Will Treasury Yield’s Climb Cause Gold’s Fall?

With its inverse correlation with the yellow metal, the next move in the 10-Year-Treasury yield can cause gold to have a rough time.

Gold declined yesterday (Apr. 22), and the GDXJ is back below its late-Feb. highs. All things considered, the rallies in both appear to be over or almost over.

Just as I did yesterday, I will start the analysis with the long-term picture of the HUI Index – the flagship proxy for gold stocks.

Please note that the 2007 – 2008 and the 2009 – 2012 head and shoulders pattern didn’t have the right shoulders all the way up to the line that was parallel to the line connecting the bottoms. I marked those lines with green in the above-mentioned formations. In the current case, I marked those lines with orange.

Now, even though the above wasn’t the case, in both cases, the final top – the right shoulder formed close to the price where the left shoulder topped. The left shoulder that formed in early 2020 topped at 303.02.

I previously wrote that it wouldn’t be surprising to see a move to about 300 in the HUI Index, and that’s exactly what we saw – this week’s high was slightly above 299.

This means that the recent rally is not a game-changer, but rather a part of a long-term pattern that’s not visible when one focuses on the short-term only.

The thing is that the vast majority of individual investors and – sadly – quite many analysts focus on the trees while forgetting about the forest. During the walk, this might result in getting lost, and the implications are no different in the investment landscape.

From the day-to-day perspective, a weekly – let alone monthly – rally seems like a huge deal. However, once one zooms out and looks at the situation from a broad perspective, it’s clear that:

What has been will be again, what has been done will be done again; there is nothing new under the sun. (-Ecclesiastes 1:9)

The rally is very likely the right shoulder of a broad head and shoulders formation. “Very likely” and not “certainly”, because the HUI Index needs to break to new yearly lows in order to complete the pattern – for now, it’s just potential. However, given the situation in the USD Index (i.a. the positions of futures traders as seen in the CoT report, and the technical situation in it), it seems very likely that this formation will indeed be completed. Especially when (not if) the general stock market tumbles.

Miners: GDX and GDXJ

As far as the GDX ETF is concerned, I previously wrote that it could move slightly above $37, and even if it did, it would not invalidate the broad head and shoulders pattern. Well, the GDX didn’t move to $37, but it was quite near to doing so. It was close enough for this rally to be very similar to what we saw in May, 2020.

The GDXJ – a proxy for junior mining stocks – declined yesterday, and it’s now back below its late-Feb. highs - please note how weak it remains relative to other proxies for mining stocks. Unlike the HUI or the GDX, the GDXJ didn’t move visibly above its late-Feb. highs and it had already invalidated this small breakout.

The ratio between the two ETFs has been declining since the beginning of the year, which is remarkable because the general stock market hasn’t plunged yet. This tells us that when stocks finally slide, the ratio is likely to decline in a truly profound manner – perhaps similarly to what we saw last year.

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Disclaimer: All essays, research and information found on the Website represent the analyses and opinions of Mr. Radomski and Sunshine Profits' associates only. As such, it may prove wrong ...

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