Can a Gold Stocks Rally Be Bearish? / Commodities / Gold and Silver 2022
History tends to repeat itself, andmining stocks appear to be repeating their 2008 performance, which has veryinteresting implications.
Why do I think that gold miners arerepeating their 2008 price patterns? Please take a look at the below chart.
The only times when gold stocks declinedsimilarly sharply as they did this year were in 2013 and in 2008.
Given that the situation in stocks appears to be similar to what we saw in 2008 (due to rising interest rates, forexample), it seems that focusing on this analogy is particularly importantright now.
All right, let’s zoom in and see howmining stocks declined in 2008.
Back then, the GDXJ ETF was not yettrading, so I’m using the GDX ETF as a short-term proxy here.
The decline took about 3 months, and iterased about 70% of the miners’ value. The biggest part of the decline happenedin the final month, though.
However, the most intriguing aspect ofthat decline – which may also be very useful this time – is that there werefive very short-term declines that took the GDX down by about 30%.
I marked those declines with redrectangles. After that, a corrective upswing started. During those correctiveupswings, the GDX rallied by 14.8-41.6%. The biggest corrective upswing (whereGDX rallied by 41.6%) was triggered by a huge rally in gold, and since I don’texpect to see anything similar this year, it could be the case that thiscorrection size is an outlier. Not paying attention to the outlier, we getcorrections of between 14.8% and 25.1%.
Fast forward to the current situation.Let’s take a look at the GDXJ ETF.
The junior mining stocks moved sharplyhigher recently, and this move took place on huge volume (I spoke about it on Nov.7). The only similarly big volume that we saw recently was at the early-Marchtop and the January top. As history has shown, the massive attention thatjunior miners have received is a bearish indicator (not only for miners butalso for related parts of the precious metals market, including gold and silver pricestoo).
Back in 2008, the biggest correctiveupswing (the 41.6% rally) was the thing that preceded the biggest part of themedium-term decline.
This time, the volatility is not as big,but the size of the corrective upswing (assuming that it started in September)that we just saw is also greater than what we’ve seen before. Consequently, itcould be the case that what happened recently is what “had to” happen given theway history decided to rhyme. Please note that we can estimate what is likelyto happen based on historical analogies, but we can never be 100% certain thata given analogy will work and some others won’t.
In this case, it seems that thecorrection happened, even though it didn’t “have to” happen based on many othertechniques. Either way, the medium-term trend remains down, so the currentcorrective upswing is likely to be a “thing of the past of little meaning”sooner rather than later.
Speaking of analogies, I previously wrotethat the current rally is a mirror image (it’s not a crystal-clear mirror,though) of the corrective decline that we saw in late March 2020. As it turnedout, due to the most recent part of the upswing, the size of both moves becameeven more aligned.
And yes, this means that another declinecould take the GDXJ all the way down to its 2020 low, or very close to it.
On the below chart, I marked just howperfectly the recent price moves played out according to theElliott Wave Theory.
Of course, EWT is not the only tool thatone could use, and I find other technical tools more useful, but still, thiskind of pattern-following is uncanny.
The classic EWT pattern is three wavesdown (I marked those with orange rectangles) and then a correction consistingof two smaller waves.
That’s exactly what we have seen inrecent months. The September–now pattern appears to be the above-mentionedcorrection. It didn’t only consist of two smaller waves higher – they wereactually almost identical in terms of size and sharpness. This created aclassic ABC correction (flag) pattern.
Now, since this pattern is complete,another huge 3-stage move lower can – and is likely – to unfold. This is very bearish for junior miningstocks (as well as for gold, silver, and probably other commodities),and the fact that juniors are already showing weakness relative togold (on Wednesday, the latter was almost flat while minersdeclined) serves as a bearish confirmation. As always, I can’t guaranteeanything, but in my view, the profits that can be reaped on this upcomingslide in mining stocks can be enormous.
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Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Toolsfor Effective Gold & Silver Investments - SunshineProfits.com
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All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.
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