2. Points To Be Covered Today:
• Gold Miners: Which Door Will Investors Choose?
• The Gold Miners
• The Junior Miners
• Gold’s & Stock’s Decline
3. Gold Miners: Which Door Will Investors Choose?
• With the current situation suggestive of a Monty Hall problem, investors are
clinging to the first, bullish door. But what if a different option is more likely?
• The Monty Hall problem is a form of a probability puzzle, and what it shows is
immensely unintuitive. Suppose you are on a game show, and you need to
choose one of three doors.
• Behind one of them is a car and behind the others, goats. You pick a door, and
then the host (who knows what’s behind them) opens one of the remaining doors,
behind which there is a goat. The host now asks: “Do you want to change your
door choice for the remaining doors?” So, what do you do?
• It turns out that if you change the door, the probability of winning the car
increases… two times! You have a 2/3 chance, instead of a 1/3.
• Tremendously unintuitive, indeed, but what if the same is happening on the
market now? With a bullish prospect representing the door of the first choice, and
the technicals and fundamentals the host’s help, wouldn’t it be safer to switch the
door to win eventually?
4. The Gold Miners
• With investors stuck in their own version of the Monty Hall problem, guessing ‘what's
behind door No.1’ has market participants scrambling to find the bullish gateway.
• However, with doors two and three signaling a much more ominous outcome for gold,
silver and mining stocks, the key to unlocking their future performance may already
be hiding in plain sight.
• Case in point: with the analogue from 2012 signaling a forthcoming rush for the exits,
there are no fire escapes available for investors that overstay their welcome. And
because those who cannot remember the past are condemned to repeat it (George
Santayana), doubters are likely to lose more than just their pride.
• While the most recent price action is best visible in the short-term charts, it is actually
the HUI Index’s very long-term chart that provides the most important details (today’s
full analysis includes 44 charts, but the graph below is one of the key ones).
• The crucial thing happened two weeks ago, and what we saw last week was simply a
major confirmation.
6. The Gold Miners - II
• What happened two weeks ago was that gold rallied by almost $30
($28.60) and at the same time, the HUI – a flagship proxy for 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. And it has important historical
analogies.
• Back in 2008, right before a huge slide, in late September and early
October gold was still moving to new intraday highs, but 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 declined then.
If stocks hadn’t declined back then so profoundly, gold stocks’
underperformance of gold would likely be present but more moderate. In
fact, that’s exactly what happened in 2012.
7. The Gold Miners - III
• The HUI Index topped on September 21, 2012, and that was just the
initial high in gold. At that time the S&P 500 was moving back and
forth with lower highs – so a bit more bearish than the current back-
and-forth movement in this stock index.
• What happened in the end? Gold moved to new highs and formed
the final top (October 5, 2012).
• It was when the S&P 500 almost (!) moved to new highs, and despite
both, the HUI Index didn’t move to new highs.
• The similarity to how the final counter-trend rally ended in 2012 (and
to a smaller extent in 2008) ended is uncanny.
• The implications are very bearish for the following weeks, especially
given that the gold price is following the analogy to 2008 and 2012
as well.
8. Clear Sell Signal
• All the above is what we had already known last week. In that case, let’s move to last
week’s confirmation.
• The thing is that the stochastic oscillator just flashed a clear sell signal. This is important
on its own as these signals often preceded massive price declines. However, extremely
bearish implications come from combining both: the sell signal and the analogy of 2008
and 2012.
• Therefore, we should consider the sell signal in the HUI-based stochastic oscillator as yet
another sign serving as confirmation that the huge decline has just begun.
• Thus, if history rhymes, as it tends to, the HUI Index will likely decline profoundly. How low
could the gold stocks fall? If the similarity to the previous years continues, the HUI could
find medium-term support 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 it
seems unthinkable.
• But which part of the mining stock sector is likely to decline the most? In my view, the
junior mining stocks.
9. The Junior Miners
• GDXJ is underperforming GDX just as I’ve been expecting it to.
Once one realizes that GDXJ is more correlated with the
general stock market than GDX is, GDXJ should be showing
strength here, and it isn’t.
• If stocks don’t decline, GDXJ is likely to underperform by just a bit,
but when (not if) stocks slide, GDXJ is likely to plunge visibly more
than GDX.
• Expanding on that point, the GDXJ/GDX ratio has been declining
since the beginning of the year, which is remarkable because the
general stock market hasn’t plunged yet.
• And once the general stock market suffers a material decline, the
GDXJ ETF’s underperformance will likely be heard loud and clear.
11. The Junior Miners - II
• Why haven’t the juniors been soaring relative to senior mining stocks?
What makes them so special (and weak) right now? In my opinion, it’s the
fact that we now – unlike at any other time in the past – have an asset
class that seems similarly appealing to the investment public. Not to
everyone, but to some. And this “some” is enough for juniors to
underperform.
• Instead of speculating on an individual junior miner making a killing after
striking gold or silver in some extremely rich deposit, it’s now easier than
ever to get the same kind of thrill by buying… an altcoin (like Dogecoin or
something else).
• In fact, people themselves can engage in “mining” these coins. And just
like bitcoin seems similar to gold to many (especially the younger
generation) investors, altcoins might serve as the “junior mining stocks” of
the electronic future. At least they might be perceived as such by some.
12. Gold’s & Stock’s Decline
• Consequently, a part of the demand for juniors was not based on the
“sympathy” toward the precious metals market, but rather on the
emotional thrill (striking gold) combined with the anti-establishment
tendencies (gold and silver are the anti- metals, but cryptocurrencies
are anti-establishment in their own way).
• And since everyone and their brother seem to be talking about how
much this or that altcoin has gained recently, it’s easy to see why
some people jumped on that bandwagon instead of investing in
junior miners.
• This tendency is not likely to go away in the near term, so it seems
that we have yet another reason to think that the GDXJ ETF is going
to move much lower in the following months – declining more than
the GDX ETF. The above + gold’s decline + stocks’ decline is truly an
extremely bearish combination, in my view.
13. Gold’s & Stock’s Decline - I
• In conclusion, once gold, silver and mining stocks’ doors finally slam
shut, over-optimistic investors will likely go down with the ship.
• And with the most volatile segments of the precious metals market
eliciting the most bearish signals, those left holding the bag will likely
wonder how it all went wrong.
• Moreover, with gold’s relative outperformance signaling waning
investors’ optimism, the miners – and more specifically, the GDXJ
ETF – will likely suffer the brunt of the forthcoming selling pressure.
• The bottom line? With the walls closing in on gold, silver and mining
stocks, the game show will likely end with investors left empty-
handed.
14. The 2016 Analogue
• Also, foretelling another revival, the USD Index has hopped into the time machine
and set the dial to 2016. With the flashback scrubbing the stains off of the USD
Index’s 2016 downswing, Mr. Clean could be arriving at just the right time.
• As you can see in the below chart, what we saw this year is quite similar to what
happened in 2016. If the analogy continues, the back-and-forth trading is likely to be
followed by an upward acceleration.
• The trigger for it could be the rally back above the 50-day moving average and the
rising dashed line.
• The confirmed breakout above both in 2016 resulted in sharper rallies in the USDX
and much lower gold prices (gold declined about $200 between early October 2016
and its December 2016 lows).
• Finally, the USD Index’s long-term breakout also remains intact. And when we
steady the binoculars and observe the currency landscape, the greenback’s recent
weakness is largely inconsequential.
16. USD Index’s Long-term Breakout Also
Remains Intact
• Finally, the USD Index’s long-term breakout also remains
intact.
• And when we steady the binoculars and observe the currency
landscape, the greenback’s recent weakness is largely
inconsequential.
• Also, please note that the correlation between the USD Index
and gold is now strongly negative (-0.93 over the last 10 days).
• The same thing happened in early January 2021 and in late
July – August 2020; these were major tops in gold.
19. The Bottom Line
• Once the momentum unfolds, ~94.5 is likely the USD Index’s first stop. In the
months to follow, the USDX will likely exceed 100 at some point over the medium
or long term.
• Keep in mind though: we’re not bullish on the greenback because of the U.S.’
absolute outperformance.
• It’s because the region is outperforming the Eurozone and the EUR/USD
accounts for nearly 58% of the movement of the USD Index – the relative
performance is what really matters.
• In conclusion, investors are well aware of the USD Index’s dirty laundry, and the
euro’s squeaky-clean image is starting to show stains. Moreover, with the U.S.
Federal Reserve (FED) poised to come clean and scale back its asset purchases
in September, the USD Index should shine over the medium term.
• More importantly, though, with gold, silver and mining stocks exhibiting strong
negative relationships with the U.S. dollar, the greenback’s eventual shower could
send all of the precious metals’ gains down the drain.
