Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks (GDXJ) are justified from the risk/reward point of view at the moment of publishing this Alert.
Some might consider an additional (short) position in the FCX.
Why did the miners’ decline pause? Might this be a bottom?
In short, it might, but it’s highly unlikely that this is indeed a bottom. Yesterday’s pause is natural given the support that miners are encountering and given the situation in the USD Index.
Let’s start with the latter.
On Jan. 4, I wrote the following on the above chart:
Besides, gold’s correction corresponds to USD Index’s correction, which is as normal as it gets. After four days of rallying, it’s natural for a market to take a breather, and that’s exactly what we see today.
USDX’s pause here could mirror the pause that we saw in the second half of December (marked with rectangles), which would both serve as shoulders of an inverse head-and-shoulders pattern – a bottoming formation.
This is in perfect tune with what I wrote previously, and those comments still remain up-to-date – they continue to support even higher USDX values.
The right shoulder of the inverse head-and-shoulders formation has indeed formed. It’s even very similar in length. This means that once we see a rally here, it’s likely to be sizable – based on the size of the patterns head. In the current case, this means a rally to at least 104 or so.
The one thing preventing the USD Index from rallying right away is its declining, medium-term resistance line. Once this line is taken out, and the breakout is verified, USD Index would be free to rally. And this is exactly what appears likely at this time. Let’s keep in mind that the USD Index has just invalidated a breakdown below a long-term support line, and the last time it happened (in the middle of the year), it generated a big rally in the USDX and big declines in the precious metals sector.
The implications are very bullish here. What used to be the ceiling for the prices (in 2016 and 2020) is now a floor.
On a very short-term basis, we see that just as the USD Index is hesitating before breaking higher, mining stocks are hesitating before breaking lower. Some indices and ETFs moved below their important support levels, but others haven’t. Here’s how the situation looks like in various proxies for mining stocks.
The GDXJ ETF – a proxy for junior mining stocks (gold and silver) is after a breakdown below the very short-term (orange) support line and verification of the breakdown, and they just moved close to the rising support line based on the October and November lows.
The GDX ETF, a proxy for senior mining stocks, is at its very short-term support line.
The HUI Index, a proxy for gold stocks, is above its very short-term support line, but it moved very close to it recently.
The XAU Index, a proxy for gold stocks and silver stocks is at its very short-term support line.
The SIL ETF, a proxy for silver stocks just broke below its rising support line.
The same goes for the SILJ ETF, a proxy for silver junior mining stocks. They too moved below their rising support line.
All in all, mining stocks are either verifying their breakdowns or are taking a pause above their rising support lines. Thus, a pause here is quite normal. The same goes for the general stock market. The latter just flashed a sell signal as the S&P 500 Index futures moved back below their previous highs, but it doesn’t mean that the market has to plunge right away – today. The currency markets are really important, and if the USD Index hesitates here, so might the stock market.
You know, with higher USD values, the U.S. exports become less competitive, which is generally bad news for the stock market. Consequently, it’s normal that a pause in the USDX translates into a pause in stocks as well.
Silver’s recent breakdown below the head-and-shoulders pattern and its verification continue to point to much lower silver values in the following days and weeks. And since the entire precious metals sector is likely to move together, the implications are bearish for gold and miners as well. Additional confirmations come from other commodities and commodity stocks, which form their own bearish patterns.
So, just as the USD Index is preparing to break higher, but it’s very likely to proceed, the opposite is the case for the mining stocks and silver price.
Gold moved slightly higher in today’s pre-market trading after yesterday’s decline, and that’s a normal phenomenon. Especially that gold just touched its rising, short-term support line.
Again, a good reason for a pause. Not a reason enough for a major bottom to form, though.
As always, I’ll keep you – my subscribers – updated.
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Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
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Summary
To summarize, the pause that we see across the precious metals sector (as well as the one in stocks) right now is rather normal. The markets are connected, and the current pause in the USD Index translates into a pause in many other markets, including commodity markets.
The key thing about the precious metals market is STILL gold’s extremely important weekly reversal that we saw over three weeks ago, which puts the following rallies in the proper context. Last week’s weekly reversal confirms the bearish nature of those price moves.
Silver’s breakdown below its head-and-shoulders pattern confirm the bearish outlook.
Additionally, the peak in interest in “how to buy gold” searches makes the current situation even more bearish, as this has been a very accurate detector of massive, medium-term tops.
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To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior 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 GDXJ ETF): binding profit-take exit price: $28.12; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding exit level for the JDST: $10.54; stop-loss for the JDST: none.
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 downside exit price: $20.22 (stop-loss: none)
SLV exit price: $18.62 (stop-loss: none)
ZSL exit price: $24.98 (stop-loss: none)
Gold futures downside exit price: $1,812 (stop-loss: none)
Spot gold downside exit price: $1,792 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the exit price: $8.43 (stop-loss: none)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the exit price: $19.49 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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’ve 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 (as 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.
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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
