Gold Forecast: Are Mining Stocks Foreseeing Gold’s Move?

CFA, Editor & Founder @ Sunshine Profits
July 20, 2021

gold designMining stocks dropped without anyone’s help – gold holds tight, but this is rather an anomaly. Will we see carnage when the king of the PMs collapses?

Finally, after a few weeks of relatively small changes and telling you that whatever minor happened (or what didn’t happen) was a confirmation of the previous forecast, now I can report to you multiple interesting developments. And yes, they also confirm the previous forecast, and you already saw the results, as your trading account got bigger once again; but this time, the clues are even more decisive and more varied.

Let’s jump right into the charts. This time, we’ll start with the general stock market, which finally moved lower in a decisive manner.

That was the third time when the stock-based RSI moved below the 70 level, which – based on the similarity to early 2020 – might be signaling that the top for this rally in stocks is already in. If it is indeed in, then the really bad times for the mining stocks and silver have just begun. Their yesterday’s performance seems to confirm that.

If it was not the final top for the stock market, then… The precious metals sector is likely to slide anyway because of what’s going on in the USD Index, and because the mining stocks’ underperformance provided us with not one, but multiple screaming sell signals in the previous weeks. Let’s take a look at the USDX.

During yesterday’s session, the USD Index moved above the neck level of the broad (~yearly) inverse head-and-shoulders pattern and then it corrected somewhat while still closing the day above the neckline. And it’s been moving slightly higher in today’s session, at least so far.

This is a very bullish price action – the USDX’s breakout was not accidental, nor was it based on geopolitical news (the latter tends to trigger temporary moves that are then reversed). Additionally, it was preceded by a consolidation. Consequently, it seems that this breakout has a huge chance of being confirmed and followed by another sharp rally. The previous highs at about 94.5 are the initial upside target, but based on the inverse H&S pattern, the USDX is likely to rally to about 98.

Consequently, what just happened (the breakout above the formation’s neckline) has really bullish implications for the U.S. currency. And since the latter tends to move in the opposite direction to gold, silver, and mining stocks, it’s also very bearish for them.

Mining Stocks

Interestingly, so far, gold didn’t do much. It declined visibly yesterday, but it then came back up before the end of the session. At the moment of writing these words, gold futures are trading just $1.50 below Friday’s (July 16) close. No wonder – even though the USD Index is completing its major, inverse H&S formation, it didn’t move significantly in nominal terms.

This is incredibly exciting for those who hold short positions in the mining stocks because this means that the huge impact falling gold will likely have on the miners is still ahead. And miners declined significantly anyway!

Before moving to the mining stocks, please note that the back-and-forth trading right after the first move lower is normal for gold. I marked those cases with ellipses. Consequently, the fact that gold moved back-and-forth now doesn’t make the forecast for gold bullish. Conversely, it’s a normal course of action right before a powerful slide.

And speaking of powerful slides, gold stocks could no longer wait and they declined before gold did.

The GDX ETF (senior gold miners) moved below the recent lows, and it closed the day below the neck level of a head-and-shoulders pattern in terms of the closing prices. The stochastic indicator flashed a fresh sell signal as well. While gold is far from its late-April lows, the GDX just closed the day below them.

And if you think this kind of relative weakness is bearish, just wait until you see what the junior mining stocks did.

Junior miners just declined not only below the neck level of the recent head-and-shoulders pattern (in a clear way, in both: intraday and closing price terms), but they actually closed the day at new 2021 lows!

Yesterday’s close in the GDXJ was the lowest close in more than a year.

There are two markets that primarily impact the performance of the junior mining stocks. One is gold, and the other is the general stock market. Gold is now about $140 above its 2021 lows, while the S&P 500 is over 16% above its 2021 highs. And yet, the GDXJ is below its previous 2021 lows.

Juniors are underperforming senior gold miners too. You can see that by comparing two previous charts and by examining their ratio.

The ratio declines when junior miners underperform seniors. This happens often when the general stock market declines – juniors are more correlated with the latter than the seniors. Interestingly, juniors underperformed recently, even while stocks were strong. If the general stock market declines from here, the underperformance is likely to take an epic form – just as it did in early 2020.

This level of underperformance and weakness is truly breathtaking.

If miners – in particular, juniors – were able to decline so much without meaningful help from gold and the general stock market, just imagine the carnage they will suffer once this “help” finally arrives.

And given the breakout above the neck level of the inverse head-and-shoulders pattern in the USD Index, it seems like the key trigger to set the wheels in motion is already here.

Summary

To summarize, the corrective upswing seems to be over, and gold seems to have started its big decline – one similar to what we saw in 2008 and 2012-2013. In fact, a fall may be just around the corner; it looks like the decline is well underway in the case of mining stocks, especially junior miners.

And as silver often moves in close relation to the yellow metal, 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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Przemyslaw Radomski, CFA, is the founder, owner and the main editor of SunshineProfits.com.  You can reach Przemyslaw at: http://www.sunshineprofits.com/help/contact-us/.

One ounce of gold is so ductile it can be drawn into a wire 50 miles long

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