Gold, Iran, and the “Yeah… no” moment in mining stocks

How can safe-haven demand accompany declines in gold stocks? 

The U.S. and Israel launched coordinated military strikes on Iran over the weekend, in what the Pentagon dubbed "Operation Epic Fury." Ayatollah Ali Khamenei was killed in the initial wave. Iran retaliated with missiles and drones across the Gulf, hitting targets in the UAE (including Dubai's Burj Al Arab and its international airport), Qatar, Kuwait, Bahrain, and Saudi Arabia. The Strait of Hormuz is effectively disrupted, with over 100 tankers halted and oil spiking about 13%.

Gold shot up as much as 2.7% to above $5,400 in early Monday trading, approaching its late January highs. Oil surged to around $82. The Dow dropped over 500 points. Flights across the Middle East are suspended. Iran's security establishment is in chaos, with some IRGC units reportedly acting autonomously after losing contact with leadership.

The mainstream financial media is, predictably, screaming about a new era for gold. Analysts are calling for $6,000. The word "structural" is being thrown around like confetti.

In reality…  Gold pretty much had to rally on this news, but the way it rallied – the size of the move, and the action in the other parts of the precious metals market – tells the full story. 

GDXJ invalidates breakout despite war news

Mining stocks – the often leading indicator of gold – just invalidated its move to new highs.

I previously wrote that one shouldn’t get too excited about this breakout as it was not confirmed – especially given the situation in the USD Index and in the main stock indices.

This is exactly the opposite of what one would expect from a truly breaking market after an obviously bullish trigger.

The implications are clear – we have a profound sell signal in mining stocks.

The big players most likely used this opportunity to unload their mining stocks onto the public that is buying today. Think about it – how much supply of mining stocks did the market have to absorb for the price of the GDXJ to decline today – despite the new military conflict?

Silver stalls at Fibonacci ceiling

Silver did not soar after its delivery notice day, either.

All that talk about the imminent collapse of COMEX and the inevitable enormous rally in silver – and what happened?

Pretty much nothing. Silver outperformed on a very short-term basis right before / during the peak uncertainty, and it reversed its course at the most classic technical resistance imaginable – the 61.8% Fibonacci retracement level.

The rally was a technical rally. Yes, the fundamentals remain intact, and they will very likely drive silver much higher in the upcoming years, but the short-term rally itself was an emotional phenomenon.

Quoting my Friday’s comments on silver:

“For now, the "Not Yet" in the title is doing double duty. COMEX hasn't defaulted yet, and based on its contractual toolkit, it almost certainly won't in the way the loudest voices are predicting – at least not soon. But the physical market hasn't fully resolved its supply-demand imbalance yet either. And this is unlikely to happen anytime soon as well. Silver is poised to soar in the long run. I just think that a rally in the USD Index and a decline in stocks will temporarily overwhelm the silver market and it will slide along with many other markets.”

Exactly.

Just because something is likely to happen eventually, does NOT mean that it will happen now.

Also, please note how the USD Index shot up today.

It soared in the first hours of March trading.

This is completely NOT surprising due to USD’s tendency to reverse close to the turn of the month. In the previous four cases, we saw rallies after those monthly turning points, and this time is no different.

This time, however, the rally comes after an extremely clear, medium-term buy signal – the invalidation of a breakdown to new lows that we saw in late January.

Quoting my Thursday’s comments on the USD Index’s short-term chart:

“Zooming in reveals that the tension is rising. The rising support line is near, and the USD Index just touched it. The declining resistance line is also just ahead.

All this created a bullish cup-and-handle pattern, which now points to a breakout – most likely in the near future as the space between support and resistance narrows.”

Right now, this raises just a few eyebrows, but when the USD Index breaks and holds above 100 in a clear way – that’s when the massive changes will happen on the markets. This is something that the USD Index was unable to do for many months, and this change will probably trigger massive, short-covering (remember, everyone still hates the USD) resulting in a big rally.

The implications for the precious metals market are – of course – bearish. And today’s performance of mining stocks and silver tells us that PMs are ready to act on the USD Index’s trigger.