Gold’s Mounting Challenges And Odds That No Longer Favor A Move To New Highs

We likely have a short-term game changer, and the implications are VERY BEARISH for gold…

by Przemyslaw Radomski via Sunshine Profits

In yesterday’s analysis, we told you that what we saw earlier this week could have been the final pre-plunge top in case of the mining stocks. The market appears to have confirmed our analysis. Miners declined along with the rest of the precious metals sector. Gold – while not plunging as much as it did earlier this month – still declined quite visibly.

We also wrote that it was relatively unclear if gold will move to new highs after all given all the bearish indications from the miners. Right now, based on what we saw yesterday, the odds no longer favor a move to new highs. And the key reasons don’t come from the precious metals market, but from the related markets: the USD Index, and the general stock market.

Let’s start with the former.

Ladies and gentlemen… The bottom in the USD Index appears to be finally in. The U.S. currency invalidated the breakdown below its previous lows and right now its testing the declining resistance line. The invalidation of the breakdown itself is a huge deal – we haven’t seen anything like that in months. It’s likely the short-term game-changer, especially that the USD Index at the same time invalidated the breakdown below the long-term rising support line visible on the below chart.

It seems that we will see a clear weekly reversal candlestick based on tomorrow’s closing prices, which would then bode very well for the following week(s). And it would be very bearish for gold.

Then again, miners could bottom before gold does, just like they have done in March.

On numerous occasions in the previous days, we wrote that the thing that triggers the turnaround in the USD Index and thus PMs, might be the invalidation of a breakout in the general stock market. And we have seen exactly that. The S&P 500 closed below the highest closing price of February, which means that the breakout was invalidated in both: intraday and closing price terms. This is a strongly bearish signal for the stock market in my opinion, and I expect to see more weakness in the following days.

More weakness in the general stock market is likely to translate into accelerating decline in the mining stocks which would likely get bearish push from both: gold and stocks. That’s what happened in March, and you know very well how far miners plunged.

The sizable daily rally in the USD Index is particularly notable, because that’s what started gold’s final decline in March. And it happened shortly after the miners had topped.

In other words, our yesterday’s comments remain up-to-date:

The vertical, black line shows the day right after the top (we didn’t want the line to cover the daily performance at the top), and it clearly shows that while gold was one day after the top, miners were already 2 days after the top.

The top in the mining stocks (in terms of the daily closing prices) took place on March 5, which we marked with red, vertical line.

On March 5, gold was still below its initial February high and the USD Index was just starting to move lower after briefly pausing. In other words, miners decline started earlier than what we saw in gold or the USD Index.

One could say that the reason for it is was the situation in the general stock market. Indeed, the latter was already declining in early March. However, the fact that miners declined yesterday despite a daily rally in stocks makes the current case even more bearish for the miners. Besides, the invalidation of the intraday breakout in stocks is a sign that miners are likely to get a bearish push from other stocks.

What does that all lead to? To the likelihood that we saw the final top in the mining stocks, which might be the right shoulder of a head-and-shoulders top pattern (the red line on the HUI chart would be the neck thereof). At the same time, it could be the case that gold will make another attempt to rally above the previous 2020 highs. They key word here is “could” – it’s not something that is carved in stone. In fact, back in March, silver was weaker, and gold was stronger. We’re seeing the opposite right now – overall, the situation is already similar to what happened when the PMs were topping in March. Therefore, if gold moves slightly the previous highs – just like it did in 2011 – it could trigger the sell-off, but at the same time we would like to stress that this kind of move is not required for the sell-off to start. Especially in case of the mining stocks.

Naturally, the sell-off would be a temporary event and PMs and miners would be likely to soar in the following months.

If the final pre-plunge top is already behind us, and gold declines similarly to how it had declined in March, then we could see the bottom as early as next week.

Also, moving back to the previous chart, please note that while miners declined quite visibly in the last two trading days, silver didn’t. This is in perfect tune with what happened in March – silver’s initial decline was relatively insignificant, and then silver caught up with vengeance, while miners’ slide slowed down. We expect this to take place once again, and we plan to switch from our short positions in miners to short positions in silver – perhaps as early as this or next week.

The situation in mining stocks is developing practically exactly as we had outlined it previously, so it seems that quoting our thoughts from the preceding analyses is appropriate:

Since miners already reached the $43 level on Monday, yesterday we wrote that we wouldn’t be surprised to see GDX at $44 or even $45 at the top.

In short, miners – and the general stock market – did exactly what we have outlined above.

The GDX ETF moved to $44.09 yesterday, but then declined on an intraday basis, and ended the session lower, despite gold’s daily gain.

This means that at the same time, we saw:

  • Miners’ extreme weakness relative to gold and general stock market, which serves as the perfect “sign of weakness” that we previously wrote about
  • Small breakout to new highs in the S&P 500 Index (and in the most popular ETF on it: SPY) that was then invalidated in case of the intraday terms
  • Miners’ had formed a top in terms of the daily closing prices 4 days after the recent bottom, and they formed a top in intraday terms 5 days after the recent bottom – exactly the same thing that we saw in March, right before THE slide
  • The shape of yesterday’s candlestick in the mining stocks is very similar to what we saw on March 6 – right before THE slide.

The above is a profoundly bearish combination for the next few days – weeks.

Thank you for reading today’s free analysis. This is the final free analysis that’s based on our Gold & Silver Trading Alerts that we plan to post for the next several days, so in order to receive the follow-ups (and intraday Alerts, whenever the situation requires them), we strongly suggest that you subscribe to their premium version. The upcoming volatility strongly justifies that, especially that we still have promotion available for new subscribers (which will be available only for the next few days). We invite you to subscribe and read today’s issue right away.

Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager