Gold Price Forecast – The Miners On The Roll

March 16, 2020
CFA, Editor & Founder @ Sunshine Profits

gold bar and gold nuggets

What a difference from a month ago, right? Miners moved overall higher – with volatile moves both ways, only to… truly plunge in March. Miners often lead gold higher and lower, so this decline doesn’t bode too well for the price of the yellow metal.

Then again, perhaps the miners declined too sharply, too fast. Let’s assess the likelihood of a rebound in mining stocks that could translate into a rally in gold. In fact, it seems that it might have already started today.

The GDX ETF plunged, plunging to $16.50 in the final 30 minutes of the session and then moving back up, ending at $19, and creating a powerful bullish reversal. We sent the final intraday Gold & Silver Trading Alert 25 minutes before the end of the session, so subscribers had very good chance to participate in the final rebound rally.

Based on the declines in gold, silver and the stock market, it seems that miners should be declining as well, but it doesn’t mean that the reasons due to which we had opened the long position changed. The markets have dropped too much too fast, and they just got major boost from the Fed.

In fact, both: GDX and GDXJ are holding up very well today. The GDX moved just a few cents below their Friday’s intraday low, and the GDXJ didn’t move below Friday’s intraday lows at all. Then, after the intraday decline, they both rallied quite visibly, erasing a large part of Friday’s declines.

On Friday, 25 minutes before the end of the session, we closed the remaining parts of our short position in the precious metals and gold and silver stocks (the one that we had entered on February 21st) as we found that the easy, moderate, and even part of the hard part of the short trade in gold and silver were over, and it seemed that aiming to catch the very last part was too dangerous. We emphasized this didn’t mean that the entire decline in the precious metals sector was over. No. We expect it to continue in the following months, but it seems that the market might have declined too far too fast, especially in case of the mining stocks.

The week that just ended…

Was the worst week for GDXJ ever.

Was the worst week for GDX ever.
Was the worst week for the HUI Index ever (it was launched in 1996).
Was the worst week for the XAU index ever (it was launched in 1983).

Yes, the mining stocks lost more during this week, than they have during any previous week since 1983. Even when we take the 2008 plunge into account.

There is little comparison in historical standards, but there’s one week that was pretty close. In July, 2002, there was a week, when the XAU Index lost almost 22%, and the HUI Index lost almost 27%. They both lost about 30% this week.

In July, 2002, the general stock market was sliding profoundly and the USD Index rallied (after a sizable decline). Gold plunged, but not as much as miners (about 6% vs. about 9% this week). Silver declined more than gold (over 8% vs. about 16% this week).

As you can see quite a few things are similar. And back in July 2002, that was the final bottom for the mining stocks. It was not the final bottom for silver, nor the general stock market, but miners and gold moved higher from there (taking weekly closing prices into account). Miners rallied particularly strongly during the following week. The HUI Index regained most of the previous week’s losses in just one week.

The time to be brave is when there’s blood on the streets. And there was never more blood on the mining streets in weekly terms - ever. 

Also, please note how well miners - especially junior miners performed in the very first part of the session. They rebounded very well.

Consequently, we opened a speculative long position in mining stocks in the final 25 minutes of Friday’s session. That’s based on how different parts of the precious metals market reacted during the most similar week in the past.

There's one more analogy that we would like to share with you. Please take a look at the price action in the two red rectangles. They are identical in terms of time and the current one is a bit smaller in terms of relative price movement.

They are very similar in terms of shape and - most likely - in terms of when they happened.

In 2015 and very early 2016, we saw the final part of the medium-term decline and the initial part of the short-term rebound. The decline was sharp at first, then miners consolidated, then they corrected, then they declined once again moving very temporarily to new lows and after invalidating this breakdown, they shot up with vengeance. And the reversal took place at the beginning of the year.

In 2019 and very early 2020, we saw a mirror image of the above.

Fear is a much stronger emotion than greed, so it’s not that surprising that the current decline is more volatile than the 2016 drop.

We previously wrote that this similarity provided us with a few extra hints that other techniques didn't. Namely, it suggested that miners were unlikely to correct before they moved even lower.

That’s exactly what happened. What needs to be updated is that what seemed to be a likely downside target, has become a likely upside target for the corrective upswing.

The mid-2019 lows are a relatively good target also based on other reasons:

  • Several 2017 and 2018 highs formed there (approximately)

  • That's where (approximately) the declining support line based on the previous highs is located

  • That's where (approximately) the rising support line based on the previous lows is located

Still, based on the strength with which miners are reversing today, it seems that they will rally more than to just a bit above $20. Correcting half of their recent decline and rallying to about $24 - $26 seems to be more likely.

Moreover, the two above-mentioned support lines cross close to the end of March, meaning that this is when the reversal could take place.

Please note that the end of March in case of the GDX fits very well the triangle-vertex-based reversal in gold that is scheduled for early April.

The problem here is that given this kind of volatility, these reversal targets could take form of either a short-term top, or a short-term bottom. It seems that the local bottom is being formed right now, but we wouldn’t bet that the corrective upswing will take another two weeks… We are likely to see the next top this week, and perhaps late March or early April will mark another short-term bottom.

Summary

While the plunging mining stocks fit the higher time frames’ picture, a short-term rebound is definitely not out of the question. Actually, several factors point to it such as the Fed intervention and a true moment of blood in the streets. A true short-term moment, that is. The triangle-vertex-based reversal points to approximately two weeks for the miners to show us what kind of an upswing they’re capable of. In other words, their very short-term outlook is bullish, while the medium-term one is strongly bearish. As miners often lead gold, the same applies also to the price of the yellow metal.

The following months 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. 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 - 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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