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Outlook Remains Bearish for Gold and Mining Stocks

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Despite last week's show of strength, the downward trend is not threatened at the moment.

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After three quarters of declines prompted by fears over US stimulus tapering, gold posted a near 8% gain for the September quarter. Yesterday, the yellow metal gained on safe-haven bids surrounding the US government shutdown. However, this improvement didn't last long and gold declined as buying slowed. What's interesting is that we saw this downward move despite a weaker dollar.

Earlier today, we saw further growth as the US government shut down some of its operations after Congress failed to agree on a spending bill, but gains were limited as investors believe the standoff will likely soon be resolved. It's worth noting that it's the first US government shutdown in 17 years. According to Reuters, the impasse also raised concerns over whether Congress can meet a more important deadline in mid-October to raise the debt ceiling limit. At this point it's worth mentioning that the debt ceiling issue came up in 2011. Back then, an agreement was reached only in the last minute and gold hit an all-time high of $1,920 per ounce, in part because of the uncertainties surrounding a deal.

If the political wrangling continues, will it be the impetus for gold to move higher? Will the yellow metal break out above the $1,350 level? Or maybe we'll see a confirmation of the breakdown below $1,300? Before we try to answer these questions, let's move on to the very long-term HUI Index (INDEXNYSEGIS:HUI) chart (a proxy for the gold stocks) and try to find out what kind of impact the mining stocks can have on gold's future price (charts courtesy of http://stockcharts.com).


Click to enlarge

As you see on the above chart, in the past weeks and months, there were several unsuccessful attempts to move above the 61.8% Fibonacci retracement level based on the entire bull market. The last attempt we saw in mid-September also failed, just like the previous ones. In this way, mining stocks returned to below the above-mentioned retracement level (at approximately 267), and still remain below it.

From today's point of view, we clearly see that the situation hasn't changed. From the long-term perspective, the implications are therefore bearish and the trend remains down.

Now, let's move on to the junior sector.



In the Toronto Stock Exchange Venture Index (which is a proxy for the junior miners as so many of them are included in it), we see that after several weeks of sideways trading, juniors moved to the declining resistance line based on the March 2011, March 2012, and January 2013 highs. It's worth mentioning that in the past when we saw analogous price moves, they all resulted in major declines.

If we see similar price action here, it will probably lead to a continuation of the downward move – and this seems very likely.

Before we summarize, we think it would be interesting to revisit the chart of gold priced in Australian dollars. Could it provide important clues about further price movements? Let's find out.


Click to enlarge

On the above chart, we see that there was a significant breakout above the long-term declining resistance/support line in mid-August, which resulted in a rally to slightly below the February high. In spite of this upside move, the improvement didn't last long, and we saw a sharp decline at the end of August and into September. With this move, gold priced in Australian dollars dropped below the broken resistance/support line once again, invalidating the breakout above this line.

As you see on the above chart, there is a bearish head-and-shoulders formation underway, which may result in further declines in the near future. In this case, we could see a strong corrective move, one which would likely push gold's price all the way back down to the April bottom area. Actually, we could even see a move below the April lows, because gold seen from this perspective is no longer strong versus gold priced in the US dollar.

Therefore, from this point of view, the implications are bearish.

Summing up, the medium-term outlook for gold remains bearish despite the positive fundamental situation (based on which gold will likely move higher in the coming years). Despite last week's show of strength, the downward trend is not threatened at the moment. Additionally, the outlook for the mining stocks also remains bearish, and the trend is still down.

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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