HUI Gold Stocks: The Illusionist's Trick Left Investors Speechless / Commodities / Gold and Silver Stocks 2021
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.
Please see below:
Furthermore, the underperformance of goldstocks relative to gold is also worthy of attention. With the junior minersoften performing the worst during medium-term drawdowns, short positions in theGDXJ ETF will likely offer the best risk-reward ratio. To that point, if youheld firm in 2008 and 2013 and maintained your short positions, you almostcertainly realized substantial profits. And while there are instances when it’swise to exit one’s short positions, the prospect of missing out on theforthcoming slide makes it quite risky.
To explain, I warned that the recentplunge was weeks in the making:
Iwrote the following about the week beginning on May 24:
Whathappened three weeks ago was that goldrallied by almost $30 ($28.60) and at the same time, the HUI – a flagship proxyfor gold stocks… Declined by 1.37. In other words, gold stocks completelyignored gold’s gains. That showsexceptional weakness on the weekly basis and is a very bearish sign for thefollowing weeks.
Thus, while the HUI Index remains steadyfor the time being, back in 2008, the ominous underperformance signaled thattrouble was ahead. To explain, right before the huge slide in late Septemberand early October, gold was still moving to new intraday highs; the HUI Indexwas ignoring that, and then it declined despite gold’s rally. However, it wasalso the case that the general stock market suffered materially. If stockshadn’t declined back then so profoundly, gold stocks’ underperformance relativeto gold would have likely been present but more moderate.
Nonetheless, the HUI Index’s bearish head& shoulders pattern is extremely concerning. When the HUI Index retraced abit more than 61.8% of its downswing in 2008 and in between 50% and 61.8% ofits downswing in 2012 before eventually rolling over, in both (2008 and 2012)cases, the final top – the rightshoulder – formed close to the price where the left shoulder topped. And inearly 2020, the left shoulder topped at 303.02. Thus, three of the biggest declines in the mining stocks (I’m using theHUI Index as a proxy here), all started with broad, multi-monthhead-and-shoulders patterns. And in all three cases, the size of the declinesexceeded the size of the head of the pattern.
In addition, when the HUI Index peaked onSep. 21, 2012, that was just the initial high in gold. At that time, theS&P 500 was moving back and forth with lower highs. And what was theeventual climax? Well, gold made a new high before peaking on Oct. 5. Inconjunction, the S&P 500 almost (!) moved to new highs, and despite thebullish tailwinds from both parties, the HUI Index didn’t reach newheights. The bottom line? The similarity to how the final counter-trendrally ended in 2012 (and to a smaller extent in 2008) remains uncanny.
As a result, we’re confronted with twobearish scenarios:If things develop as they didin 2000 and 2012-2013, gold stocks are likely to bottom close to theirearly-2020 high.If things develop like in 2008(which might be the case, given the extremely high participation of theinvestment public in the stock market and other markets), gold stocks couldre-test (or break slightly below) their 2016 low.
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
Founder, Editor-in-chief
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