Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Gold is attempting to break above the $2,000 milestone, and miners are trying to break above their declining resistance line. Will they manage to do so, and if so, how long will the rally last?
Yesterday, gold didn’t manage to close above the $2,000 level and it’s making another attempt to rally above it in today’s pre-market trading. However, will it be successful?
Given the RSI above 70 and the strength of the current resistance, it’s doubtful.
In fact, nothing has changed with regard to this likelihood since yesterday, so what I wrote about it in the previous Gold & Silver Trading Alert remains up-to-date:
Gold touched $2,000 in today’s pre-market trading, which is barely above its 2021 high and below its 2020 high. Crude oil is way above both analogous levels.
In other words, gold underperforms crude oil to a significant extent, just like in 2003.
Interestingly, back in 2003, gold topped when crude oil rallied about 40% from its short-term lows (the late-2002 low).
What happened next in 2003? Gold declined, and the moment when crude oil started to visibly outperform gold was also the beginning of a big decline in gold stocks.
That makes perfect sense on the fundamental level too. Gold miners’ share prices depend on their profits (just like it’s the case with any other company). Crude oil at higher levels means higher costs for the miners (the machinery has to be fueled, the equipment has to be transported, etc.). When costs (crude oil could be viewed as a proxy for them) are rising faster than revenues (gold could be viewed as a proxy for them), miners’ profits appear to be in danger; and investors don’t like this kind of danger, so they sell shares. Of course, there are many more factors that need to be taken into account, but I just wanted to emphasize one way in which the above-mentioned technical phenomenon is justified.
Back in 2003, gold stocks wiped out their entire war-concern-based rally, and the biggest part of the decline took just a bit more than a month. Let’s remember that back then, gold stocks were in a very strong medium- and long-term uptrend. Right now, mining stocks remain in a medium-term downtrend, so their decline could be bigger – they could give away their war-concern-based gains and then decline much more.
Mining stocks are not declining profoundly yet, but let’s keep in mind that history rhymes – it doesn’t repeat to the letter. As I emphasized previously today, back in 2003 and 2002, the tensions were building for a longer time, and it was relatively clear in advance that the U.S. attack was going to happen. This time, Russia claimed that it wouldn’t attack until the very last minute before the invasion. Consequently, the “we have to act now” is still likely to be present, and the dust hasn’t settled yet – everything appears to be unclear, and thus the markets are not returning to their previous trends. Yet.
However, as history shows, that is likely to happen. Either immediately, or shortly, as crude oil is already outperforming gold.
The above chart features the GDXJ ETF. As you can see, the junior miners moved to their very strong resistance provided by the declining resistance line. This resistance is further strengthened by the 38.2% Fibonacci retracement, and the previous (late-2021) high. This means that it’s particularly strong, and any breakout here would likely be invalidated shortly.
Given the clear sell signal from the RSI indicator, a turnaround here is even more likely. I marked the previous such signals to emphasize their efficiency. When the RSI was above 70, a top was in 6 out of 7 of the recent cases, and the remaining case was shortly before the final top, anyway.
This resistance seems to be analogous to the $2,000 level in gold.
By the way, please note that gold tried to break above $2,000 several times:
- twice in August 2020;
- twice in September 2020 (once moving above it, once moving just near this level);
- once in November 2020 (moving near this level);
- once in January 2021 (moving near this level);
- once in February 2022 (moving near this level).
These attempts failed in each of the 7 cases mentioned above. This is the eight attempt. Will this very strong resistance break this time?
Given how much crude oil has already soared, and how both markets used to react to war tensions in the case of oil-producing countries, it seems that the days of the rally are numbered.
Moving back to the GDXJ ETF, please note that while gold is moving close to its all-time highs, the junior miners are not doing anything like that. In fact, they barely moved slightly above their late-2021 high. They are not even close to their 2021 high, let alone their 2020 high. Instead, junior mining stocks are just a bit above their early-2020 high, from which their prices were more than cut in half in less than a month.
In other words, junior miners strongly underperform gold, which is a bearish sign. When gold finally declines – and it’s likely to, as geopolitical events tend to have only a temporary effect on prices, even if they’re substantial – junior miners will probably slide much more than gold.
One of the reasons is the likely decline in the general stock market.
I recently received a question about the impact the general stock market has on mining stocks, as the latter moved higher despite stocks’ decline in recent weeks. So, let’s take a look at a chart that will feature junior mining stocks, the GLD ETF, and the S&P 500 Index.
Before the Ukraine crisis, the link between junior miners and the stock market was clear. Now, it's not as clear, but it’s still present. Juniors only moved to their late-2021 highs, while gold is over $100 above those highs. Juniors underperform significantly, in tune with the stock market's weakness.
The gold price is still the primary driver of mining stock prices – including junior mining stocks. After all, that’s what’s either being sold by the company (that produces gold) or in the properties that the company owns and explores (junior miners). As gold prices exploded in the last couple of weeks, junior miners practically had to follow. However, this doesn’t mean that the stock market’s influence is not present nor that it’s going to be unimportant going forward.
Conversely, the weak performance of the general stock market likely contributed to junior miners’ weakness relative to gold – the former didn’t rally as much as the latter. Since the weakness in the general stock market is likely to continue, and gold’s rally is likely to be reversed (again, what happened in the case of other military conflicts is in tune with history, not against it), junior miners are likely to decline much more profoundly than gold.
Speaking of the general stock market, it just closed at the lowest level since mid-2021.
The key thing about the above chart is that what we’ve seen this year is the biggest decline since 2020, and the size of the recent slide is comparable to what we saw as the initial wave down in 2020 – along with the subsequent correction. If these moves are analogous, the recent rebound was perfectly normal – there was one in early 2020 too. This also means that a much bigger decline is likely in the cards in the coming weeks, and that it’s already underway.
This would be likely to have a very negative impact on the precious metals market, in particular on junior mining stocks (initially) and silver (a bit later).
The analogy in the case of the link between gold and oil remains up-to-date as well:
The price of crude oil soared by almost $40 in just a bit over a week! That’s over 40%. Gold rallied too, but the extent of the move higher is nothing compared to what we just saw in crude oil.
The black gold reversed on an intraday basis today, so we might have seen the top, but it’s far from being clear.
What is clear, however, is that crude oil is greatly outperforming gold.
As you may have noticed, crude oil shot up recently in a spectacular manner. This seems normal, as it’s a market with rather inflexible supply and demand, so disruptions in supply or threats thereof can impact the price in a substantial way. With Russia as one of the biggest crude oil producers, its invasion of Ukraine, and a number of sanctions imposed on the attacking country (some of them involving oil directly), it’s natural that crude oil reacts in a certain manner. The concern-based rally in gold is also understandable.
However, the relationship between wars, concerns, and prices of assets is not as straightforward as “there’s a war, so gold and crude oil will go up.” In order to learn more about this relationship, let’s examine the most similar situation in recent history to the current one, when oil supplies were at stake.
The war that I’m mentioning is the one between Iraq and the U.S. that started almost 20 years ago. Let’s see what happened in gold, oil, and gold stocks at that time.
The most interesting thing is that when the war officially started, the above-mentioned markets were already after a decline. However, that’s not that odd, when one considers the fact that back then, the tensions were building for a long time, and it was relatively clear in advance that the U.S. attack was going to happen. This time, Russia claimed that it wouldn’t attack until the very last minute before the invasion.
The point here, however, is that the markets rallied while the uncertainty and concerns were building up, and then declined when the situation was known and “stable.” I don’t mean that “war” was seen as stable, but rather that the outcome and how it affected the markets was rather obvious.
The other point is the specific way in which all three markets reacted to the war and the timing thereof.
Gold stocks rallied initially, but then were not that eager to follow gold higher, but that’s something that’s universal in the final stages of most rallies in the precious metals market. What’s most interesting here is that there was a time when crude oil rallied substantially, while gold was already declining.
Let me emphasize that once again: gold topped first, and then it underperformed while crude oil continued to soar substantially.
All in all, it seems that due to the technical resistance in gold and mining stocks, the sizable – but likely temporary (like other geopolitical-event-based-ones) – rally is likely to be reversed shortly. Then, as the situation in the general stock market deteriorates, junior miners would be likely to plunge in a spectacular manner.
Having said that, let’s take a look at the markets from a more fundamental point of view:
When You Dance With the Devil
While headline after headline helps embed the PMs with larger war premiums, fear has overtaken rationality. However, with the law of gravity often forcing investors to learn this lesson the hard way, remember that ‘he who sups with the devil should have a long spoon.’
To explain, FAANG – which is an acronym for Meta Platforms (Facebook), Apple, Amazon, Netflix, and Alphabet (Google) – was perceived as invincible in late 2021. For example, when stock market breadth was plummeting and the average NASDAQ Composite constituent was down by more than 20%, investors took solace in the belief that no one would sell FAANG.
However, after Netflix and Meta Platforms plunged by more than 40% recently, the NASDAQ 100 suddenly wasn’t so popular anymore. As a result, sentiment shifted, and fundamental realities re-emerged.
Please see below:
To explain, the chart above tracks the monthly performance of the NASDAQ 100, while the blue line above tracks the index’s 20-month moving average, and the purple line on the bottom half of the chart tracks the index’s monthly RSI (Relative Strength Index).
If you focus your attention on the latter, extreme overbought readings on the RSI are precursors to material drawdowns. More importantly, though, if you turn to the blue line on the right side of the chart, notice how the NASDAQ 100 completely ran away from its 20-month MA in 2020/2021?
For context, the only comparable outperformance was the dot-com bubble, and even then, the index’s disconnect wasn’t as steep. However, with the law of gravity returning the NASDAQ 100 to its 20-month MA in 2022 (it’s actually below it now), it highlights how you can only run from reality for so long.
However, how is it connected with forecasting gold prices?
Well, when analyzing the inflationary onslaught plaguing the U.S., I spent a lot of time covering the S&P Goldman Sachs Commodity Index (S&P GSCI). For context, the S&P GSCI contains 24 commodities from all sectors: six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals. However, energy accounts for roughly 54% of the index’s movement.
Moreover, with commodities running wild amid the Russia-Ukraine conflict, the S&P GSCI has become the new FAANG. With gold, silver, and mining stocks riding the momentum higher, profound pain should confront the PMs when the all-time outperformance reverses.
Please see below:
To explain, the chart above tracks the monthly performance of the S&P GSCI, while the blue line above tracks the index’s 20-month moving average, and the purple line on the bottom half of the chart tracks the index’s monthly RSI.
Now, if the month ended on Mar. 7, the S&P GSCI would record the third-highest monthly RSI of all time. For context, the only periods with higher monthly readings were May and June 2008.
Furthermore, if you analyze the right side of the chart, you can see that the S&P GSCI is now 58% above its 20-month MA, and this is the largest outperformance on record.
To that point, if you focus your attention on the long-term bull market from 2002 until roughly 2006, the S&P GSCI remained closely connected to its 20-month MA. Moreover, even during the vertical ascent from 2006 to 2008, peak intra-month outperformance of the 20-month MA was 56%. Today, if we use the current intra-month high, the outperformance is 64%. As a result, the S&P GSCI has never been more disconnected, and the PMs have been material beneficiaries.
In addition, even though the global financial crisis (GFC) helped accelerate the sharp drop in the S&P GSCI in 2008 and the economic fundamentals are different now, please note the connection between the S&P GSCI and its 20-month MA. As you can see, reconnections are inevitable, and they often occur within 12 to 24 months. Furthermore, the S&P GSCI began its current outperformance in January 2021, so we’re roughly 14 months into the recent splurge; but investors seem to think that the S&P GSCI is the new FAANG and will never fall.
However, the unabated optimism rivals what we saw with SPACs, IPOs, and the ARK Innovation ETF in 2020. Yet, is this time different, and $2,500 gold on the horizon?
Please see below:
To explain, the chart above tracks the monthly performance of the ARK Innovation ETF, while the blue line above tracks the index’s 20-month moving average, and the purple line on the bottom half of the chart tracks the index’s monthly RSI. For context, the ETF launched in 2015, so the historical record is less than the NASDAQ 100 and the S&P GSCI.
Do you notice a familiar pattern? When the ARK Innovation ETF’s monthly RSI approached 86 in 2018 and its outperformance of its 20-month MA hit 42%, the ETF ended up suffering a 30% peak-to-trough decline.
However, that’s child’s play. When its RSI mirrored this behavior and the ARK Innovation ETF outperformed its 20-month MA by more than 115% in 2020, an epic collapse eventually unfolded. As of the Mar. 7 close, the ETF had suffered a 64% peak-to-trough decline.
As a result, while investors are tripping over themselves to buy any and all commodities, now may not the best time in history to be long the PMs. (Except as insurance – in this case full positions seem justified.)
Please see below:
To explain, the red line above tracks the monthly performance of the S&P GSCI, while the gray line above tracks the silver futures price. For context, I used silver instead of gold because the performance of the white metal is more comparable to that of the GDXJ ETF. Also, silver has a much longer historical record than the GDXJ ETF.
If you analyze the connection, you can see that sharp declines in the S&P GSCI often coincide with sharp declines in silver. As a result, if (once) the S&P GSCI mean reverts from its all-time outperformance, the momentum that uplifted the PMs should be just as furious on the downside.
With the algorithms turning the S&P GSCI into a meme stock, investors seem to think that the lessons learned by technology traders in 2020/2021 don’t apply here. However, when the next Minsky Moment strikes the commodities market, the bloodbath should be epic.
In conclusion, the PMs were mixed on Mar. 7, as silver ended the day in the red. However, while the Russia-Ukraine conflict may keep the PMs elevated until a resolution materializes, the similarities between Big Tech in 2020/2021 and commodities in 2022 are uncanny. While investors often conjure up reasons why three-sigma moves are valid, the reality is that epic rises are often followed by epic falls. As a result, while the consensus seems to think that commodities are invincible (despite the near-certain interest rate hikes), the 2022 version of FAANG should eventually suffer the same hard landing.
Overview of the Upcoming Part of the Decline
- It seems to me that the corrective upswing is now over or very close to being over , and that gold, silver, and mining stocks are now likely to continue their medium-term decline.
- It seems that the first (bigger) stop for gold will be close to its previous 2021 lows, slightly below $1,700. Then it will likely correct a bit, but it’s unclear if I want to exit or reverse the current short position based on that – it depends on the number and the nature of the bullish indications that we get at that time.
- After the above-mentioned correction, we’re likely to see a powerful slide, perhaps close to the 2020 low ($1,450 - $1,500).
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place, and if we get this kind of opportunity at all – perhaps with gold close to $1,600.
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold close to $1,350 - $1,400. I expect silver to fall the hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,375, but at the moment it’s too early to say with certainty.
- As a confirmation for the above, I will use the (upcoming or perhaps we have already seen it?) top in the general stock market as the starting point for the three-month countdown. The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector is likely to bottom about three months after the general stock market tops.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.
Letters to the Editor
Q: There is a rumor in Russia that due to a shortage of reserves and an economic blockade, the country would sell about 5% of its holdings in gold. Would that affect the price?
A: Most likely, negative. It might be the trigger for the decline that appears very likely, based on the technical reasons.
Q: Hello PR, I have read that as Russia is excluded from SWIFT, they will not be able to service the payment of their loans. This will lead to default and possibly create contagion in the financial system, sending gold soaring. I highly respect your opinion and would be interested in your thoughts.
A: Thank you. This could work as you wrote above, but… history tells us that this would likely not be the case initially. Remember 2008? We had an international banking crisis (this doesn’t fully express what it was, but serves as a good summary), so the contagion effect was in full force, and what did gold do? It first declined significantly, along with the general stock market, and then came back up with a vengeance. While gold was declining, silver and mining stocks were also declining particularly significantly. That’s in perfect tune with what I’m expecting to see in the future of the precious metals market.
Summary
Summing up, despite last week’s rally in gold, the outlook for junior mining stocks remains exactly as I described previously.
Crude oil’s extreme outperformance, the stock market’s weakness, and critical medium-term resistance levels reached by gold and junior mining stocks all indicate that the tops are at hand or have just formed.
It looks like “peak uncertainty” and “peak gold” are already here or very, very close. It’s even more likely that the top in junior mining stocks is in.
Investing and trading are difficult. If it was easy, most people would be making money – and they’re not. Right now, it’s most difficult to ignore the urge to “run for cover” if you physically don’t have to. The markets move on “buy the rumor and sell the fact.” This repeats over and over again in many (all?) markets, and we have direct analogies to similar situations in gold itself. Junior miners are likely to decline the most, also based on the massive declines that are likely to take place (in fact, they have already started) in the stock markets.
From the medium-term point of view, the two key long-term factors remain the analogy to 2013 in gold and the broad head and shoulders pattern in the HUI Index. They both suggest much lower prices ahead.
It seems that our profits from short positions are going to become truly epic in the coming months.
After the sell-off (that takes gold to about $1,350-$1,500), I expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.
Most importantly, please stay healthy and safe. We made a lot of money last March and this March, and it seems that we’re about to make much more in the upcoming decline, but you have to be healthy to enjoy the results.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $34.63; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged) and GDXD (3x leveraged – which is not suggested for most traders/investors due to the significant leverage). The binding profit-take level for the JDST: $14.98; stop-loss for the JDST: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the GDXD: $25.48; stop-loss for the GDXD: none (the volatility is too big to justify a SL order in case of this particular trade).
For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway.):
Silver futures downside profit-take exit price: $19.12
SLV profit-take exit price: $17.72
ZSL profit-take exit price: $38.28
Gold futures downside profit-take exit price: $1,683
HGD.TO – alternative (Canadian) inverse 2x leveraged gold stocks ETF – the upside profit-take exit price: $11.79
HZD.TO – alternative (Canadian) inverse 2x leveraged silver ETF – the upside profit-take exit price: $29.48
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash
Insurance capital (core part of the portfolio; our opinion): Full position
Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.
Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGL, GLL, AGQ, ZSL, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
