Our short position in gold remains profitable despite the lack of action on the markets.
But that’s just peanuts compared to what’s to come.
As not much is happening on the markets, I’ll provide you with a quick update, and then I’ll do the following:
- Discuss the reversal in stocks.
- Provide context for the current outlook for mining stocks.
Let’s start with gold.
Gold is down after another attempt to move higher – the latter failed, and the outlook remains bearish. The profits on the short position in gold just increased.
Please note that the current back-and-forth trading is somewhat similar to what we saw in mid-June, and perhaps the mid-June – now period can be viewed as a head-and-shoulders pattern, with the late-June top being the head.
This would explain why the current price moves and the mid-June price moves are similar – both shoulders often retain some degree of similarity.
This is a weak (but still) confirmation of the bearish points that I made previously. Weak because the pattern is not yet complete. This doesn’t matter, anyway, because the outlook is already strongly bearish even without this formation.
In yesterday’s analysis, I commented on the above chart in the following way:
What I’d like to add here is that it’s not only gold on its own that is suggesting that it will decline soon, but the same indication is also coming from the USD Index.
The latter declined, touched its 50% Fibonacci retracement and the May high once again, and then it reversed in a clear manner. It looks like the local bottom is in.
Since the USD Index, and gold tend to move in the opposite directions, the above is likely to translate into lower gold prices.
Indeed, the local bottom was in at that time, and the USD Index is now testing its recent highs. It’s likely to break higher sooner rather than later, as the short-, medium-, and long-term trends in it are UP.
Having said that, let’s take a look at the mining stocks.
During yesterday’s session miners first jumped, but then declined during the day. Overall, nothing changed, and with the GDXJ very close to the declining resistance line, it’s literally pennies to the upside, and dollars to the downside situation. In my opinion, the risk to reward ratio strongly favors a short position here.
Now, the key thing is that this could be the start (actually, the start was likely in May) of a much more powerful decline than seems possible based just on the above chart.
The next strong support for the GDXJ is in the $33 - $34 area, that is based on the rising support line and the 61.8% Fibonacci retracement level. That’s where we might see a bigger rebound (perhaps a tradable one).
The GDXJ has been trading in the 40s for a while now, so a move to the low 30s might seem unlikely, but that’s what the charts are suggesting (and more, but I’ll move to that shortly).
The medium-term declines in the GDXJ can be significant, and given the similarity to 2022 in terms of shape of the rally, and the top as well as other indications coming from other markets (as discussed on Friday), it seems that another 2022-style decline is already underway.
That decline cut GDXJ’s price in half (approximately). Can this happen also this time? Of course, especially if the general stock market declines substantially (which is likely as well).
But that’s not all. Let’s zoom out some more.
The previous chart made it seem like a move back to the 2022 low was a decline that’s already enormous, but that’s not true.
If stocks fall substantially, then miners can fall REALLY hard. Remember the 2008 slide? Or the 2023 one? In particular, the latter took place after the XAU Index broke below its rising dashed support line.
When the XAU Index breaks below the analogous line, is where the decline could take a truly epic form.
The basis for this move is already here – we have an excessive situation in stocks (Nvidia’s Enterprise Value exceeded 10% of the GDP, which is ridiculous by any standards, that’s even crazier than what we saw at the 2000 top!), we have a verified breakdown in the Chinese stocks, and we know that in the second stage of the declines in the latter, gold and mining stocks fall significantly.
(Thanks for sharing that image, Simon!)
So, yes, the 2022 bottom might not be the final bottom for mining stocks.
Their 2020 bottom or even lower seems to be a much more likely target for when the decline really develops momentum.
Think about it – while I can’t guarantee this, and it’s just my opinion, with a slide this big (also, as fear is a stronger emotion than greed, it’s likely that the fall will be faster than the rally was), the profits made on this decline could be astronomical.
Thank you for reading my today’s free analysis. If you’d like to read more and stay up-to-date with the quick trades, intraday Alerts, and all the key details that my subscribers are getting, I invite you to sign up for my Gold Trading Alerts or the Diamond Package that includes them. Alternatively, please sign up for my free gold newsletter today.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
P.S. While I think that gold will move lower in the following months, please note that I’m keeping my insurance capital (physical gold / silver) intact. If you want to establish this capital or you want to buy gold/silver now anyway(or plan to do so soon), I encourage you to do so using the gold dealers that we trust. The above link will take you to a page that includes one US and one UK dealer. The former also has a pretty cool Inflation / Retirement Calculator, I encourage to check it out. PRO TIP: fill out their quick form – when you decide to buy gold, it will be faster to proceed at that time thanks to having a connection with the dealer.