Briefly: in our opinion, full (100% of the regular position size) speculative long positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

NOTE: The “Briefly” paragraph included a typo yesterday, based on our previous position; it’s already been corrected; we apologize for any confusion this might have caused. 

Gold moved to new yearly lows yesterday (Mar. 8) and mining stocks didn’t. That’s a very good indication that a short-term bottom in the precious metals sector is likely in.

One of the key indicators that was constantly pointing to lower precious metals values over the past several months was mining stocks’ weak performance relative to gold. This trend has now – at least temporarily – reversed, so it’s very important that one pays attention to it.

Figure 1 – VanEck Vectors Gold Miners ETF (GDX) and GLD ETF Comparison

The above 4-hour chart (each candlestick represents 4 hours of trading) makes it crystal-clear that the late-February bottom was the moment after which miners stopped declining and started to trade sideways. Gold (here: the GLD ETF, which I’m using to have an apples-to-apples comparison – both ETFs trade on the same exchange) continued to decline in March. Well, to be precise, miners did form new yearly lows in March, and we went long almost right at one of those intraday lows, but the moves were not significant enough to really change anything.

So, since miners no longer want to decline, there are only two other things left for them to do: either nothing or rally.

They’ve been doing nothing for the past several days, due to the lack of bullish leadership in gold. And it seems that they are going to get this bullish ignition any day, or hour now.

Figure 2 - COMEX Gold Futures (GC.F)

Gold is moving back up in today’s pre-market trading and since miners were able to shrug off yesterday’s decline, then today’s comeback would likely trigger their upswing.

Please keep in mind that the upswing mind be relatively short-lived – perhaps lasting only one week or so. There’s a triangle-vertex-based reversal point on Monday, so it wouldn’t be surprising to see an interim top at that time, especially considering that:

1. The triangle-vertex-based turning points have been working particularly well in the recent past – they marked the January and February tops.
2. The corrective upswings during this medium-term decline (especially in mining stocks) often took about a week to complete – at least the easy part of the upswing took a week.

The USD Index has been rallying relentlessly – just like in 2018 – in the last couple of days, but a quick pullback would not be surprising. In fact, the USD Index is already lower in today’s pre-market trading.

Figure 3 - USD Index (DX.F)

Yesterday, the USD Index closed above its lowest daily closing price of August 2020 (92.13), but at the moment of writing these words, it’s already after a move back below it. If the USDX closes the day below it, we’ll have an invalidation of a breakout with bearish implications for the very short term.

How low could the USD Index move during this pullback? Not particularly low, as the similarity to 2018 implies a rather unbroken rally. The February 2021 high of 91.6 seems to be a quite likely target, but we might see the USDX move a bit lower as well – perhaps to one of the classic Fibonacci retracements based on the recent upswing – lowest of them (the 61.8% one) being at about 90.8.

Ultimately, it seems that the above corrections will result in the GDX ETF moving to about $34 or so.

Figure 4 - VanEck Vectors Gold Miners ETF (GDX)

The resistance levels in the $34 - $35 area are provided by:

• The late-February 2020 high
• The rising neck level of the previously completed head and shoulders pattern
• The analogy to how big miners’ correction was in April (assuming that the mirror similarity continues)
• The declining blue resistance line
• The 50-day moving average

Consequently, the GDX is likely to form a top in the above-described area, and my previous comments on the likely follow-up remain up-to-date:

After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.

This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, the day of reckoning for stocks is coming, and it might be very, very close.

As I explained previously, based on the similarities to the 1929 and 2008 declines, it could be the case that the precious metals sector declines for about three months after the general stock market tops. And it seems that we won’t have to wait long for the latter. In fact, the next big move lower in stocks might already be underway, as the mid-Feb. 2021 top could have been the final medium-term top.

In conclusion, the gold miners should continue to glisten as oversold conditions buoy them back to the $33-$35 range. Due to the GDX ETF’s recent strength, combined with gold rallying off of the lows on Mar. 5, the PMs could enjoy a profitable one-week (or so) party. However, with the celebration likely to be short-lived, it’s important to keep things in perspective. While this week’s performance may elicit superficial confidence, medium-term clouds have already formed. As a result, positioning for an extended rally offers more risk than reward.

Having said that, let’s take a look at the market from the more fundamental point of view.

The Usual Suspects

While the PMs remain in consolidation mode and are likely to bounce over the next week (or so), the ‘usual suspects’ delayed the forthcoming rally for at least another day.

I’ve warned on several occasions that equity-market stress often reverberates across the precious metals’ market. And despite the Dow Jones Industrial Average (DJIA) attempting to put on a brave face, the NASDAQ 100’s severe correction hasn’t gone unnoticed.

Figure 5

If you analyze the table above, you can see that NASDAQ 100 drawdowns of more than 2.00% tend to unnerve the PMs. Moreover, if you exclude silver’s short squeeze on Jan. 29 and the NASDAQ 100’s relatively ‘quiet’ 2.63% drawdown on Feb. 22, bouts of equity volatility aren’t met with much resistance.

Letting the air out of Joe Biden’s $1.90 trillion stimulus balloon, ominous indicators actually headlined Monday’s (Mar. 8) trade. Contrary to expectations, both the USD Index and the Cboe Volatility Index (VIX) traded higher: the former, shrugging off the shower of liquidity, and the latter, reacting to techs’ turbulence. What’s more, I warned on Mar. 2 that the USD Index has a tendency to track the VIX’s movement.

Please see below:

Figure 6

More importantly though, I warned on Jan. 15 that 2020’s bearish stimulus story has now become dollar-positive.

I wrote:

An interesting development is unfolding right before our eyes. Instead of traders dumping the U.S. dollar at the first hint of new stimulus, loose fiscal policy is causing a sell-off in the bond market and leading to dollar strength. Remember, to pay the bills, the U.S. government needs to sell $1.90 trillion worth of U.S. Treasuries; and as the supply of Treasuries rise, yields rise, which in turn, pushes prices down.

And on Mar. 8?

Well, surging by nearly 9% (again), the U.S. 5-Year Treasury yield is behaving like a Man on Fire. And while I’ve reiterated on several occasions that Jerome Powell, Chairman of the U.S. Federal Reserve (FED), has lost control of the bond market, Mar. 8 was just the latest example.

Please see below:

Figure 7

Leading the USD Index higher, on Mar. 8, the EUR/USD closed at its lowest level since Nov. 27. I shine a spotlight on the currency pair because the EUR/USD accounts for nearly 58% of the movement in the USD Index. And if you analyze the chart below, you can see that the EUR/USD is nearing a point of no return. With ~1.16 the break point, a breach of this key level could open up the floodgates.

Figure 8

For context, I wrote previously:

Barely breaking out of a roughly 12-year downtrend, the EUR/USD has yet to invalidate its declining long-term resistance line. As a result, a break below ~1.16 puts ~1.08 well within the range of the EUR/USD’s 2015/2016 lows.

Figure 9

But is there a real pathway lower?

Well, for one, with the European economy drastically underperforming the U.S., the European Central Bank (ECB) is projected to outprint every other G7 central bank in 2021 (the yellow bar below). As a result, excess asset purchases should pressure the FED/ECB ratio and further erode the EUR/USD.

Figure 10

What’s more, the ECB’s splurge could begin as early as this week. With Eurozone bond yields already on the rise and the debt-ridden economy unlikely to tolerate a sustained ascension, the ECB’s weekly PEPP purchases (pandemic emergency purchase program) are likely to accelerate.

Please see below:

Figure 11

To explain, the vertical gray bars above represent weekly ECB asset purchases. Similarly, the yellow horizontal line depicts weekly average asset purchases (since July). And given the impact of mean reversion, with last week’s PEPP purchases falling below the monthly average, the ECB is likely to accelerate its spending in the coming weeks.

Second, and highlighting the fundamental divergence that I’ve been warning about for over a month, Eurozone-U.S. growth differentials have sunk like a stone.

Please see below:

Figure 12

To explain, the dark blue line above tracks the performance of the EUR/USD, while the light blue line above tracks Eurozone-U.S. growth expectations. As you can see, the EUR/USD tends to rise when European growth prospects outperform the U.S. and tends to fall when U.S. growth prospects outperform Europe. And given the sharp decline in the light blue line, the EUR/USD still has plenty of catching up to do. Case in point: analysts at Nordea Markets believe that fundamental value for the EUR/USD is 1.13 (the red box above).

Circling back to the USD Index, the 2017-2018 analogue continues to gain momentum.

I wrote previously:

In 2017-2018, it also took 82 days for the USDX to form a final bottom (the number of days between the initial bottom and the final bottom) and the duration amounts to 21.19% of the overall timeframe. If we apply a similar timeframe to today’s move, then the USD Index likely bottomed on Feb. 12.

If the history rhymes once again (the similarity has been uncanny in the previous months), then the next temporary stop for the USD Index is a bit below 95, as that’s when the USDX topped in September 2020. Precisely, that was 94.80, so to be conservative, we can say that the next particularly significant resistance for the USD Index is at about 94.5.

Figure 13

And because seeing is believing, the side-by-side comparison is nearly a splitting image. However, if we overlay the two moves, it’s clear why ~94.5 is likely to materialize.

Please see below:

Figure 14

To explain, the gray line above depicts the USD Index’s performance from September 2017 to August 2018, while the blue line above depicts the USD Index’s current performance. As you can see, the USD Index is following the 2017-2018 analogue to a tee.

As further evidence, the economic outperformance of Europe isn’t the only fundamental variable that’s supporting the USD Index. Similarly, the U.S.’s fundamental performance relative to other G9 countries is also a reliable indicator of the USD Index’s future behavior.

Please see below:

Figure 15

To explain, the light blue line above tracks the performance of the USD Index, while the dark blue line above tracks U.S-G9 growth expectations. As you can see, the USD Index tends to rise when U.S. growth prospects outperform G9 countries and tends to fall when G9 countries’ growth prospects outperform the U.S. Thus, with a material divergence clearly visible on the right side of the chart, a USD Index uprising is likely to materialize in the coming weeks.

In conclusion, the USD Index’ mettle continues to unnerve the precious metals. Due to their strong negative correlations, a resurgent USD Index is extremely negative for the PMs. However, it’s important to remember that the above mosaic paints a profoundly bearish picture over the medium-term. And because gold and the miners have a pathway higher over the next week (or so), the PMs likely have immediate upside before they meet their maker. However, once the Grim Reaper appears, the PMs will likely hit new lows before a reliable medium-term buying opportunity emerges.

Overview of the Upcoming Part of the Decline

1. It seems to me that the initial bottom has either just formed or is about to form with gold falling to roughly $1,670 - $1,680, likely this week.
2. I expect the rebound to take place during the next 1-3 weeks.
3. After the rebound (perhaps to $33 - $34 in the GDX), I plan to get back in with the short position in the mining stocks.
4. Then, after miners slide once again in a meaningful and volatile way, but silver doesn’t (and it just declines moderately), I plan to switch from short positions in miners to short positions in silver (this could take another 1-4 weeks to materialize). I plan to exit those short positions when gold shows substantial strength relative to the USD Index, while the latter is still rallying. This might take place with gold close to $1,450 - $1,500 and the entire decline (from above $1,700 to about $1,475) would be likely to take place within 1-10 weeks and I would expect silver to fall hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold – after gold has already declined substantially) is likely to be the best entry point for long-term investments in my view. This might happen with gold close to $1,475, but it’s too early to say with certainty at this time.
5. Consequently, the entire decline could take between 3 and 17 weeks.
6. If gold declines even below $1,500 (say, to ~$1350 or so), then it could take another 10 weeks or so for it to bottom, but this is not what I view as a very likely outcome.
7. As a confirmation for the above, I will use the (upcoming or perhaps we have already seen it?) top in the general stock market as the starting point for the three-month countdown. The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector would be likely to bottom about three months after the general stock market tops . If the mid-February 2020 top was the final medium-term top, then it seems that we might expect the precious metals sector to bottom in mid-May or close to May’s end.
8. The above is based on the information available today and it might change in the following days/weeks.

Summary

To summarize, the PMs’ medium-term decline is well underway, as miners broke below the neck level of their almost-yearly head-and-shoulders formation and then continued the decline. However, it now seems that we’re going to see a counter-trend bounce with the GDX ETF moving to about $34 or so, which is why I wrote about opening long positions in the mining stocks.

In addition, because we’re likely entering the “winter” part of the Kondratiev cycle (just like in 1929 and then the 1930s), the outlook for the precious metals’ sector remains particularly bearish during the very first part of the cycle, when cash is king.

The confirmed breakout in the USD Index is yet another confirmation of the bearish outlook for the precious metals market.

After the sell-off (that takes gold to about $1,450 - $1,500), we expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money last March and it seems that we’re about to make much more on this March decline, 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 long positions (100% of the full position) in mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDX ETF): binding profit-take exit price: $33.92; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the NUGT (2x leveraged) and GDXU (3x leveraged – which is not suggested for most traders/investors due to the significant leverage). The binding profit-take level for the NUGT: $60.92; stop-loss for the NUGT: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the GDXU: $18.92; stop-loss for the GDXU: 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.):

Silver futures upside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,758.

Gold futures upside profit-take exit price: $1,758.

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

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief