Gold’s days in a glamorous apartmentat the top of the PMs’ building are numbered. We’d better prepare for a rapidelevator ride to the first floor.
TheGold Miners
With the gold miners essentially runninglaps on the treadmill, the HUIIndex, the GDX ETF, and the GDXJ ETF are working extremely hard but makinglittle progress. And with the gambit resulting in ‘one step forward, two steps back,’ frustrating exhaustion has mining stocks questioning theirevery move. To that point, even though the trio transitioned from the conveyorbelt to the stairs in recent weeks, history shows that slow climbs oftenculminate with elevator rides lower. Should we expect a different outcome thistime around?
Goldended the week in the green (up by $27.30), but the HUI Index was stuck in thered (down by 1.39). This is extremely noteworthy, as a similar divergenceoccurred at the end of May. For context, when the yellow metal rallied by $28.60in a week back then, the HUI Index fell by 1.37 index points.
In the following weeks, the HUI Indexdeclined by about 50 index points, while gold declined by about $150.
Keep in mind though: scenario #2 mostlikely requires equities to participate. In 2008 and 2020, sharp drawdowns in the HUI Index coincidedwith significant drawdowns of the S&P500. However, with the Fed turning hawkish and investors extremely allergicto higher interest rates, the likelihood of a three-peat remains relativelyhigh.
As further evidence, let’s analyze thebehavior of the GDX ETF and the GDXJ ETF. Regarding the former, the seniorminers celebrated gold’s strength by falling to their previous lows on Jul. 8.If this is not a shocking proof of extreme underperformance, then I don’t knowwhat would be one.
Please see below:
Regarding the latter, on Jun. 29 (theJune low), the GDXJ ETF closed at $45.83. And on Jul. 8, it closed at $45.53.Ladies and gentlemen, we had a breakdown.
Of course, we see that the breakdown wasinvalidated, but the fact that it moved to new lows while gold rallied isextremely bearish. It seems like the junior miners simply can’t wait to breakto new lows.
The bottom line?
If gold repeats its June slide, it willdecline by about $150. Taking the entire decline into account (since August2020), for every $1 that gold fell, on average, the GDX was down by about 4cents (3.945 cents) and GDXJ was down by about 6.5 cents (6.504 cents).
Thismeans that if gold was to fall by about $150 and miners declined just asthey did so far in the past year (no special out- or underperformance), theywould be likely to fall by $5.92 (GDX) and $9.76 (GDXJ). Given the Jul. 8closing prices, this would imply price moves to $27.76 (GDX) and $35.78 (GDXJ).So, the profits on the current short position are likely to soar.
In conclusion, while the HUI Index, theGDX ETF and the GDXJ ETF are likely to have some small breathers along the way,their sprints lower are likely far from finished. When we combine their extremeunderperformance relative to gold with the bearish 2008 and 2012 analogues, thegold miners might just huff and puff and blow their own houses down. As aresult, while 2021 has already delivered two desperate pleas for more oxygen,the trio will likely require a third ventilator in the coming months. Theoutlook for the following weeks remains very bearish.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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