What a way to start a year! Gold just faked its comeback before moving to new yearly lows. That’s a very bearish way for a market to start the year.
Given that miners underperformed gold and silver briefly outperformed it, we have a very bearish storm brewing for the next couple of weeks / months.
The year 2021 is over, 2022 has finally arrived. However, why does the current price action look “sooo last year”? Because the patterns appear to be repeating and the clearest similarity is present in the key precious metal – gold itself.
Gold prices moved higher in late December, and it happened on low volume. The rally caused the stochastic indicator to move above 80 and the RSI above 50. That’s exactly what happened in both: late 2021 and late 2020.
What does it mean? Well, it means that we shouldn’t trust this rally, as it could end abruptly, just like the one that we saw a year ago.
Besides, gold corrected 61.8% of the preceding decline (so it moved to its most classic Fibonacci retracement), which means that – technically – what we saw in the past two weeks was just a correction, not the beginning of a new rally.
And what happened next?
Gold declined, faked its comeback, and then declined again to new yearly lows. 2022 continues to be a down year for gold, and this is particularly revealing, because early January is the time when the buy-backs should – theoretically – happen.
I’m referring to the tendency for investors to exit losing positions (and – in tune with my expectations and against expectations of almost everyone else – 2021 was a down year for gold, silver, and mining stocks, after all) close to the end of the year, in order to harvest the tax loss, and then to get back into the market in early January.
Despite the above tendency, gold is down, silver is down, and mining stocks are down as well.
This shows that the precious metals market is weak (which has been clear since gold invalidated its breakout above the 2011 high in 2020) and is unlikely to soar significantly (in terms of hundreds of dollars) unless it slides first.
Besides, at the beginning of major rallies, gold stocks tend to lead the way up. And right now, it’s exactly the opposite.
The upper part of the above chart features the GDXJ ETF – proxy for junior mining stocks, the middle part features the GLD ETF – proxy for gold, and the bottom part features the S&P 500 Index.
The red lines compare the previous stock market highs to what happened in junior miners, and the dotted lines show what juniors did when gold formed its recent highs and lows.
In short, junior gold mining stocks are underperforming both: gold, and other stocks.
This is as bearish as it can get, given the current situation regarding the USD Index (which is in a medium-term uptrend) and the situation in the interest rates, which are not only about to go up, but the expectations of them going up are becoming more and more hawkish. And that’s no accident either, as it’s in tune with the current political narrative in the U.S. – inflation is currently presented as the major enemy that needs to be dealt with.
In other words, as the situation in interest rates is likely to become even more hawkish and the USD Index is likely to move higher, gold is likely to go down, and so – eventually – will the general stock market. And since junior mining stocks have already proven over and over again that they magnify declines on both markets, they are likely to fall particularly hard, when the above markets decline. We gained quite a lot based on the decline in the juniors in 2021, but it seems that the gains that could be reaped in 2022 (of course, I can’t and I’m not promising any kind of specific performance for any market) based on junior miners’ decline (and then their revival) could be breathtaking – but as always, only if one is positioned correctly for both major moves.
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Przemyslaw Radomski, CFA
Sunshine Profits: Effective Investment through Diligence & Care
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