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.
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
Toolsfor Effective Gold & Silver Investments - SunshineProfits.com
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