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Gold, Miners: How Long Will Short-Term Rally Last?

March 10, 2021, 9:36 AM Przemysław Radomski , CFA

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Gold rallied, gold miners soared to new March highs and the USD Index finally moved lower; and most likely, these price moves are not yet over.

The precious metals market finally moved yesterday (Mar. 9) after providing us with bullish indications for quite a few days. Let’s jump right into charts and examine the details, starting with the part of the precious metals market that showed particular strength – mining stocks.

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Figure 1 - VanEck Vectors Gold Miners ETF (GDX)

Even though gold moved lower in early March, gold miners stopped declining after reaching my target area based several techniques – most importantly the 50% Fibonacci retracement based on the entire 2020 rally, and the previous lows and highs. Just as miners’ relative weakness had previously heralded declines for the entire precious metals sector, their strength meant that a rally was about to start. And that’s just what we saw yesterday (Mar. 9).

Ultimately, it seems that the above corrections will result in the GDX ETF moving to about $34 or so.

The resistance levels in the $34 - $35 area are provided by:

  • The late-February 2020 high
  • The rising neck level of the previously completed head and shoulders pattern
  • The analogy to how big miners’ correction was in April (assuming that the mirror similarity continues)
  • The declining blue resistance line
  • The 50-day moving average

Additionally, please note that the last few local tops were accompanied by RSI at about 50. The latter is currently below 45, suggesting that this rally has more potential, but that it’s not particularly extreme.

The confirmation that the top is indeed in might come from the volume. Please note that the last three times when we saw really important tops, the GDX rallied on particularly strong volume. If we see something like that within the next 5 trading days or so (quite likely on Monday or close to it), we’ll have an even bigger chance of catching the reversal.

Consequently, the GDX is likely to form a top in the above-described area.

After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.

This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, the day of reckoning for stocks is coming, and it might be very, very close.

As I explained previously, based on the similarities to the 1929 and 2008 declines, it could be the case that the precious metals sector declines for about three months after the general stock market tops. And it seems that we won’t have to wait long for the latter. In fact, the next big move lower in stocks might already be underway, as the mid-Feb. 2021 top could have been the final medium-term top.

Let’s consider what the GDX and GLD did on an intraday basis yesterday.

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Figure 2 - VanEck Vectors Gold Miners ETF (GDX) and Gold ETF (GLD) Comparison

As I already wrote, mining stocks rallied to new monthly highs, and the above 4-hour chart (each candlestick represents 4 hours of trading) makes it crystal-clear that the late-February bottom was the moment after which miners stopped declining and started to trade sideways. Gold (here: the GLD ETF, which I’m using to have an apples-to-apples comparison – both ETFs trade on the same exchange) continued to decline in March. Well, to be precise, miners did form new yearly lows in March, and we went long almost right at one of those intraday lows, but the moves were not significant enough to really change anything.

So, since miners no longer wanted to decline, and there were only two other things left for them to do: either nothing or rally.

They had been doing nothing for several days, due to the lack of bullish leadership in gold. They just got this leadership yesterday, and they soared.

Now, let’s keep in mind what I wrote in yesterday’s intraday Alert – namely, that mining stocks tend to rally particularly well in the initial part of the upswing, and then they underperform during the final part of the rally. So, when gold is above $1,750 or so, miners might already be rallying to a limited degree. Consequently, miners might rally above $34.27, but that is far from being certain. They might actually rally slightly less – perhaps to exactly $34 or so.

I applied the Fibonacci retracement levels to the above chart, but I actually used them as Fibonacci extensions. My current upside target for gold is at about $1,770 (which corresponds to about $166 in the GLD ETF) and it’s at about $34 for mining stocks (GDX ETF). The Fibonacci extensions emphasize that if both targets were to be reached, then it means that gold so far rallied (intraday) about half of its entire rally, while mining stocks rallied (intraday) about 61.8% of their entire rally. This perfectly fits miners’ tendency to outperform in the initial part of a given move, which makes both price targets more reliable.

Having said that, let’s move to gold.

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Figure 3 - COMEX Gold Futures

Gold rallied strongly after bottoming right in the middle of my target area and after moving almost right to its June 2020 bottom, and after almost doubling its initial January decline. Yesterday’s rally also meant invalidation of the brief breakdown below the 61.8% Fibonacci retracement level based on the entire 2020 rally. Thus, the very short-term trend is up.

Please keep in mind that the upswing might be relatively short-lived – perhaps lasting only one week or so. There’s a triangle-vertex-based reversal point on Monday, so it wouldn’t be surprising to see an interim top at that time, especially considering that:

  1. The triangle-vertex-based turning points have been working particularly well in the recent past – they marked the January and February tops.
  2. The corrective upswings during this medium-term decline (especially in mining stocks) often took about a week to complete – at least the easy part of the upswing took a week.

The USD Index has been rallying relentlessly – just like in 2018 – in the last couple of days, but a quick pullback would not be surprising. In fact, it seems that one is already underway.

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Figure 4 - USD Index (DX.F)

On March 8, the USD Index had closed above its lowest daily closing price of August 2020 (92.13), but yesterday, it closed back below this resistance. This means that we just saw an invalidation of the breakout – which is a bearish sign for the short term.

How low could the USD Index move during this pullback? Not particularly low, as the similarity to 2018 implies a rather unbroken rally. The February 2021 high of 91.6 seems to be a quite likely target, but we might see the USDX move a bit lower as well – perhaps to one of the classic Fibonacci retracements based on the recent upswing – lowest of them (the 61.8% one) being at about 90.8.

This pullback might trigger a question about the validity of the analogy to the 2018 rally, which seems to have taken place without any interruptions.

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Figure 5

The analogy seems to remain intact when looking at it from the long-term point of view. Let’s keep in mind the recent decline was a bit sharper and it took less time to complete.

The 2017 – 2018 decline took 387 day (between the top and the first low) and then there were 82 days between the initial and the final low (21.19% of the decline).

This time, there were 269 days between the top and the first low. Adding 21.19% to this time, points to Feb. 12 as the "proportionately identical" bottom time target. The final bottom formed on Feb. 25 - just 9 trading days away from the analogy-based target. The analogy remains clearly intact.

“So, doesn’t it imply that there shouldn’t be any pullbacks until the USD Index rallies above 94?

No. And this becomes obvious once we zoom in.

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Figure 6

You see, it’s not true that there were no pullbacks during the 2018 rally. There were, but they were simply too small to be visible from the long-term point of view.

The first notable pullback took place in early May 2018, and it contributed to a corrective upswing in the precious metals market. To be precise, the USD Index declined after rallying for 56 trading days, but gold rallied earlier – 51 trading days after the USD Index’s final bottom. The USDX’s immediate-top formed 16 trading days after its final bottom, and gold’s bottom formed 10 trading days after the USD’s final bottom.

Comparing this to the size of the previous decline in terms of the trading days, it was:

  • 51 – 56 trading days / 283 trading days = 18.02% - 19.79%
  • 10 – 16 trading days / 283 trading days = 3.53% - 5.65%

Now, let’s examine the current situation.

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Figure 7

The preceding decline lasted for 200 trading days and there were 41 – 42 trading days between the final USDX bottom and the short-term reversals in gold and USDX. Comparing this to the final USDX bottom, we get 7 – 8 trading days.

Applying the previous percentages to the length of the most recent medium-term decline in the USD Index provides us with the following:

  • 18.02% - 19.79% x 200 trading days = ~36 - ~40 trading days
  • 3.53% - 5.65% x 200 trading days = ~7 - ~11 trading days

The above estimation of about 36 – 40 trading days almost perfectly fits the current 41 – 42-day delay, and the estimation of about 7 – 11 trading days almost perfectly fits the current delay of 7 – 8 trading days.

In other words, the analogy to the 2018 performance does not only remain intact – it actually perfectly confirms the validity of the current corrective upswing. Once again, it’s very likely just a pullback, not a big trend reversal.

Also, please note that back in 2018, the USD Index corrected after moving back above its mid-2017 lows and now we see the analogy to that – the USDX corrects after moving back above its mid-2020 lows. Back in 2017, the USD Index corrected to approximately its previous short-term high (the January 2018 high). Now, the February high is providing strong support at about 91.6 – that’s where this brief correction might end – on an approximate basis.

The above perfectly fits the scenario in which the precious metals market rallies on a very short-term basis (likely to about $1,770 in gold and about $34 in GDX), and then resumes its medium-term decline.

Letters to the Editor

Q: Dear Mr. Radomski,

I am currently long Silver. Can you please indicate the target price for silver or should I just exit when gold touches $1750?

Warm regards

A: Silver is the least predictable of the classic precious metals trio (gold, silver, and mining stocks) – at least at this time. The biggest problem with silver’s upside targets is that silver tends to overshoot resistance levels and create “fakeouts” (instead of breakouts) right before plunging. This means that using the tool that is so useful in case of other markets (resistance lines and levels) is often misleading in case of the white metal.

Still, I’ll attempt to provide a useful upside target for it.

Figure 8

The recent silver price pattern is somewhat similar to what we saw between mid-2019 and early 2020. I marked them both with red rectangles. If this similarity continues to some extent, then we can expect silver move higher in the very near term. Back in March 2020, silver corrected about half of the recent upswing and it topped close to both: it’s 20-day moving average (marked with red) and the previous lows.

Silver’s 20-day moving average is currently at $26.89, and the mid-February lows are between $26.75 and $27.33 (I’m not counting the February 19 low, which seems relatively accidental). The 50% retracements are at $27.60 (if we take the 2021 high as the start of the decline) and $26.64 (if we use late-February top as the start of the decline).

Based on the above levels, it seems that silver’s next short-term top is likely to form in the $26.60 - $26.85 range.

But, if I had a long position in silver, would I wait until the above area is reached? No, I would focus on gold and exit the long position in silver, when gold moves to $1,758 ($12 below its upside target of $1,770). Gold seems more predictable at this time, so I’d use the above silver target area only as additional information. If silver is there when gold is at about $1,758, it would further validate this target.

Also, please note that the above is my opinion on the silver and gold market in general – it’s not investment advice / information directed to you only (I can’t tell you, specifically, what you should do, as that depends on more factors than just the outlook for the markets).

Q: Thank you for providing a valuable service with a genuine and considerate tone toward your clients.

It amazes me that PR is brilliant with analyses and yet takes the time to share his insights for others. It must take hours to compile the facts that confer a risk to reward short to medium term strategy, and then to write a comprehensive report at a level anyone can grasp. A lesser mortal – a selfish person – would keep the knowledge close to the chest and profit with less effort.

Please pass on my sincere respect and appreciation.

A: Thank you very much for your kind words – I’m very happy to see that you appreciate the results of my (and the entire Sunshine Profits Team’s) work. The fact that I can contribute to people’s investment successes and the realization of their plans and dreams is very satisfying and motivating. As well, longer reports are actually usually quicker and easier to write than the short ones, because when I notice something that’s particularly interesting to me (like the analogy in the USD Index to 2018 that I described today), I’m typing the analyses quickly naturally. It’s more difficult when the situation is boring from my point of view and there’s little worth commenting on (again from my point of view), but at the same time I realize that many subscribers will still want to read about the market on a given day – so I’m preparing the analyses on those days, anyway. Fortunately, it seems that the boring days for the precious metals investors are over.

Q: Hi PR. Regarding the typo on Mar. 8 – thank you for the correction. But I read your report word for word and then backwards. I knew what you meant – it’s all good. By the way, thank you. Its takes a great deal of trust to part with your hard earned dough on somebody else’s advice ( for me that's the case anyway ). I've been watching gold go down like a rock falling in water, and it was difficult this time to go long. But I did and spread my coin amongst three Aussie Gold miners for the counter trend rally. Catalyst Metals asx Cyl, Perseus PRU and Ramelius resources RMS. I am learning from you and your team. Thanks a million.

A: Thank you. I’m very happy to read that you’re benefitting from my analyses. It might be more difficult to profit from the brief price moves in the non-US exchanges as the currency price moves could be a relatively important factor with regard to the total rate of return. Still, it seems to me that these three stocks would be likely to rally along with the GDX in the next several days.

Q: Hi PR / Team

Thanks for the update, I'm out of this countertrend rally as soon as Gold reaches $1750 assuming it’s in Australian time. I can only trade between 10 am and 4 pm.

A: If your broker allows this, it might be a good idea to enter a limit sell order that could be realized also outside of the regular trading hours (in the pre-market / after-market trading) – this applies also to other exchanges, including the U.S. exchanges. That’s the kind of order that I have placed on my account.

Why? Because this might increase the chance of the trade being realized. Gold might move above $1,770, but it might do that when the U.S. markets are closed. Putting the profit-take price below this level is one of the ways in which I’m aiming to increase the chance of the trade being realized, but extending the time during which the trade could take place is another tool that would be useful in my view.

As always, the above is just my general opinion, not an investment advice or recommendation directed at anyone specifically.

Q: Phenomenal email - and exactly what I'd expect from a top-rate alert service.

Warmest Regards

A: Thank you! That’s our promise – to keep our subscribers updated, and that’s what we’re doing through not only the regular (and flagship) Gold & Silver Trading Alerts, but also through the intraday Alerts, if the situation seems to warrant it.

Thank you for reading our free analysis today. Please note that the above is just a small fraction of the full analyses that our subscribers enjoy on a regular basis. They include multiple premium details such as the interim targets for gold and mining stocks that could be reached in the next few weeks.We invite you to subscribe now and read today’s issue right away.

Sincerely,
Przemyslaw Radomski, CFAFounder, Editor-in-chief

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