By Przemyslaw Radomski, CFA. Originally published at ValueWalk.
Gold, silver, and mining stocks started 2022 with a bang. However, this wasn’t the kind of fireworks investors were hoping for.
Q3 2021 hedge fund letters, conferences and more
While gold, silver, and mining stocks partied hard into year-end, the trio woke up to massive hangovers on Jan. 3. Although I’ve been warning for some time that mining stocks would stumble in 2021, the New Year is still filled with old problems.
For example, the GDX ETF has been making lower lows and lower highs for months, and when its RSI (Relative Strength Index) approaches 70, the senior miners often run out of gas. For context, I highlighted the events with the blue vertical dashed lines below.
Moreover, with the senior miners’ current price action following the ominous paths of 2000, 2008, and 2013, and their stochastic indicator still signaling overbought conditions, Monday’s weakness may be a sign of things to come.
Please see below:
Please also consider the implications of year-end tax-loss harvesting. With the general stock market rallying to start the New Year, losing positions that were sold to offset capital gains near the end of 2021 were likely repurchased on Jan. 3. However, gold, silver, and mining stocks didn’t benefit from the phenomenon. As a result, while the GDX ETF may have outperformed gold, the relative strength was immaterial within the overall picture.
Turning to the HUI Index’s long-term chart, the same bearish forecast is present. For example, I marked the specific tops with red and black arrows. In the current situation, we saw yet another small move up, but that’s most likely because price moves are now less volatile. The areas marked with red ellipses remain similar and show back-and-forth movement before the big decline.
As a result, we’ve entered a consolidation phase, and the implications are not bullish, but bearish.
Making three of a kind, the GDXJ ETF’s corrective upswing has likely run its course. Interestingly, the junior miners’ current rally mirrors the small correction that materialized in mid-2021. Back then, the GDXJ ETF rallied on low volume and didn’t recapture its 50-day moving average. With the same tepid strength present today, the drawdown that followed in mid-2021 will likely commence once again.
On top of that, the behavior of the GDXJ ETF’s RSI is also similar – with the indicator moving from roughly 30 to 50. For context, I highlighted the similarities with green and purple ellipses below. Also noteworthy, similar developments occurred in February/March 2020, before the profound plunge unfolded. As a result, the GDXJ ETF looks set for another sharp drawdown over the medium term and predicting higher prices might be misleading.
Finally, while my short position in the GDXJ ETF proved quite prescient in 2021, the junior miners continue to underperform the senior miners. With the GDX/GDXJ ratio likely to confront new lows in the coming months, the GDXJ ETF should remain a material laggard in 2022.
In conclusion, gold, silver, and mining stocks started off 2022 with a bang. However, it wasn’t the kind of fireworks that investors were hoping for. With each new celebration shorter in magnitude, it’s likely only a matter of time before their parties are canceled. As a result, the precious metals still confront the same bearish technical outlooks that plagued them in 2021. While mean reversion remains undefeated over the long term, the wait may prove longer than many expect.
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Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Sunshine Profits: Effective Investment through Diligence & 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 subject to change without notice. Opinions and analyses are 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 deemed 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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