In the case of the gold stocks to gold ratio, we definitely have bearish implications. It was already after Monday’s closing price that we saw a small breakdown below the 2017 and 2016 lows, however, based on yesterday’s decline, the breakdowns are now clearly visible.
This opens the road to much lower valuations. Still, let’s not forget that verifications of breakdowns happen from time to time. For instance, in late October 2017, the ratio broke below the previous lows and consolidated before diving deeper. This corresponded to a relatively small – but still – corrective upswing in gold.
Then again, the above might have simply been a result of the cyclical turning point in gold (and in mining stocks). Consequently, it’s not clear if the preceding breakdown resulted in a verification, which in turn resulted in a small rally in gold. It seems more likely that it was the other way around. Gold and miners reversed their courses temporarily because of the turning point, but the corrective upswing was relatively small as – among other factors – the HUI to gold ratio was after a major breakdown and thus, there was a limit to how high the ratio and gold were eager to rally.
So, the question becomes, if we have a turning point nearby.
Not really, we already had one at the beginning of the month and it seems that the turnaround that preceded the turning point was the development that was likely to happen based on it.
Wait, there are turning points for mining stocks as well?
In short, yes, but it’s nothing entirely new - the turnings point for mining stocks are the turning points for gold, with additional sub-cycles in between.
We’ve been recently asked if it’s true that mining stocks have turning points between the 4th and the 10th day of the month. The reply is that this was the case in the previous year – but it’s moving toward the scenario in which the turning points are seen at or very close the end of the month. Consequently, the next turning point is not this week, but it’s already behind us and the next one is at the end of February and the beginning of March.
In other words, there’s not much more to the 4th to 10th day of the month rule – it’s a cycle that will likely be continued, but the above rule will likely not. If you’ve been following our analyses for some time, you knew about this cycle all along (precisely, about every other cycle as that’s what appeared most useful for the gold market).
The additional thing that we can see on the above chart is that the volume that accompanied yesterday’s decline was quite sizable, so the bearish implications of the price-volume link remain in place.
So, based on the gold stocks to gold ratio and the turning points for mining stocks (GDX, HUI and XAU), it doesn’t seem that the turnaround has to be seen shortly or that it’s likely.
Still, let’s keep in mind that if the current bearish momentum persists, mining stocks will reach their 2017 lows very soon. The RSI indicator is already close to the 30 level and since reaching it is a classic buy signal for the short term, we may see at least a corrective upswing soon.