2008 and enter positions before the slide happened, what positions would they take? Of course, they would short mining stocks (perhaps FCX as well, and perhaps many other companies that declined at that time). And now, in my view, we have the same kind of opportunity. At least that’s what I see on multiple charts that are out there. I don’t mean just the above, but also the ones that I included in Friday’s flagship Gold Trading Alert.
Speaking of the FCX, it does look like it just can’t wait to slide.
It almost completely ignored the most recent run-up in the stock market. It looks like the profits on the short positions in FCX that we entered in early April are likely to increase substantially soon. And profits from a short position in the GDXJ is likely to join in as well.
Now, let’s keep in mind that the outlook for gold, silver, and mining stocks is bearish… But it’s bearish for short- and medium-term ONLY.
I fully expect gold, silver, and mining stocks to truly soar in the coming years, so those, who insist on holding their purchases and waiting for much higher prices, are likely to get them… Eventually.
So, in a way, in my opinion, people with the buy-and-hold approach toward gold, silver, and/or mining stocks, will likely be profitable in the following years, but those who wait until this decline is complete and back up the truck at least close to the bottom, are going to be even more profitable.
And those who manage to take advantage of the current decline by actively profiting from it are likely – in my view – to reap astronomical rewards, as they would benefit from moves to both sides – first to the downside, and then thanks to the huge comeback.
The above – and my continuous analyses of the precious metals market – are likely to help one navigate those muddy investment waters and reap the above-mentioned benefits.
Now, I got the feeling that – in addition to this kind of support – many might also be interested in the “end game”. How high will gold rally ultimately? When is it time to sell gold – at what price? How much money is there to be made in the long run?
I’m usually focusing on the short term or medium term in my analyses, and I’m just saying that “well, I’m bullish for the long run”.
This issue is not that simple. In fact, it’s not simple at all because, in the long run, many (!) things can change. Things like the “monetary system” that are unlikely to change over the short- or medium term.
What should the gold price be compared to if the value of the fiat currencies evaporates?
This issue is complex, and I don’t think that I would be able to convey all the key points in a written format in an easily digestible way. And some of the things that I would be writing might require immediate explanation, which I can’t provide due to the lack of interactivity in the case of this standard format of communication.
Consequently, I decided to run a webinar dedicated to the all-important issue of gold’s long-term potential. If you are reading this, then the odds are that you might be interested in it, which is precisely why I’m writing about it here.
I’m going to additionally cover the thing that people are usually asking me about with regard to long-term investments in gold: own physical or not? If using funds is acceptable, then what funds to choose (of course, that will be just my personal opinion in general, not individual investment advice), and I’m going to also talk about the extra aspect that very few are paying attention to – the geographical diversification.
This webinar is something that I’m going to provide in addition to my regular (and intraday) Gold Trading Alerts, so it’s a separate service (single-time investment in the webinar is $199) – also from the technical point of view, as I’m going to hold the webinar right here, on Golden Meadow.
I’m going to hold that webinar and speak about the upside potential, reasoning behind it and other important (and related) matters tomorrow at 2 PM ET (which is 11 AM PT and 8 PM CET). I plan the webinar to take 60 minutes and then I plan another 30 minutes for Q&A.
If you can’t participate at those times, no worries. We got you covered. The webinar will be recorded (including the Q&A), and the recording will be made available to those who sign up for the webinar regardless of whether they attend the webinar or not.
The great thing about live participation is that you’ll be able to ask your questions and quite likely get them answered by me – live. (Of course, if there are hundreds of questions, I won’t be able to accommodate all of them, but I’ll be picking the ones that appear most relevant to the biggest number of people).
You are hereby cordially invited to participate in the above-mentioned webinar :) Please use this link to sign up, and I’ll see you tomorrow.
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Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief