If history is any indicator, then patterns tend to repeat themselves and gold is no exception. The patterns emerging now are retracing events which followed in the wake of the 2016 presidential elections. As it’s taking a breather, bearish signs continue to point at gold being poised for a decline.
Overall, as the outlook remains bullish for the USD Index, it remains bearish for the precious metals sector. This is particularly the case if we take into account that recently, the Gold Miners Bullish Percent Index ($BPGDM) showed the highest possible overbought reading.
The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.
Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the Gold Miners Bullish Percent Index to move up once again for a few days. It then declined once again. We saw something similar also this time. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.
Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline. Given the situation in the USD Index, it seems that we’re seeing the same thing also this time.
Please note that back in 2016, after the top, the buying opportunity didn’t present itself until the Gold Miners Bullish Percent Index was below 10. Currently, it’s above 70, so it seems that miners have a long way to go before they bottom (perhaps a few months – in analogy to how gold declined in 2016).
On Thursday (Nov 12th) and Friday (Nov 13th) of last week, miners moved and closed higher, but it’s important to note that their upswing was tiny and not accompanied by strong volume. In other words, it has all the characteristics of the breather that’s going to be followed by another move in the direction in which the market had been moving previously. The previous move was down, so the implications are bearish.
The intraday nature of Friday’s and Thursday’s moves is also quite informative. In both cases miners moved higher – just as gold did – but then they declined, erasing large part of the preceding gains before the end of the session. That’s yet another clue confirming the counter-trend nature of the recent upswing in the miners.
It seems that in the previous weeks, miners once again rallied in the manner that is similar to other sessions that we marked with blue ellipses on the chart.
In particular, what we saw in mid-September appears similar to what we see right now. Back then, the GDX ETF was also after a small breakout above its short-term, blue support line and the 50-day moving average. A relatively sharp short-term decline followed at that time, and the same seems likely also this time.
Also, let’s not forget that the GDX ETF has recently invalidated the breakout above the 61.8% Fibonacci retracement based on the 2011 – 2016 decline.
When GDX approached its 38.2% Fibonacci retracement, it declined sharply – it was right after the 2016 top. Are we seeing the 2020 top right now? This is quite possible – PMs are likely to decline after the sharp upswing, and since there is only less than two months left before the year ends, it might be the case that they move north of the recent highs only in 2021.
Either way, miners’ inability to move above the 61.8% Fibonacci retracement level and their invalidation of the tiny breakout is a bearish sign.
The same goes for miners’ inability to stay above the rising support line – the line that’s parallel to the line based on the 2016 and 2020 lows.
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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager