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One Big Factor Foretelling Gold’s and Miners’ Next Moves

March 23, 2021, 10:18 AM Przemysław Radomski , CFA

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For gold and the miners, it’s a small crack in the dam, and the beginning of something bigger. It’s when support lines turn into resistance lines.

What do I mean? Before getting to the crux of the matter, let’s start with a brief overview of what happened yesterday (Mar. 22) in the daily charts.

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The overview will be in fact very short, because practically nothing changed in the case of gold and mining stocks. The sell signal from the stochastic indicator is now more visible, but I already wrote about it yesterday, so – again – nothing really new.

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Silver moved lower in a more visible manner, which might be surprising to some investors (especially those that went long based on the “silver short squeeze” movement almost two months ago), but it’s not surprising to me. If the history repeats itself to a considerable degree, then it’s not odd to see the same kind of performance that we saw in the similar stage of a given price move.

In this case, I already discussed the self-similarity present in the silver market, and I marked the similar patterns with red rectangles. The current situation seems similar to early March 2020, when silver was just starting a major decline while being between its 50- and 200-day moving average. Let’s keep in mind that gold actually moved to a new high in early March, and silver was very far from doing so. Back then, silver underperformed, so it’s no wonder that it’s underperforming right now. While the silver shortage was the topic of the day for many days about two months ago, it seems that more bearish headlines will soon be more popular.

At this point you might be wondering if this indicates bullishness as miners did not show significant weakness yesterday. The answer is “no”, because this kind of relative performance would be important only after a clearly visible decline. We are currently after a clearly visible corrective upswing.

The daily decline in silver is not the thing that I previously described as “barely visible, but perhaps very important”.

It’s the breakdowns that are key here.

We saw breakdowns in both gold and mining stocks, and while it’s almost not visible in the daily charts, it is visible in the 4-hour charts (each candlestick is based on 4 hours).

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The above 4-hour GDX chart clearly shows that the value of this ETF moved – and closed the day – below the rising red support line. In fact, the same happened in the GLD ETF in the bottom part of the chart.

This breakdown is not yet confirmed, but it seems to be the first small crack in an enormous, bearish dam.

On a side note, please note that the GDX topped practically in exact tune with my original expectations. On March 10 (when we were already long), I wrote the following:

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.

At this point one might wonder if exiting the positions earlier, close to $33, was indeed a good idea. Since this is an opportune moment for a thought experiment, let’s discuss it.

We now know that miners moved higher and (likely) topped a bit above $34. If, on March 11, we had known that the miners would rally even more, it would have been a much better idea to wait with taking profits off the table for several more days. However, it’s impossible to know exactly what will happen in the future and it’s now easy to say with the benefit of hindsight that this or that would have been the best choice after all.

However, since the supply of time machines is very limited, we cannot use information that was not available at the moment of making the decision to discuss whether that decision was good or not.

Using an analogy, would drunk driving for many miles have been a good idea if one didn’t hit anybody and was able to arrive home in one piece? Absolutely not. That would be a terrible decision, because of the ridiculous amount of unnecessary risk that one would have taken based on this very decision. The fact that nobody got hit and that the driver didn’t hurt themselves would have been pure luck, which would be unlikely to be repeated many times, if one made the same decision over and over again.

In the case of mathematics or physics, where probability isn’t involved, one can judge the decisions based on the outcomes. 2+2=4, so if one’s outcome if this equation was 7, then this is clearly wrong. If one thinks that dropping a heavy object on one’s head is a good idea, one will soon learn – based on the effect – that this is a bad idea and a bad decision.

What is the thing that makes the situations described in both the above-mentioned paragraphs different as night and day? The certainty or uncertainty of outcomes – in other words, probability.

The bottom line is that one can judge decisions based on outcomes only if probability isn’t involved. If it is, one needs to take only the information available at the time of making the decision in order to determine whether a given decision or idea (including gold investment ideas) was good or not. This applies to non-investment situations as well.

Let’s get back to the investment world. Our original plan was to get out after the “easy” part of the rally was over and based on information available on March 11 – that “easy” part of the rally was indeed over. Based on what happened on that day and in the prior days, the decision to close this position was justified – in my view, and if I saw exactly the same situation unfolding in the future, I would be making exactly the same decision. Just because the price then moved higher in the following days, doesn’t mean that this decision became a bad one. It was a rally, but it was not the easy part of the rally, and while it actually happened, that was not enough to keep betting on it.

I don’t expect the market to move higher for much longer (if at all). In fact, the above chart and the one below provide a good indication that the decline has already started or is about to start.

The final chart for today is the one featuring gold’s 4-hour candlesticks.

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Gold has not only broken below its rising, short-term support line, but it’s been verifying this breakdown for about 24 hours without invalidating it. If gold manages to stay below the support line, the latter will turn into resistance, and we’ll likely see the start of another powerful slide.

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Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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