Miners declined once again yesterday, regardless of the stock market’s upswing. Can nothing save miners?
In short, that seems to be the case. Ok, if we saw another war break out somewhere, gold would get a push higher and miners would be forced to move up in the near term. But that’s unlikely to happen. Also, the effect would most likely be just temporary.
In late February 2022 Russia invaded Ukraine, and the war continues to this day. Soon before the war started, the GDXJ moved from its lows slightly above $36 to above $50. It’s now below $34 even though the war continues. It’s below $34 despite the conflict in the Middle East.
If two wars and stock market at new highs were not enough to push mining stocks higher, and the latter declined nonetheless, how can one really expect them to soar in the medium run?
Don’t get me wrong – they will rally. And they will rally in a spectacular manner during the first part of the big, medium-term uptrend in the (entire!) precious metals sector, but we would first need to see a major bottom, so that this uptrend could start.
For now, miners’ medium-term outlook is incredibly bearish.
Some of you might think that I’m just using that word for linguistic aesthetics. No. I’m using it to emphasize that the outlook for mining stocks is not “just” bearish – it’s really extremely bearish.
Stock market just moved to new highs.
Gold – the primary driver for mining stock prices (miners are producing and selling gold and silver, after all) is close to its all-time (just nominal, but still) highs.
Those are the two primary drivers of miners’ prices. Based on the above, one would expect miners to be at least close to their all-time highs, right?
Nothing even close to something like that is taking place. The GDX ETF (proxy for senior mining stocks) is less than half as expensive as it was at its 2011 top, and the GDXJ is valued at only about one-fourth of its 2011 top valuation.
The medium-term trend in the GDXJ is extremely bearish as well.
On its own it might not look that bad, but when you compare it to how high the S&P 500 rallied in the recent months, it becomes obvious that the situation in miners is really, really bad. Please look at the area that I marked with a red rectangle. Stocks are up – miners are down. Significantly so.
And when stocks finally do decline, miners are likely to truly plunge – just like in 2008 and 2020.
As I wrote yesterday, the situation in the S&P 500 is currently similar to what we saw at the late-2021 – early-2022 top. Quoting:
And we might not need to wait for that [decline] for much longer, either. If you look at the most recent trading pattern and compare it with what we saw at the end of 2021 and in early 2022, you’ll see that it’s the same kind of price movement.
In both cases we saw two local tops along with two higher lows and then a sharp rally to new highs, which turned out to be the final top.
We saw the two local tops with two higher lows (so, we saw a consolidation), and on Friday we saw a sharp rally to new highs. Is this a final top? I view that as a likely outcome, especially given that commodities (like copper and silver) are not performing well. Also, have you seen that huge plunge in natural gas?
Weak commodity prices suggest that there’s no significant industrial demand, which is connected with insufficient demand for products coming from many companies. This, in turn, indicates weaker sales, revenues and profits. This means lower stock valuations.
Something doesn’t add up, especially since credit is still relatively expensive compared to the what the markets were used to – the interest rates haven’t fallen.
When stocks decline in a meaningful way – and they are likely to – silver and junior mining stocks are likely to be affected to particularly high extent. And – as you can see in today’s pre-market trading – silver just can’t wait to move to new lows… New lows are most likely approaching in case of miners as well and it seems that profits on our short position in junior miners are going to increase shortly.
Interestingly, stocks reversed yesterday.
Daily reversals often end in rallies, and we just saw a daily reversal candlestick of this kind. Precisely, it was a so-called gravestone doji reversal candlestick.
This, plus the above-mentioned self-similar pattern, plus the fact that the RSI is very close to 70 makes it quite likely that the top is here or at hand.
This means that the decline in the junior mining stocks can accelerate any day now.
The situation in the USD Index provides another good reason for it.
The U.S. currency index is after another bottom close to the 100 level. This level used to be resistance, and now it has proved to be strong support.
The last time we saw a rally from below the blue support line, the USD Index soared to about 107. It’s likely to rally higher this time, but what is particularly interesting at this time, it’s the shape of that rally.
The USD Index moved considerably higher over the course of several months, but it paused a few times along the way. And the key thing is that the size of the pauses was similar to what we see right now.
This means that the USD Index might be ready to rally again right away or very soon.
The GDXJ declined yesterday, but overall, it continues to consolidate after breaking below the neck level of its head and shoulders top formation. The implications remain very bearish. The breakdown was confirmed, so it’s clear that the next big move is just around the corner.
When stocks decline in a meaningful way – and they are likely to – silver and junior mining stocks are likely to be affected to a particularly high extent. New lows are most likely approaching in the case of miners as well and it seems that profits for our short position in junior miners are going to increase shortly.
The situation in junior mining stocks currently offers an exceptional risk to reward opportunity in my view - I invite you to take the 10-day free trial of my Gold Trading Alerts and take advantage of it before it’s too late.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief