Could Bitcoin’s Moves Indicate the Fall of Junior Gold Stocks?
Although comparing gold and bitcoin gives an idea of the patterns in the market, can the avalanche of junior miners be predicted by the same method?
Those of you who have followed my analyzes for a while might expect me to write that it is based on the rise of the stock market and therefore only temporary, as miners will follow gold sooner rather than later. It is their ultimate source of income (current or expected). While that is true, right now there is another major factor likely contributing to the situation.
It is most likely the crypto drama unfolding.
Remember when I previously commented on the link between juniors and cryptocurrencies? What I wrote at the time was particularly important considering the lesser known (obscure?) with shady backgrounds. In fact, some even call them “shitcoins”.
I wrote that for many individual investors, cryptocurrencies became the “new precious metals market.”
Alternative payment system? Just like gold, right?
It is a flagship (gold, Bitcoin).
It is a cheaper but obviously more useful resource (silver, Ethereum).
There are a number of little-known assets that are risky but have the potential to provide massive returns (high-quality mining stocks, low-quality mining stocks, especially low-quality junior mining stocks, altcoins, “shitcoins”). While gold didn’t do much, the wild rallies in crypto got a lot more attention. It was finally exciting!
So individual investors flocked from the precious metals market to crypto. Not all investors, of course, but many.
While cryptos were on the rise and the general sentiment was positive, investors dumped their PM holdings to buy cryptos as they predicted that the latter would continue to rally “to the moon.” And while that didn’t mean much to gold, as the yellow metal has powerful buyers and sellers who aren’t interested in crypto, it meant a lot to the junior mining equity sector as purchasing power waned.
Fast forward to today’s situation, every other day we hear or read about another crypto scandal, while the prices of cryptocurrencies are dropping sharply.
This means that the above-mentioned effect could have been reversed. The investors who moved out of the junior mining equity sector to get into cryptos (especially altcoins) can now aim to get out of that market (people tend to sell on dips, in fact, that’s why dips happen in the first place ) and go back to what they “liked” before – junior miners.
This specific phenomenon can be seen from a broader perspective when comparing the prices of gold and bitcoin.
As I wrote, the link is probably stronger in the case of altcoins and juniors, but gold and bitcoin have price data that is more comparable, so that is what I will analyze.
Although both gold and bitcoin moved higher between 2014 and now, they quite often moved in opposite directions in the short term. Especially short-term bottoms in gold were usually followed by (more or less) declines in bitcoin.
Interestingly, I originally showed the chart above many months ago, and note that this tendency worked like a charm recently.
Gold formed a short-term bottom, rallied, and now Bitcoin is sliding. Why? Probably because people were tired of Bitcoin’s inability to hold up while gold soared. So they flocked to gold, silver and — probably most intensely — to junior mining stocks.
Right, so does this mean that as Bitcoin slides into the abyss, junior miners will now be floating?
No market moves up or down in a straight line, right? Well, neither does Bitcoin. How low is too low then? This is where the technical stuff comes in.
Remember when I wrote that Bitcoin peaked at around $50,000? Well, it moved a bit above that, but it didn’t trade there for long.
The flagship crypt fell like a stone in the water, and it did so in accordance with the technical principles. Bitcoin formed a bearish head and shoulders pattern and after breaking below the neck level earlier this year, it corrected slightly and then plunged below $20,000.
All of this is a textbook example of how a head and shoulders pattern should work.
Now the size of the decline based on this pattern is probably equal to the size of the head. I marked it with dotted lines.
Guess what – Bitcoin just moved to this target level (marked in green) recently. It is a strong indication that the bottom has been reached. The second indication comes from the huge volume that just followed the decline and the fact that the decline was quite sharp. The ROC (rate of change) indicator at the top of the chart above is close to -25, and when this happened and bitcoin was after a huge volume decline, it then rose.
What is even more interesting is that it was also the times when gold fell.
Sentiment itself is the ultimate indicator that a short-term (!) bottom for bitcoin is at or near. Just go to any news site and look at what is being written about Bitcoin – it’s all scary and bearish. Or at least the majority of news/articles. That’s what happens when prices fall to their lowest point. Remember what was written on those same pages when bitcoin was trading above $50,000? There was sunshine and rainbows. All this time I was warning about the incoming slide. Very few listened then, just as very few want to hear about the coming crash in junior mining stocks.
Anyway, here’s how often people search for “crypto scam” on Google (chart courtesy of Google Trends).
The other characteristic peaks in these searches were in May 2021 (a big peak and big drop in Bitcoin), early November 2021 (a big peak in Bitcoin) and late January 2022 (a big bottom in Bitcoin).
Interest was so high only when there were major reversals in Bitcoin. And since it is crystal clear that the previous move in Bitcoin was to the downside, it cannot be a top. Therefore, it is likely that there is a big bottom in Bitcoin.
Not necessarily the last, but a big one for a while. A bottom big enough to trigger a significant rally in Bitcoin… And a significant decline in the precious metal sector!
It’s easy to follow the herd. “Miners good, Bitcoin bad” is the current word out there. It is also easy to repeat this mantra. But what is easy and what is profitable are rarely the same, and therefore many tend to lose money over time. I’m not saying that every single price movement can be predicted – it can’t. But as time goes on, following logical analysis and being mindful not to follow the herd often pays big dividends.
My responsibility is to keep you updated on my market views, which I strive to base on logical analysis free from bias. Whether it is possible for a human to achieve this kind of objectivity is another question, but as much as I can, I aim to deliver analyzes that are as objective as possible. Right now, the way I see it, Bitcoin seems to have formed a short-term bottom, and mining stocks have either formed a short-term top or are about to do so soon.
Of course, I can’t make any guarantees, but in my view the next step down in the precious metals sector – especially in the junior mining stocks – will probably be something epic.
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