Gold Price Forecast – Gold Miners And Their 2016 High

Historical precedents are in many a technician's toolbox – and it's a tool they reach for with success repeatedly. What lessons can we draw from the miners' performance back in 2016 and now?

We previously described the above HUI Index – flagship proxy for the gold miners – in the following way:

The HUI Index declined significantly, and then it rebounded significantly.

Both are likely linked. Miners first declined more sharply than they did in 2008, so the rebound was also sharper. Based on the stimulus and gold reaching new yearly highs, miners also rallied, and tried to move to new yearly highs. It's not surprising. 

However, if the general stock market is going to decline significantly one more time, and so will gold - and as you have read above, it is very likely - then miners are likely to slide once again as well. This would be in tune with what happened in 2008.

At this time, it may seem impossible or ridiculous that miners could slide below their 2015 lows, but that's exactly what could take place in the following weeks. With gold below their recent lows and the general stock market at new lows, we would be surprised not to see miners even below their 2020 lows. And once they break below those, their next strong resistance is at the 2016 low. However, please note that miners didn't bottom at their previous lows in 2008 - they moved slightly lower before soaring back up.

Please note that the HUI Index just moved to its 2016 high which serves as a very strong resistance. Given the likelihood of a very short-term (1-2 days?) upswing in stocks and perhaps also in gold (to a rather small extent, but still), it could be the case that gold miners attempt to rally above their 2016 high and... Spectacularly fail, invalidating the move. This would be a great way to start the next huge move lower.

And what happened next?

The HUI Index invalidated the breakout above its 2016 high in terms of the weekly closing prices and also in terms of the monthly closing prices.

The HUI ended last week higher, but only insignificantly so. The flagship index for gold mining stocks definitely remains below the 2016 highs and it looks like it got fed up with waiting on gold’s massive slide and it started to decline on its own earlier. That’s yet another similarity to what happened in late February and in the first half of March. Gold miners’ underperformance is a very bearish sign. In fact, looking how miners perform relative to gold is one of the more important gold trading tips traders should focus on.

On a short-term basis, we see more of the same thing. The GDX ETF is moving back and forth – just about 10% higher than where it had been trading when the big March slide started.

Miners are already in a short-term downtrend, but once gold finally declines significantly (and the USDX rallies while the stock market plunges), miners are likely to break below the declining trend channel (marked with blue) and the decline is likely to enter the dramatic stage – similarly to what we saw in March.

Today’s breakout above the trend channel is not confirmed so far, so it doesn’t have to be bullish despite the early excitement that it might cause.

Summary

Miners have attempted to break above their 2016 highs, yet are stumbling, and this pause doesn't have bullish implications. This is underscored by the fact that they're already moving lower without much in terms of gold’s help. Such underperformance is a very bearish sign.

The following days are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months. But what’s profitable is rarely the thing that feels good initially. As silver often moves in close relation to the king of metals, forecasting gold’s rally without a bigger decline first is thus likely to be misleading. The times when gold is trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

Naturally, the above is up-to-date at the moment of publishing and the situation may – and is likely to – change in the future. If you’d like to receive follow-ups to the above analysis, we invite you to sign up to our gold newsletter. You’ll receive our articles for free and if you don’t like them, you can unsubscribe in just a few seconds. Sign up today.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
Sunshine Profits: Analysis. Care. Profits.

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be subject to change without notice. Opinions and analyses are based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are deemed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.