The document discusses the bearish outlook for gold miners based on weakness in the HUI Index, GDX ETF, and GDXJ ETF compared to gold. It notes the indexes are forming head-and-shoulders patterns indicating further declines. The FOMC minutes showed divisions between hawks and doves but acknowledged upside inflation risks. Most members felt tapering and rate hikes were still premature given economic uncertainty.

1. Gold: High Time To Move
Out Of The Penthouse

2. Points To Be Covered Today:
• The Gold Miners
• HUI Index
• GDXJ ETF
• Bearish Head-and-shoulders Pattern
• FOMC Minutes: A Confirmation Of Fed’s Hawkish Shift?

3. The Gold Miners
• With the gold miners essentially running laps on the treadmill, the HUI Index, the
GDX ETF, and the GDXJ ETF are working extremely hard but making little
progress.
• And with the gambit resulting in ‘one step forward, two steps back,’ frustrating
exhaustion has mining stocks questioning their every move.
• To that point, even though the trio transitioned from the conveyor belt to the
stairs in recent weeks, history shows that slow climbs often culminate with
elevator rides lower. Should we expect a different outcome this time around?
• Gold ended the week in the green (up by $27.30), but the HUI Index was
stuck in the red (down by 1.39).
• This is extremely noteworthy, as a similar divergence occurred at the end of
May. For context, when the yellow metal rallied by $28.60 in a week back
then, the HUI Index fell by 1.37 index points.
• In the following weeks, the HUI Index declined by about 50 index points, while
gold declined by about $150.

4. Gold Bugs Index

5. HUI Index
• To explain, with the HUI Index unable to muster any meaningful relief rallies, I
warned that the recent plunge was weeks in the making:
• I wrote the following about the week beginning on May 24:
• What happened three weeks ago was that gold rallied by almost $30 ($28.60)
and at the same time, the HUI – a flagship proxy for the gold stocks…
Declined by 1.37. In other words, gold stocks completely ignored gold’s
gains.
• That shows exceptional weakness on the weekly basis and is a very bearish sign
for the following weeks.
• To that point, with the HUI Index’s ominous signals only increasing, if history
rhymes (as it tends to), medium-term support will likely materialize in the 100-to-
150 range.
• For context, high-end 2020 support implies a move back to 150, while low-end
2015 support implies a move back to 100. And yes, it could really happen, even
though such predictions seem unthinkable.

6. GDXJ ETF
• Furthermore, with the junior miners often suffering the most during medium-term
drawdowns, short positions in the GDXJ ETF will likely offer the best risk-reward
ratio.
• For context, if you held firm in 2008 and 2013 and maintained your short
positions, you almost certainly realized substantial profits. And while there are
instances when it’s wise to exit one’s short positions, the prospect of missing out
on the forthcoming slide makes it quite risky.
• Even more bearish, a drastic underperformance by the HUI Index also preceded
the bloodbath in 2008.
• To explain, right before the huge slide in late September and early October, gold
was still moving to new intraday highs; the HUI Index was ignoring that, and then
it declined despite gold’s rally.
• However, it was also the case that the general stock market suffered materially. If
stocks didn’t decline back then so profoundly, gold stocks’ underperformance
relative to gold would have likely been present but more moderate.

7. Bearish Head-and-shoulders Pattern
• The HUI Index’s bearish head-and-shoulders pattern is already sounding the alarm.
When the HUI Index retraced a bit more than 61.8% of its downswing in 2008 and in
between 50% and 61.8% of its downswing in 2012 before eventually rolling over, in
both (2008 and 2012) cases, the final top – the right shoulder – formed close to the
price where the left shoulder topped.
• And in early 2020, the left shoulder topped at 303.02. Thus, three of the biggest
declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with
broad, multi-month head-and-shoulders patterns. And in all three cases, the size of the
declines exceeded the size of the head of the pattern.
• In addition, when the HUI Index peaked on Sep. 21, 2012, that was just the initial high
in gold. At that time, the S&P 500 was moving back and forth with lower highs.
• And what was the eventual climax? Well, gold made a new high before peaking on Oct.
5. In conjunction, the S&P 500 almost (!) moved to new highs, and despite bullish
tailwinds from both parties, the HUI Index didn’t reach new heights.
• The bottom line? The similarity to how the final counter-trend rally ended in 2012 (and
to a smaller extent in 2008) remains uncanny.

8. Two Bearish Scenarios
• As a result, we’re confronted with two bearish
scenarios:
1.If things develop as they did in 2000 and 2012-2013,
gold stocks are likely to bottom close to their early-2020
low.
2.If things develop like in 2008 (which might be the case,
given the extremely high participation of the investment
public in the stock market and other markets), gold
stocks could re-test (or break slightly below) their 2016
low.

9. Two Bearish Scenarios - I
• Keep in mind though: scenario #2 most likely requires equities to
participate. In 2008 and 2020, sharp drawdowns in the HUI Index
coincided with significant drawdowns of the S&P 500.
• However, with the Fed turning hawkish and investors extremely
allergic to higher interest rates, the likelihood of a three-peat remains
relatively high.
• As further evidence, let’s analyze the behavior of the GDX ETF and
the GDXJ ETF.
• Regarding the former, the senior miners celebrated gold’s strength
by falling to their previous lows on Jul. 8. If this is not a shocking
proof of extreme underperformance, then I don’t know what would be
one.

10. Gold Miners ETF

11. GDXJ ETF

12. GDX & GDXJ
• We see that the breakdown was invalidated, but the fact that it moved to
new lows while gold rallied is extremely bearish. It seems like the junior
miners simply can’t wait to break to new lows.
• The bottom line?
• If gold repeats its June slide, it will decline by about $150. Taking the entire
decline into account (since August 2020), for every $1 that gold fell, on
average, the GDX was down by about 4 cents (3.945 cents) and GDXJ
was down by about 6.5 cents (6.504 cents).
• This means that if gold was to fall by about $150 and miners declined just
as they did so far in the past year (no special out- or underperformance),
they would be likely to fall by $5.92 (GDX) and $9.76 (GDXJ). Given the
Jul. 8 closing prices, this would imply price moves to $27.76 (GDX) and
$35.78 (GDXJ). So, the profits on the current short position are likely to
soar.

13. GDX ETF & GDXJ ETF
• In conclusion, while the HUI Index, the GDX ETF and the GDXJ
ETF are likely to have some small breathers along the way,
their sprints lower are likely far from finished.
• When we combine their extreme underperformance relative to
gold with the bearish 2008 and 2012 analogues, the gold
miners might just huff and puff and blow their own houses
down.
• As a result, while 2021 has already delivered two desperate
pleas for more oxygen, the trio will likely require a third
ventilator in the coming months.
• The outlook for the following weeks remains very bearish.

14. FOMC Minutes: A Confirmation Of Fed’s
Hawkish Shift?
• The latest FOMC minutes were… mixed. The discussion between
hawks and doves continues giving gold no comfort. Who will gain the
upper hand?
• The FOMC published the minutes from its last meeting in June.
• Investors who counted on some clear clues are probably
disappointed, as the minutes can please both hawks and doves.
Indeed, the report showed that the Fed officials are divided on their
inflation outlook and the appropriate course of action.
• The dovish side believes that the recent high inflation readings are
transitory and they will ease in the not-so-distant future, while
the hawkish camp worries that the upward pressure on prices could
continue next year:

15. FOMC Minutes
• Looking ahead, participants generally expected inflation to ease
as the effect of these transitory factors dissipated, but several
participants remarked that they anticipated that supply chain
limitations and input shortages would put upward pressure on
prices into next year.
• Several participants noted that, during the early months of the
reopening, uncertainty remained too high to accurately assess
how long inflation pressures will be sustained.
• Importantly, most FOMC members recognized that the risks to
inflation forecasts leaned more to the upside.

16. FOMC Minutes - I
• This means that the hawkish shift is indeed real, although the Fed will remain
very accommodative:
• Although they generally saw the risks to the outlook for economic activity as
broadly balanced.
• A substantial majority of participants judged that the risks to their inflation
projections were tilted to the upside [emphasis added] because of concerns
that supply disruptions and labor shortages might linger for longer and might
have larger or more persistent effects on prices and wages than they currently
assumed.
• Several participants expressed concern that longer-term inflation expectations
might rise to inappropriate levels if elevated inflation readings persisted.
• Several other participants cautioned that downside risks to inflation remained
because temporary price pressures might unwind faster than currently anticipated
and because the forces that held down inflation and inflation expectations during
the previous economic expansion had not gone away or might reinforce the effect
of the unwinding of temporary price pressures.

17. FOMC Minutes - II
• As a consequence of fast economic growth and higher inflation than expected, some
participants suggested that it would be appropriate to taper the quantitative
easing and hike the federal funds rate sooner than previously thought. Or, to be at
least prepared if higher inflation turns out to be more persistent than the consensus sees
it:
• In light of the incoming data and the implications for their economic outlooks, a few
participants mentioned that they expected the economic conditions set out in the
Committee's forward guidance for the federal funds rate to be met somewhat earlier than
they had projected in March (…)
• Various participants mentioned that they expected the conditions for beginning to reduce
the pace of asset purchases to be met somewhat earlier than they had anticipated at
previous meetings in light of incoming data (…)
• Participants generally judged that, as a matter of prudent planning, it was important to be
well positioned to reduce the pace of asset purchases, if appropriate, in response to
unexpected economic developments, including faster-than-anticipated progress toward
the Committee's goals or the emergence of risks that could impede the attainment of the
Committee's goals.

18. FOMC Minutes - III
• However, despite all these hawkish commentaries, the majority of FOMC
members remains extremely cautious and believe that the economy has still a
long way to achieve the Fed’s targets, especially full employment:
• Many participants remarked, however, that the economy was still far from
achieving the Committee's broad-based and inclusive maximum-employment
goal, and some participants indicated that recent job gains, while strong, were
weaker than they had expected.
• So, given that the economy hasn’t yet fully recovered, inflation will likely be just
transitory, and there is high uncertainty about the economic outlook, it would be
premature to tighten the monetary policy and raise the interest rates:
• Participants generally agreed that the economic recovery was incomplete and
that risks to the economic outlook remained. Although inflation had risen more
than anticipated, the increase was seen as largely reflecting temporary factors,
and participants expected inflation to decline toward the Committee’s 2 percent
longer-run objective (…)

19. FOMC Minutes - IV
• Several participants emphasized, however, that uncertainty around the economic
outlook was elevated and that it was too early to draw firm conclusions about the
paths of the labor market and inflation.
• In their view, this heightened uncertainty regarding the evolution of the economy
also implied significant uncertainty about the appropriate path of the federal funds
rate (…)
• Participants discussed the Federal Reserve’s asset purchases and progress
toward the Committee’s goals since last December when the Committee adopted
its guidance for asset purchases.
• The Committee’s standard of “substantial further progress” was generally seen
as not having yet been met, though participants expected progress to continue
(…) Some participants saw the incoming data as providing a less clear signal
about the underlying economic momentum and judged that the Committee would
have information in coming months to make a better assessment of the path of
the labor market and inflation.
• As a result, several of these participants emphasized that the Committee should
be patient in assessing progress toward its goals and in announcing changes to
its plans for asset purchases.

20. Gold: High Time To Move
Out Of The Penthouse

21. Gold: High Time To Move
Out Of The Penthouse