The Perfect Short-Term Confirmation for Gold
2023.02.22 11:07
Gold stocks just closed at a new 2023 low. Not only that – miners declined more than while was strong. That’s a VERY bearish combo.
Silver Joined the Party
Let’s jump right into the chart that features the 4-hour candlesticks of the VanEck Junior Gold Miners ETF (NYSE:) (a proxy for junior miners), the SPDR® Gold Shares (NYSE:) (a proxy for gold), and the iShares Silver Trust (NYSE:) (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.
GDXJ 195-Min Chart
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.”
On the above chart, I used the 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.
The Fundamental Trigger
On 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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