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Are Gold and GDX Reversing, or Pushing to New Highs?


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Gold and mining stocks just closed at a new yearly high. Silver is not even close to reaching such levels, and gold is already back below where it was trading 24 hours ago. Can these breakouts be trusted? Do they have a lasting power? To answer that, we better remember something important first. This changes the overall picture regarding gold and mining stocks entirely.

This key thing is the cyclical turning point. They often work even without additional factors strengthening them, but this time, we have the very rich week in terms of monetary announcements, which makes increased and temporary volatility even more likely.

Is Gold Seriously Pushing to New Highs?

While gold closed a bit higher than it did in February, it didnt make a new 2019 intraday high. In other words, gold attempted to move substantially higher, but it reversed before the end of the session. And its already back below the February high at the moment of writing these words.

It was not only a tiny breakout that we saw it was also yet another reversal. The implications of the former would be bullish (only once the breakout is confirmed, which it probably wont be), but the implications of the latter are clearly bearish.

Especially that we saw significant gold volume.

Also because it happened right after the cyclical turning point.

Bot factors confirm that the reversal interpretation of yesterdays price action in gold is the correct one.

What about mining stocks?

The Same Question Goes for Miners Too

We see more or less the same thing. Mining stocks broke above the February high in an insignificant manner right after the cyclical turning point. The RSI above 70 shows that they are overbought. This along suggests that miners should take a breather and invalidate the breakout. Based on multiple other gold trading techniques (especially the long-term-oriented ones), its likely that the decline will be much more than just a correction of the recent upswing.

Lets turn our attention now to the big picture regarding the mining stocks and their under- and outperformance in the final parts of precious metals rallies. It mightily helps in making sense of todays situation.

The Issue of Miners True Strength

A move above this strong resistance line is possible, but its highly unlikely that it would be significant or sustainable. Conversely, its very likely that we will see a reversal and a big decline shortly after the small breakout is invalidated in line with what we saw earlier this year.

As a reminder, the more important tops are used to create a given line, the more important it is from the technical point of view. Also, the more of the tops are used, the stronger the line becomes. The above-mentioned resistance line is based on five important tops and an additional confirmation of its strength in the form of XAUs inability to hold above it earlier this year. These five tops are:

the late 2011 top

the mid-2012 top

the 2016 top

the early 2018 top

the mid-2018 top

All of them are very important and theres quite a few of them usually the resistance lines are created based on just two extremes, and this time we have five of them. The implication is that this line is very unlikely to be broken, especially given the massive reversals in gold and silver that we saw recently.

So why did the miners move higher recently despite these reversals?

Thats indeed the key question to ask. The reply may appear strange not only to those who have become interested in the precious metals market recently, but also to those, who have been in it for longer.

It is generally known that the mining stocks stop reacting to golds movement before the move is reversed. Miners usual outperformance wanes before tops, and the miners dramatic decline becomes less dramatic or even stops altogether before gold bottoms.

However, what investors usually miss, is that in case of the really major turnarounds, there is also one additional stage of miners relative performance. Its the part when miners fake the comeback of their regular strength. Thats exactly how the early-2016 rally in the mining stocks started with mining stocks underperformance. Gold didnt make a new low in January 2016, but the HUI Index did. Of course, one swallow doesnt make a summer, and one exception from the rule is not enough to change the rule. The point is, however, that it was not the only exception this phenomenon is actually quite common in case of major reversals. Please take a look at the chart below for details.

The early-2016 case is the most prominent one, but there were quite a few in the following months and years as well. Even the very end of the 2016 rally was accompanied by a small show of miners strength.

The black rectangles mark the times when miners reaction to golds movement became weaker, and the red rectangles mark the cases when the strength was back right before the final reversal.

What does it mean? It means that if we are looking at a major top right now, this temporary strength in the mining stocks is very normal its not a game-changer, or a reason to ignore the huge reversals in gold and silver that we just saw.

Are we looking at a major top right now? Last week, gold reversed in a profound manner after reaching the resistance line based on the previous major tops and silvers intraday reversal was very volatile. Gold moved to a new high in terms of the daily closing prices yesterday but made no new intraday yearly high and remains solidly below it in todays pre-market trading. Gold miners are at new yearly highs. Thats exactly what a major top should look like.

Summary

Summing up, the combination of golds reaching the very long-term resistance line, the immediate invalidation of the breakout to new 2019 highs, huge volume, proximity of the cyclical turning point, and RSI almost at the 70 level all suggest that the 2019 top for gold is in, and silvers price action clearly confirms it. Yesterdays strength in the mining stocks and todays monetary-news-based upswing in gold seem temporary and dont change the overall outlook, which remains down.

Today is exceptionally rich in monetary news, with the Fed playing the main role, so we might see more intraday volatility in the following hours. The turning points and the preceding rally, however, make it clear that ultimately after todays volatile price action - gold is likely to decline.

We know the last few weeks, months, and years have been exhausting because not that much happened in the precious metals market but it is exactly this kind of boring action that usually precedes the biggest price moves and biggest opportunities. This was even made into a trading technique. Bollinger bands become narrow when a given market is calm and seasoned traders know that when they are narrow, its time to prepare for a huge move. Most people dont know that, and they get caught by surprise and only join the move once its mostly over. It seems that we have this kind of situation in the precious metals right now. The patience will be well rewarded, especially that our medium-term downside target for gold remain intact.

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Thank you.

Przemyslaw Radomski, CFA

Editor-in-chief, Gold & Silver Fund Manager

Sunshine Profits - Effective Investments through Diligence and Care

* * * * *

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 a subject to change without notice. Opinions and analyses were 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 believed 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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About the author


Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same. 

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation. 

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions. 

High quality of analytical tools available at http://www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital. 

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential. 

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society. He also holds a master's degree in Finance and Banking, and is currently writing his thesis after having finished his PhD studies in Economics. 

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