Overall, based on the previous two charts, it seems that we may indeed see a corrective upswing once miners move to (or very close to) their 2017 lows, but it’s not likely that the upcoming rally will be anything significant.
The long-term HUI Index chart shows that one should indeed think at least twice before trying to time the upcoming correction.
Let’s start with the thing that’s easiest to interpret. We just saw a long-term sell signal from the Stochastic indicator. Last year we saw it only twice and, in both cases, a big decline followed. This was the case also multiple times in the preceding years. Consequently, the implications here are bearish.
The thing that’s more complex, but also more rewarding from the analytical point of view, is the continuation of the analogy to the 2011 – 2013 period.
The 2011 and 2016 tops were preceded by substantial rallies, but they were shortly followed by big and sharp declines, and then by corrective upswings. This, by itself, is not enough to view these situations as similar, but the additional details are. These additional details are the sizes of the corrective upswings (about 50% in both cases as marked using Fibonacci retracements) and the – approximate – time that it took for the corrections to materialize. We marked the latter using red dashed lines. As you can see, the horizons are almost identical.
The declining purple, dashed line is a line connecting the top with the top of the first local move up during the decline. In this case, the price that was reached is correct only approximately and the time seems to be off for more than a month. The latter seems to be a violation of the analogy, but please keep in mind that the last couple of weeks were characterized by a sharp slide in the value of the USD Index that was only reflected in the PM prices to a small extent. In fact, in terms of the euro, gold topped very early in January, and taking this date into account would imply only a small deviation in the analogy present on the above chart. Overall, it seems that we can still view the analogy as present.
The interesting fact about both initial local tops during the correction (the late-2012 one and the most recent 2018 one) is that they formed close to previous local tops.
What are the overall implications of the above? We should expect a big and volatile decline to follow. Last week’s performance and what we’re seeing this week seems to be just the very first sign of what’s to come. If the 2013 move is repeated, then we are likely to see the HUI Index well below the 100 level before the bottom is really in.
This may sound ridiculous, but the HUI at 200 sounded just as ridiculous when it was trading above 500 in late 2012. Yet, a year later, that’s exactly the value that we saw.
What does the above imply for the near term? Back in 2013, there was no visible corrective upswing until the HUI broke below the previous major low (the 2012 low). The analogous low is the late-2016 bottom, which is relatively far. So, if the analogy is to continue, then gold miners may move significantly lower without a bigger move higher.
Summing up, the outlook for the precious metals market is bearish for the following weeks and it seems that even if we see a corrective upswing shortly, it will not be anything spectacular. At least not until gold stocks move to their 2017 lows.
On a side note, please note that our bearish comments on the precious metals sector doesn’t make us an enemy of gold and silver investors – it makes us a true (!) friend. If you ask your friends how you look before going to an important meeting, everyone will tell you that you look great regardless of the truth as they will prefer not to be the ones that ruin your mood by saying something unpleasant. But a true friend will tell you how things really are, so that you can fix something before your leave. This may be unpleasant, but ultimately, it’s the second approach that benefits you.
Most gold promoters will want you to think that gold is going to go higher no matter what happens and all you should do is buy, buy, buy. And then buy some more. They don’t want to risk upsetting you. But not us. We’re that true friend that tells you what they think and why, regardless of the possibility of being unpleasant – so that you can benefit more. In this case, if we’re correct about the bearish outlook for the precious metals, it will be much more profitable to be buying at lower prices than at the current ones.
So, in our view, the outlook for the precious metals market is friendly bearish. The precious metals market is likely to move much higher in the coming years, but if we’re correct about the medium-term decline first, then the best buying opportunity is still ahead of us.