2023-08-04 08:56:00
What difference can 24 hours make? It rose clearly on Monday, but lost its gains on Tuesday. Same with mining stocks. So what next?
Exactly the same thing that was expected happened before yesterday’s session. One of the things that indicated this decline was its outperformance – this indicator rarely misses its signals. It comes as a bit of a surprise to those who are new to the silver market, but it is true – the white metal tends to feign relative strength against gold before the entire sector turns south. Here we see it again.
That was fake power. False weakness was what we saw recently in the American.
USD; GLD/SLV
On July 14th, when the US Dollar Index had a daily close of 99.49, I wrote the following:
The American is likely to reverse and fly very soon.
Which was slightly lower than expected and the lower than expected Nonfarm Payrolls does not justify the significant decline. The market simply wanted to go lower as it seems that market participants are still in denial and expect the Fed to start cutting again soon. This is not possible without reducing demand. A downward move in the US Dollar Index made this task more difficult for the Federal Reserve, as a US-produced commodity became much cheaper for foreign buyers.
On the technical front, every move below 101 was reversed (and 100 is an even deeper support since it is a very round number) and was quickly reversed, followed by a rally. Since we are also now seeing a strong buy signal from the RSI (we haven’t seen it this low in over a year!), it is very likely that we are seeing a bottom in the making now.
That’s exactly what happened. This was fake weakness, and it ended up being one of the most bullish monthly price patterns imaginable – we saw a hammer reversal candle on the monthly time frame.
USD/GDXJ/SPX
And do you know what happened after the previous monthly reversal?
The US Dollar Index took off on a strong rally, although the reversal we saw at the time (in early 2021) was not as pronounced as the one we saw in July 2023. Van-Eck Emerging Gold Mining Fund – a proxy for small mining stocks – rose When the US Dollar Index reversed in early 2021, it continued to fall simply with the cyclical correction.
The point is, higher GDXJ gold fund prices have never been seen since then, even though the general stock market has moved higher since then, which “should have” contributed to mining stocks’ rally.
Speaking of stocks, please take a look at what happened in them yesterday and what is happening in today’s trading before entering the market.
The chart above indicates daily price changes (each candle is one trading day), and the chart below shows 4-hour candles.
It formed a clear shooting star reversal in late July, and can also be seen as a failed attempt to move above the mid-July high. Stocks tried to move above this level also in early August, but failed again. Today’s early decline suggests that the rally may be over.
Why is this important for mining stocks?
Because it moved significantly lower yesterday, while stocks moved slightly lower. So, if stocks are going to drop really sharply (and it probably will happen very soon or soon, anyway), mining stocks will probably go down as well.
As a reminder, history is in tune with small miners, and the movement following the vertical and red lines is very similar. These lines are not randomly placed – they represent days when non-farm statistics fell short of expectations. In both cases, the start-up miners clustered first, then formed significant peaks.
This has also been the case recently, and the current decline is in perfect harmony with what we have already seen.
Yes, the economic/geopolitical situation is not the same as it was in April 2023 or mid-2022, but it doesn’t matter. What matters is that the statistics were below expectations. This is the key part because previous predictions evoke similar feelings regardless of the same stats. And since price movements are ultimately triggered by humans making emotional decisions (they may well justify those emotional decisions with logic, but emotions always play a big part in making decisions on average), the same patterns will keep working over and over again.
Because neither fear nor greed nor other feelings will go away no matter who wins, how high interest rates get, etc. This is why applying technical analysis while making predictions for XAU/USD makes sense now, and it did decades ago. And it will still make sense in the future.
What does history’s tendency to repeat tell us – gold investors – now? We should prepare for more turbulence this year, as the rise in the US dollar index and the decline in stocks do not bode well for the gold price outlook. In particular, the aforementioned combination is likely to lead to lower shares of small mining companies.
This, in turn, means that our recent huge profits in FCX will likely be joined by huge profits from our current short positions in junior mining stocks and in the FCX Fund.
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#gold #lose #progress #fall #continue