Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
As it turned out, the USD Index didn’t reverse yesterday. Instead, it declined further and reached the 92.50 level, while gold responded with a rally as a result. And yet – that’s still bearish and in line with what I wrote yesterday. But why is that? How could it be that a daily rally in gold is bearish? The answer is simple – it’s not the rally in gold that’s bearish, but what it had caused. More precisely, what it hadn’t caused. It didn’t make miners rally to any similar extent.
Based on the recent decline, gold touched its October highs and, once again, tested its 38.2% Fibonacci retracement level. This resistance held on, and therefore, the upswing that we’ve witnessed this month is nothing but a corrective upswing.
The breakout above the declining short-term resistance line is a quite bullish sign on its own, especially since gold managed to hold above it for a few days. To be a little more specific – this would have been a bullish indication if it wasn’t balanced by equally or more important new signals coming from the mining stocks.
Yesterday, the GDX ETF (which we’ll use as a proxy for the sector) moved higher ($0.95) but gave away most of its gains ($0.49) before the session was over, ultimately closing merely $0.46 higher. This means that miners have barely closed above their Friday’s closing price. As a matter of fact, they didn’t even move close to the October high.
Miners’ weakness is something that heralds precious metals market declines, and such was the case back in early March. As you can see on the chart above, the GDX ETF didn’t move back to its previous highs in March – even though at the same time, gold moved slightly above its previous highs. And we are all well aware of the carnage that followed.
Now, you might be thinking that comparing gold and miners is not a true apples-to-apples comparison, as their closing time is different. That’s true, so let’s see how the GLD ETF performs – its closing price is the same as the one of the GDX ETF.
The GLD ETF chart is even better in showing us that yesterday’s closing price is visibly above last Friday’s close. Therefore, the argument about miners’ severe underperformance is a valid one.
Moreover, please note that the above chart shows us that the GLD is currently testing its October highs and its 50-day moving average. Back in early September, this MA served as support, and when it was finally broken in mid-September, it was then followed by a quite visible decline. This makes it quite a potent resistance right now, and it’s no wonder that gold is down in today’s pre-market trading.
Additionally, please also take into account that the GLD bounces off relatively similar price levels. In August and early September, the 180-level and its surrounding served as support, and subsequently – in October – it served as resistance. There’s a good reason why that’s the case.
Namely, these are the levels that stopped GLD’s rally back in 2011. This is where we saw the ultimate top. It formed a bit north of $180, but the overall area remains the same.
And what are the implications for the current situation because of it? That the resistance that gold and GLD just reached is stronger than it appears at first sight.
Currently, gold is trying to climb back above its 2011 highs, and the attempt is not a successful one for now. Even at the moment of writing these words, gold futures are trading below their 2011 high.
So… Is there any other indication that gold and miners are about to turn south? You can bet there is.
The USD Index might have already bottomed, or it might not have bottomed at all. Before dismissing the above sentence as non-informative, let us add that even if it didn’t bottom yet, it’s likely that it will bottom and reverse its course pretty soon.
And why is that? It’s because of the price level that it reached yesterday. Namely, it moved to about 92.5. Why would this be of any significance? Because earlier this year, the 92.5 level either proved to be robust support right away or the USD Index invalidated the breakdown below it after a maximum of 3 trading days.
Moreover, in the preceding years, many times before this level (proximity of 92.5) served as resistance and support.
The strength of this level as support (and resistance) in the long run and in case of the recent developments makes it incredibly strong in the current circumstances.
Consequently, the USD Index outlook remains bullish, and the outlook for the precious metals sector remains bearish.
You might wonder, from what levels is the USD Index likely to rally? From the current levels, after re-testing the early-September low, or it could bottom between these prices. It’s very likely that the USD Index would not be able to confirm the breakdown below the 92.5 level, just like it was unable to do it in early September. Consequently, we will view a brief move below this level as a buying opportunity for the USD Index, and as a good shorting opportunity for the mining stocks.
All in all, given the limited bullish and the sizable bearish potentials, from today’s point of view, the bearish outlook for the mining stocks continues to be justified.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think it has already begun.
During the final part of the slide (which could end later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we expect silver to decline more than miners. That would align with how the markets initially reacted to the Covid-19 threat.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run, which does not make the short-term decline improbable. Markets can and will get ahead of themselves and decline afterward – sometimes very profoundly – before continuing with their upward climb.
The plan is to exit the current positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 5 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is soft, but at the same time, a broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to execute such a strategy successfully.
The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.
Summary
Summing up, given the recent move higher in the general stock market, it could be the case that the decline is delayed, but there are also signs pointing to the corrective upswing being already over, just like the visible mining stocks underperformance and the very recent USD Index breakout verification.
Considering gold's breakout invalidation above the 2011 highs, it's evident that the big rally (that ended $4 above our upside target) is entirely over. Given this invalidation and the confirmed USD Index breakout, gold will probably slide much lower over the next few weeks. There are indications that the corrective upswing in the precious metals market and the pullback in the USDX are close to being over, so the decline could resume any day – or hour – now.
Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway.
After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-6 weeks, so it's important to stay alert to any changes.
Most importantly, please stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely earn much more in the following weeks and months), but you have to be healthy to enjoy the results.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:
Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $32.02; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $28.73; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)
Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $42.72; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $21.22; stop-loss for the JDST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)
For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway. In our view, silver has greater potential than gold does):
Silver futures downside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.
Gold futures downside profit-take exit price: $1,703
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash
Insurance capital (core part of the portfolio; our opinion): Full position
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Please note that we describe the situation for the day that the alert is posted in the trading section. In other words, if we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder - "initial target price" means exactly that - an "initial" one. It's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade), we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (DGLD for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn't, then we will view both positions (in gold and DGLD) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels daily for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Furthermore, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
