It took so little for miners to decline so much! Just imagine how far they could slide with real triggers…
Mining stocks declined by a lot yesterday, and the most important thing about that decline is that all gold stock proxies – at least the important ones – now show breakdowns below the key support line.
Over a week ago, on January 10, I provided an overview of the mining stock sector and I commented on the breakdowns that we saw in silver seniors and silver junior miners, and I wrote that breakdowns in the HUI and XAU indices are likely to follow. The outlook – as I emphasized – was bearish for GDX and GDXJ ETFs as well.
What happened since that time?
Last week, only GDXJ was after a breakdown below its accelerating support line, and it was right at its lower rising support line.
Today, it’s a few dollars lower. It’s not only below the above-mentioned support line, which already turned into resistance, but it’s also below the December lows and the neck level of the bearish head and shoulders pattern!
That’s a massive deterioration of the short-term situation. While we might see a comeback to the neck level of the formation ($34.5 or so), it’s clear that the big move is to the downside.
We see the same thing in the GDX – both declined substantially in the last few weeks and GDX – proxy for senior miners – is also well below its rising support lines.
The HUI Index (proxy for gold stocks) finally broke lower, too.
The recent slide in the HUI is an important confirmation of the bearish outlook, because it was the proxy for miners that didn’t break lower initially. It bounced from the lower support line and… It turned out to be a fake move, just as we had indicated in the analyses. The current slide proves that the real move is indeed to the downside.
The XAU Index (which includes both: gold stocks and silver stocks) also moved below its rising support line. That’s yet another breakdown confirming the same message – miners are about to move lower.
Silver senior miners (SIL) and silver juniors (SILJ) moved below their December lows, but they didn’t move to their rising support lines. The reason is that those lines are not rising as steeply as the ones in gold stocks, simply because silver miners were particularly weak in early November. So, no, that’s not bullish.
Besides, silver and gold stocks are slightly different sectors, so it’s not right to say that silver stocks invalidate indications from gold stocks.
Now, since the very short-term outlook is clear(-ly bearish), let’s check how big the potential of the decline really is. This time you want to see the forest in addition to seeing the trees.
The current situation in mining stocks can be compared to what we saw in early 2013. That was when miners underperformed gold to a great extent by declining despite it moving back and forth close to previous highs. In both cases, and what silver was declining as well. I marked both periods with orange rectangles so you can see what gold did, what silver did (both are visible in the lower part of the above chart) and how the XAU Index performed.
It's not just the relative performance of miners and the situation in gold that’s similar – it’s also the price patterns seen in the XAU Index itself.
After forming a triple-top, miners declined profoundly (2012 and 2022) and then they rallied back up. Interestingly, in both cases, the rally took the XAU back to the 50-day moving average and then about as much as it took to reach it.
Then, the powerful slide continued. In the recent past, we saw the war breakout in Ukraine and in the Middle East, so it’s natural that gold moved higher in the short run, pushing miners higher as well. However, geopolitical events have only a temporary impact on gold prices. So, as the dust seems to have settled (the military conflicts exist, but they don’t seem to really escalate), the medium-term trends have returned.
On the above chart, you can see this as the 10%+ slide that we see in the XAU Index so far this month.
All this means that the downside potential for this decline is huge, and not “just” significant as the very short-term mining stock charts indicate. Thanks to yesterday’s declines, our profits from the short position in the GDXJ increased visibly, and they are likely to increase much more in the following weeks.
Miners are going much lower. Let’s make the most of it.
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