The gold miners’ 2021 gains prompted astanding ovation among investors. However, they didn’t notice a magic trickuntil everything vanished.
TheGold Miners
After the HUI Index plunged by more than 10% and made all of its 2021 gainsdisappear, the magic trick left investors in a state of shock. But while Mr.Market still hasn’t sawed the HUI Index in half, the illusionist is likelygearing up for his greatest reveal. Case in point: while the Zig Zag Girlcaptivated audiences in the 1960s, the HUIIndex’s zigzag correction leaves little to the imagination. And with therecent swoon a lot more than just smoke and mirrors, the HUI Index’s short-termoptimism will likely vanish into thin air.
To explain, despite the profounddrawdown, the HUI Index hasn’t been able to muster a typical relief rally.Moreover, with ominous signals increasing week by week, if history rhymes (asit tends to), the HUI Index will likely find medium-term support in the100-to-150 range. For context, high-end 2020 support implies a move back to150, while low-end 2015 support implies a move back to 100. And yes, it couldreally happen, even though such predictions seem unthinkable.
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.
If we turn our attention to the GDX ETF,lower highs and lower lows have become mainstays of the senior miners’ recentperformance. Moreover, while the GDX ETF’s swift drawdown occurred onsignificant volume, the recent bounce hasn’t garnered much optimism. As aresult, we’re likely witnessing a corrective upswing within a medium-termdowntrend.
Please see below:
Finally, comparing the current priceaction to the behavior that we witnessed in 2012, back then, the GDX ETFcorrected back to the 38.2% Fibonacci retracement level and then continued tomake lower highs before eventually rolling over. And today, the senior minersare displaying similar weakness. Gold stocks are declining even whilecorrecting, and the lack of meaningful upswings signals that the currentenvironment is very bearish.
In conclusion, while gold, silver, andmining stocks will attempt to pull rabbits out of their hats, the bunnies’bounce will likely fade over the medium term. Moreover, with the preciousmetals searching for a magic bullet that likely doesn’t exist, anotherdisappointment could leave investors without an ace in the hole. The bottomline? While gold, silver, and mining stocks will likely dazzle the crowd in theyears to come, their wizardry could resemble black magic in the coming months.
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Przemyslaw Radomski, CFA
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