Before we get into the absolute weakness in gold and other precious metals, let’s review the relative weakness in the mining space.
Here’s a dual-pane chart of the Gold Miners ETF $GDX versus the Gold ETF $GLD and the Silver Miners ETF $SIL versus the Silver ETF $SLV:
Both gold and silver miners are trending lower against the metals they mine. The GDX/GLD ratio is printing fresh multi-year lows, while the SIL/SLV ratio nears its lows marked by the Covid sell-off.
The relative weakness of miners against their respective metals speaks to a lack of risk appetite. We'd expect mining stocks to not only do well but to outperform in an environment favoring gold and precious metals.
Notice how these ratios rose into the summer of 2020. That’s when gold was hitting new all-time highs. Now that these ratios are printing fresh lows, gold has somehow managed to hold above a critical support level.
That’s impressive.
If these miners are going to step in and begin to outperform, now is the time and place, not just against these shiny rocks but also against the broader market.
Here’s a chart of GDX vs. the S&P 500 ETF $SPY:
Gold miners also aren’t faring well against stocks.
Despite the major indexes experiencing significant selling pressure, the GDX/SPY ratio is hitting its lowest level since 2018.
It’s no wonder the gold mining bellwether Newmont Corp $NEM is breaking down to fresh two-year lows on absolute and relative terms.
The absolute and relative weakness from GDX and NEM is as bearish as it gets from gold stocks.
And yet…
Gold doesn’t care!
Another chart that points to an absence of risk appetite is the Silver/Gold ratio breaking to multi-year lows:
That shiny white metal brings greater profit potential, but it also comes with increased risk.
That makes this ratio a great gauge of investor sentiment. And with the silver trending lower relative to gold for months now, it indicates that investors are taking on risks elsewhere.
The overlay chart of our equal-weight PM index and the silver/gold ratio highlights the relationship:
Precious metals tend to do well when this ratio is rising and struggle when it’s not. But even with our equal-weight PM index and the silver/gold ratio making fresh multi-year lows…
Gold doesn’t care. Instead of breaking down, it’s digging in and finding support.
Here’s a dual pane chart of our PM index and gold futures:
Like gold mining stocks and the silver/gold ratio, our equal-weight PM index has broken down from a multi-year consolidation.
The breakdown speaks to the general weakness of precious metals, as silver and platinum futures have resolved lower from similar patterns. This is anything but bullish.
But again, gold remains buoyant. It refuses to roll over while bearish evidence stacks against it.
To be clear, I don’t care what direction gold takes here.
And I’m not proposing getting long gold at this level. The idea of enduring the pain and opportunity cost of trading a range-bound market does not interest me.
What does interest me is the resilience of this shiny yellow rock. A breakdown in the coming weeks would make sense.
But if it continues to hold above support, then gold deserves the benefit of the doubt.
Stay tuned.
COT Heatmap Highlights
Commercial hedgers hold long exposure at three-year extremes in crude oil.
Commercials' net long positioning in gold and silver are at three-year records for the second week in a row.
And commercials carry their largest net long position for lumber in three years.
