Gold Is It Weird to Have Two Corrective Upswings Instead of One? / Commodities / Gold & Silver 2023

By P_Radomski_CFA / December 31, 2022 / / Article Link


Here's how history rhymes in theprecious metals market and what we can glean from recent movements in gold,silver, and mining stocks.

Historytends to repeat itself. Not to the letter, but in general. The reason is thatwhile economic circumstances change and technology advances, the decisions tobuy and sell are still mostly based on two key emotions: fear and greed. Theydon’t change, and once similar things happen, people’s emotions emerge insimilar ways, thus making specific historical events repeat themselves to acertain extent.

Forexample, right now, gold stocks are declining similarly to how they did in 2008and in 2012-2013. 

This is an extreme underperformance ofgold stocks, similar to what we saw in 2013 before the worst of the slide. This is an extreme underperformance of goldstocks – something that we’ve also seen in 2013 before the biggest part of theslide.

For many months, I’ve been writing thatthe situation in the HUI Index is analogous to what we saw in 2008 and in 2013.Those declines were somewhat similar, yet different, and what we see now isindeed somewhere between of those declines – in terms of the shape of thedecline.

At first, the HUI Index declined justlike it did in 2013, and the early 2022 rally appears to be similar to thelate-2012 rally. However, the correction that we saw recently is also similarto the late-2012 rally.

Is it really that strange that we nowhave two corrective upswings instead of one, given that history does not repeatitself to the letter but rather rhymes? Not necessarily.

This is especially the case given thatthe 2008 decline had one sizable correction during the big decline. It’s notclearly visible on the above chart due to the pace of the 2008 slide, but it’sdefinitely there. You can see it more clearly in one of the below charts.

So,no, the recent rally is not an invalidation of the analogies to the previouspatterns, it continues to rhyme with them in its own way. And the extremelybearish implications for the following months remain intact.

Howlow can the HUI Index fall during the next big downswing?

Asis the case with gold and silver, a move backto the 2020 lows is definitely in the cards. Please note that this level isalso strengthened (as support) by other major lows: the 2019, 2014, and 2008ones.

However,I wouldn’t rule out a move even lower on a temporary basis. If gold were todecline to about $1,450-1,500, it would mean that it would double its current2022 decline. If the HUI Index does that, it will move below 150.

So,all in all, 100-150 is my current targetarea for the upcoming slide in the HUI Index.

Allright, let’s zoom in and see how mining stocks declined in 2008.

Backthen, the GDXJ ETF was not yet trading, so I’m using the GDX ETF as ashort-term proxy here.

Thedecline took about 3 months, and it erased about 70% of the miners’ value. Thebiggest part of the decline happened in the final month, though.

However,the really interesting thing about that decline – that might also be veryuseful this time – is that there were five very short-term declines that tookthe GDX about 30% lower. 

Imarked those declines with red rectangles. After that, a correctiveupswing started. During those corrective upswings, the GDX ralliedby 14.8-41.6%.

Do you know now how muchthe GDX ETF has rallied from its September 2022 bottom? It moved up by 41.7%. Thismeans that the move higher now is practically identical with the corrective (!)upswing that we saw in September 2008.The analogy was not broken – it remains intact, and itpoints to much lower prices in the future.

Justlike gold, the GDXJ invalidated the breakout above its 38.2% Fibonacciretracement a few times, and now it also broke below the rising, short-termsupport line (marked with orange).

This is a powerful, bearishcombination of factors, especially that miners were the first to decline – gold followed,while silver was still showing strength.

Yes, miners are now once again slightlyabove the 38.2% Fibonacci retracement, but since the previous attempt wasinvalidated shortly and miners are now practically ignoring gold’s rallies,it’s extremely likely that this small breakout will be invalidated as well.

Pleasekeep in mind that the above comes on top of the analogy that I marked with redrectangles, and my previous description thereof remains up-to-date:

Thecurrent upswing continues to be similar to what we saw in March and Aprilearlier this year. On the above chart I named both rallies “ridiculous” – I didso as what we see now is contrary to what’s happening in the real interestrates, and it appears that it’s the general public that’s pushing the priceshigher now.

Technically,one could say that the GDXJ formed an inverse head and shoulders pattern (theearly September bottom being the left shoulder and the mid-October bottom beingthe right shoulder), which was just completed.

Justas the March – April rally ran its course on declining volume, we saw the samething recently. Even the RSI was slightly below 70 at the April top, just likeit was recently.

Speaking of analogies, earlier today (andyesterday), I discussed the analogy to mid-2021. The GDXJ’s performance alsosupports this link. Back then, junior miners had corrected a bit more than halfof the preceding decline before sliding again, and this time, they corrected abit less than half of the preceding decline.

Interestingly,after the mid-2021 correction, the pace of the decline picked up, and minersdeclined almost twice as fast. And yes, this could happen in the followingmonths as well.

Andyes, this means that another decline could take the GDXJ all the way down toits 2020 low, or very close to it.

On the below chart, I marked just howperfectly the recent price moves played out according to theElliott Wave Theory.

Ofcourse, EWT is not the only tool that one could use, and I find other technicaltools more useful, but still, this kind of pattern-following is uncanny.

Theclassic EWT pattern is three waves down (I marked those with orange rectangles)and then a correction consisting of two smaller waves. 

That’sexactly what we have seen in recent months. The September–now pattern appearsto be the above-mentioned correction. It didn’t only consist of two smallerwaves higher – they were actually almost identical in terms of size andsharpness. This created a classic ABC correction (flag) pattern.

Three weeks ago, I wrote that the Dec. 1small breakout above the upper red line didn’t have meaningful bullishimplications as it hadn’t been confirmed. And indeed, it was invalidated.

Now,since this pattern is complete, another huge 3-stage move lower can – and islikely – to unfold. This is verybearish for junior mining stocks (as well as for gold, silver, andprobably other commodities and stocks), and the fact thatjuniors are already showing weakness relative to gold (the latter wasalmost flat yesterday, while miners declined) serves as a bearish confirmation.As always, I can’t guarantee anything, but in my view, the profits that can be reaped on thisupcoming slide can be enormous.[PR1] 

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