Gold Forecast: Why Mining Stocks Fell Instead Of Rising

Gold rallied by almost $10 on Monday, the stock market reversed, but gold miners declined anyway. What is this witchcraft?

Because they’re weak, that’s why. This is because there is a medium-term downtrend in them. In fact, let’s keep in mind that it was only gold that managed to break above the 2011 highs – neither silver nor mining stocks got even close to similar price levels. Thus, has the real bull market in the precious metals sector begun yet? No, it hasn’t. It was only gold that caught people’s attention, and only temporarily so.

The fact is that despite the open-ended QE, historically low interest rates for years, and a global pandemic that triggered world-wide lockdowns, gold was unable to hold the breakout above its 2011 high. If this doesn’t make you suspicious about the real strength of the gold bull market, then I don’t know what would.

Let’s check the HUI Index – the flagship proxy for gold stocks – and see where the gold miners are.

After all, gold stocks tend to perform exceptionally well at the beginning of massive bull markets. For example, that was the case between 2000 and 2002.

Between its 2000 low and 2002 high, the HUI Index rallied by over 300%, while gold rallied by less than 40%. Now that’s outperformance!

Now, between the bottoms of 2015 and 2016, gold is up by 75%, and the HUI Index is up by about 150%. There is still some leverage (several times less!), but if we compare that to the sizes of the declines and the risk in general, things are much worse.

Gold is now over $400 above its 2016 high. The HUI Index is below its 2016 high.

The HUI Index is below its 2008 high.

In fact, the HUI Index is now even below its 2003 highs! Can you imagine that? Well, you don’t have to imagine it because these are the facts. However, please think about it: gold rallied from about $400 to about $1,800 – more than quadrupling its price, and gold stocks are trading lower.

Based on similarities from previous patterns that were preceded by massive head-and-shoulders formations (marked with green), we can expect to see a massive decline, and the long-term weakness of gold stocks vs. gold provides an excellent background for such a slide.

Want reasons of a more fundamental nature? The rates are going up in the U.S. but not that much in the rest of the world. Consequently, the real interest rates are going up in the U.S. and the same is likely for the USD Index. The two key headwinds for gold are about to blow at full strength.

While gold is likely to decline, given the weakness that gold stocks have been proving over and over again, they are likely to truly slide in such an environment. In particular, junior mining stocks, which have proven to be most vulnerable during the 2020 slide, and also during the recent (and this year’s) declines.

The GDXJ ETF – a proxy for junior mining stocks – declined and reversed some of its declines before the end of the day. This might appear bullish, until you factor in the following facts:

• Gold closed the day almost $10 higher;
• The general stock market ended the day higher.

Consequently, mining stocks should have rallied yesterday, but instead they declined by over 1.5% anyway. This underperformance is bearish. Period.

Please note the broad red rectangle that I placed on the above chart. It’s there to illustrate the size of the initial 2020 decline.

Yes, junior miners are already below the price levels from which the 2020 started, and if they simply decline as much as they declined back then (so, I’m not asking for anything “completely new” to happen), they could be at $34 in a matter of days.

For now, junior miners bounced off of their rising support line, but this doesn’t change the fact that they greatly underperformed gold and the general stock market, which means that the implications of yesterday’s session are bearish.

As I mentioned earlier, the S&P 500 declined and then rallied back up yesterday. The daily reversal took place on huge volume, which is bullish at its face value.

On the other hand, however, let’s keep in mind that the early-2020 decline had days of hesitation too. On Feb. 26, 2020, the S&P 500 also moved back and forth, closing only slightly lower. Declines resumed on the following day.

Looking at the RSI, we see that once this indicator moved below 30, it (and the S&P 500 itself) kept declining until it moved below 20. That’s not what happened yesterday.

Also, the initial decline in 2020 took the S&P 500 lower by over 15% before we saw a small corrective upswing. The 2022 decline took the S&P 500 down by a bit over 12%, including yesterday’s intraday low. If history repeats itself to a significant degree, we could see even lower stock market prices before seeing a more visible rebound.

On the other hand, seeing a rebound right away wouldn’t be likely to change anything – it seems that an even bigger, medium-term decline is already underway.

Yes, RSI below 30 is generally considered oversold territory, but the direct analogies take precedence over the “usual” way in which things work in markets in general. In this case, the situation could get from oversold to extremely oversold. Let’s keep in mind that stocks declined very sharply in 2020.

One could say that times were different, but were they really? The key difference is that the monetary authorities are now already after the bullish money-printing cycle and are handling inflation by aiming to increase interest rates, while they had been preparing to cut them in 2020.

The situation regarding the pandemic is not that different either. Sure, back in 2020, it was all new, we had massive lockdowns and there was great uncertainty regarding… pretty much everything. Now, the situation is not entirely unexpected, but given the explosive nature of new COVID-19 cases (likely due to the Omicron variant), it’s still quite new and uncertain.

The uncertainty is not as great as it was back in 2020, but then again, now we’re facing monetary tightening, not dramatic dovish actions. Thus, I wouldn’t exclude a situation in which we really see a repeat of the early-2020 performance, where the declines are sharp and huge. The technicals in the precious metals market have been pointing to that outcome for months, anyway, especially the long-term HUI Index chart that I’ve been discussing previously.

Summary

To summarize, despite appearances to the contrary, the outlook for the precious metals sector still remains bearish for the next few months.To

Gold reacted reluctantly to the January dollar rise, but eventually something made the yellow metal soar: Russia's last week's rearmament on Ukraine's borders. The rally, however, was based only on the heightened tensions regarding Ukraine, and was not significant.

While gold is likely to decline, given the weakness that gold stocks have been proving over and over again, mining stocks are likely to truly slide in such an environment. In particular, junior mining stocks, which have proven to be most vulnerable and also this year’s declines.

Since it seems that the PMs are starting another short-term move lower more than it seems that they are continuing their bigger decline, I think that junior miners would be likely to (at least initially) decline more than silver.

From the medium-term point of view, the key two 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.

And as silver often moves in close relation to the yellow metal, when gold falls, silver is likely to decline as well – it has probably already started its slide. The times when gold is continuously trading well above the 2011 highs will come, but they are unlikely to be seen without being preceded by a sharp drop first.

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Thank you.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits - Effective Investments through Diligence and Care

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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.

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