Gold Miners: Last of the Summer Wine / Commodities / Gold and Silver Stocks 2021
Autumn is just around the corner, andwhile the precious metals tasted some success most recently, the medium-term isstill set for a downtrend.
With Fed Chairman Jerome Powell stickingto his dovish guns and U.S. nonfarm payrolls elongating the central bank’sperceived taper timeline, gold, silver, and mining stocks were extremely happycampers. However, with event-driven rallies much more semblance than substance,I warned on Sep.7 that the rollercoaster of emotions would likely end in tears.
I wrote:
Withthe 2013 analogue leading the gold miners down an ominous path, the HUI Indexand the GDX ETF have rallied by roughly 8% off their recent lows. However,identical developments occurred in 2013, and neither bout of optimism invalidedtheir bearish medium-term outlooks.
And after the GDX ETF and the GDXJ ETF(our profitable short position) plunged by 5.35% and 6.98% respectively lastweek, summertime sadness confronted the precious metals. Likewise, with moremelancholy moves likely to materialize over the medium term, gold,silver, and mining stocks should hit lower lows during the autumn months.
To explain, the HUI Index also plunged bynearly 6% last week, and the reversal of the previous corrective upswingmirrors its behavior from 2013. In addition, with its stochastic oscillator andits RSI (Relative Strength Index) also a spitting image, an ominousre-enactment of 2013 implies significantly lower prices over the medium term.
Please see below:
What’smore, the vertical, dashed lines above demonstrate how the HUI Index isfollowing its 2012-2013 playbook. For example, after a slight buy signal fromthe stochastic indicator in 2012, the short-term pause was followed by anothersharp drawdown. For context, after the HUI Index recorded a short-term buy signal in late 2012 – when the index’s stochastic indicator was already belowthe 20 level (around 10) and the index was in the process of forming the rightshoulder of a huge, medium-term head-and-shoulders pattern – the index moved slightly higher, consolidated, and then fell off acliff. Thus, the HUI Index is quite likely to decline to its 200-week movingaverage (or so) before pausing and recording a corrective upswing. That’s closeto the 220 level. Thereafter, the index will likely continue its bearishjourney and record a final medium-term low some time in December.
Furthermore,I warned previously that the miners’ drastic underperformance of gold was anextremely bearish sign. There were several weeks when gold rallied visibly andthe HUI Index actually declined modestly. And now, gold stocks are tradingclose to their previous 2021 lows, while gold is almost right in the middlebetween its yearly high and its yearly low.
Andwhy is this so important? Well, because the bearish implications of goldstocks’ extreme underperformance still remain intact.
Let’skeep in mind that the drastic underperformance of the HUI Index also precededthe bloodbath in 2008 as well as in 2012 and 2013. To explain, right before thehuge slide in late September and early October 2008, gold was still moving tonew intraday highs; the HUI Index was ignoring that, and then it declineddespite gold’s rally. However, it was also the case that the general stock market sufferedmaterially. If stocks didn’t decline so profoundly back then, gold stocks’underperformance relative to gold would have likely been present but moremoderate.
Nonetheless,broad head & shoulders patterns have often been precursors to monumentalcollapses. For example, when the HUI Index retraced a bit more than 61.8% ofits downswing in 2008 and in between 50% and 61.8% of its downswing in 2012before eventually rolling over, in both (2008 and 2012) cases, the final top –the right shoulder – formed close to the price where the left shoulder topped.And in early 2020, the left shoulder topped at 303.02. Thus, three of thebiggest declines in the gold mining stocks (I’m using the HUI Index as a proxy here)all started with broad, multi-month head-and-shoulders patterns. And in allthree cases, the size of the declines exceeded the size of the head of thepattern. As a reminder, the HUI Index recently completed the same formation.
Yes,the HUI Index moved back below the previous lows and the neck level of theformation, which – at face value – means that the formation was invalidated,but we saw a similar “invalidation” in 2000 and in 2013. And then, the declinefollowed anyway. Consequently, I don’t think that taking the recent move higherat its face value is appropriate. It seems to me that the analogies to the verysimilar situation from the past are more important.
Asa result, we’re confronted with two bearish scenarios:If things develop as they did in 2000 and 2012-2013, gold stocks arelikely to bottom close to their early-2020 low.If things develop like in 2008 (which might be the case, given theextremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightlybelow) their 2016 low.
Inboth cases, the forecast for silver, gold, and mining stocks is extremelybearish for the next several months.
Foreven more confirmation, let’s compare the behavior of the GDX ETF and the GDXJETF. Regarding the former, investors rejected the senior miners (GDX) attemptto recapture their 50-day moving average and the failure was perfectly in tunewith what I wrote on Sep. 7:
Largespikes in daily volume are often bearish, not bullish. To explain, three of thelast four volume outliers preceded an immediate top (or near) for the GDX ETF,while the one that preceded the late July rally was soon followed by the GDXETF’s 2020 peak. Thus, when investors go ‘all in,’ material declines oftenfollow. And with that, spike-high volume during the GDX ETF’s upswings oftenpresents us with great shorting opportunities.
Please see below:
Even more bearish, not only did lastweek’s plunge usher the GDX ETF back below the neckline of its bearish head& shoulders pattern (the horizontal red line on the right side of the chartabove), but the sell signal from the stochastic oscillator remains firmlyintact. As a result, ominous clouds continue to form.
And with the GDXJ ETF stuck in a similarrut, I wrote on Sep. 7 that overzealous investors would likely end the week disappointed:
Withthe current move quite similar to the correctiveupswing recorded in mid-May, thespringtime bounce was also followed by a sharp drawdown. As a result, the GDXJETF could be near its precipice, as its 50-day moving average is right ahead.And with the key level now acting as resistance, investors’ rejection on Sep. 3could indicate that the top is already here.
Moreover, while the junior minersfollowed the roadmap to perfection, the GDXJ ETF still remains ripe for lowerlows over the medium term.
Please see below:
Finally, while I’ve been warning formonths that the GDXJ/GDX ratio was destined for devaluation, after anothersharp move lower last week, the downtrend remains intact. For example, when theratio’s RSI jumped above 50 three times in 2021, it coincided with short-term peaks ingold. Second, the trend in the ratio this year has been clearly down, andthere’s no sign of a reversal, especially when you consider that the ratiobroke below its 2019 support (which served as resistance in mid-2020). When thesame thing happened in 2020, the ratio then spiked even below 1.
More importantly, though, with therelative weakness likely to persist, the profits from our short position in theGDXJ ETF should accelerate during the autumn months.
The bottom line?
If the ratio is likely to continue itsdecline, then on a short-term basis we can expect it to decline to 1.27 or so.If the general stock market plunges, the ratio could move even lower, but let’sassume that stocks decline moderately (just as they did in the last couple ofdays) or that they do nothing or rally slightly. They’ve done all the aboverecently, so it’s natural to expect that this will be the case. Consequently,the trend in the GDXJ to GDX ratio would also be likely to continue, and thusexpecting a move to about 1.26 - 1.27 seems rational.
If the GDX is about to decline toapproximately $28 before correcting, then we might expect the GDXJ to declineto about $28 x 1.27 = $35.56 or $28 x 1.26 = $35.28. In other words, $28 in theGDX is likely to correspond to about $35 in the GDXJ.
Is there any technical support around $35that would be likely to stop the decline? Yes. It’s provided by the late-Feb.2020 low ($34.70) and the late-March high ($34.84). There’s also the late-Aprillow at $35.63. Conservatively, I’m going to place the profit-take level justabove the latter.
Consequently, it seems that expecting theGDXJ to decline to about $35 is justified from the technical point of view aswell.
In conclusion, gold, silver, and mining stockswent from delighted to despondent, as the technical downpour continues to rainon their parade. And while a major buying opportunity may present itself inDecember, the next few months will likely elicit more tears than cheers. As aresult, while we eagerly await the opportunity to go long the precious metalsand participate in their secular uptrends, bearish breakdowns, stock marketstruggles, and the Fed’s taper timeline will likely dampen their moods over themedium term.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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