Gold Forecast: Keep Calm and Stay on the Short Side of Junior Miners

CFA, Editor & Founder @ Sunshine Profits
June 6, 2022

A price jump on a given day doesn’t necessarily mean you should give up your short position or go long. Let’s look at the context by examining what happened in the junior mining stocks.

The price of the GDXJ ETF – a proxy for junior miners – moved sharply higher on Thursday, and this got many people excited. High volume confirms that. It’s natural for most investors and traders to view rallies as bullish, but let’s keep in mind that most traders tend to lose money… It’s not that simple. After all, the best shorting opportunities are at the tops, which – by definition – can only be formed after a rally. 

The particularly interesting thing about high volume readings in the GDXJ ETF is that they quite often mark local tops. Remember the late-April/early-May consolidation? It ended when GDXJ finally rallied on high volume. That was the perfect shorting opportunity, not a moment to panic and exit the short position.

The GDXJ-based RSI indicator is also quite informative right now. It moved well above 50, but it’s not at 70 yet. Why would that be important? Because that’s when many of the previous corrections ended.

When one digs deeper, things get even more interesting. You see, when we consider corrections that started after the RSI was very oversold (after forming a double bottom below 30), it turns out that in all those cases, the tops formed with the RSI between 50 and 70. I marked those situations with blue ellipses on the above chart.

So, while it’s easy to “follow the action,” it’s usually the case that remaining calm and analytical leads to bigger profits in the end. 

Also, let’s use yesterday’s move as something useful. If this single-day move higher made you really uncomfortable and almost made you run for the hills, it might be a sign that the size of the position that you have is too big. It’s your capital and you can do with it what you wish, but if the above were the case, it might serve as food for thought.

The big trend (as well as the reasons for it) remains down, which means that the enormous profit potential remains intact.

Friday’s decline confirms the above. While the GDXJ had closed above the upper border of the previous price gap on Thursday, it closed back below it on Friday, thus invalidating the small breakout. This is a bearish sign, especially in light of what I wrote above. The top might be already in.

Remember, the strong medium-term downtrend remains intact.

Summary

Summing up, it seems to me that the short-term rally in the precious metals market is either over or close to being over. In fact, it’s so close to being over that I think it’s already a good idea to be shorting junior mining stocks.

I previously wrote that the profits from the previous long position were likely to further enhance the profits on this huge decline, and that’s exactly what happened. The profit potential with regard to the upcoming gargantuan decline remains huge.

As investors are starting to wake up to reality, the precious metals sector (particularly junior mining stocks) is declining sharply. Here are the key aspects of the reality that market participants have ignored:

  1. rising real interest rates,
  2. rising USD Index values.

Both of the aforementioned are the two most important fundamental drivers of the gold price. Since neither the USD Index nor real interest rates are likely to stop rising anytime soon (especially now that inflation has become highly political), the gold price is likely to fall sooner or later. Given the analogy to 2012 in gold, silver, and mining stocks, “sooner” is the more likely outcome.

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 most likely come, but they are unlikely to be seen without being preceded by a sharp drop first.

Thank you for reading our free analysis today. Please note that it is just a small fraction of today’s all-encompassing Gold & Silver Trading Alert. The latter includes multiple premium details such as the outline of our trading strategy as gold moves lower.

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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/.


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