Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks 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.
AI! Computers making intelligent decisions! New paradigm! Old laws don’t apply anymore! Long live the bull market! …Really?
Yes, AI is transformative. It already starts to enhance multiple businesses, just like the Internet did many years ago. And as many thought cryptocurrencies would.
But it doesn’t mean that the huge transformation will happen overnight! Or that it fixes everything with regard to the world’s problems in general or with the economic situation.
However, as always, markets – that are ultimately made of people (and bots that were programmed by people, anyway) – are emotional in the short run. And this emotionality is what likely we have just seen when the interest in AI soared.
AI Interest
We even have data to support it. Here’s how frequently “AI” has been searched with Google:
The first peak was in the Dec. 4-10, 2022 week, and the second peak was in the Apr. 16-22, 2023 week.
Now, the above is the interest in AI in general, not necessarily in investing in AI-oriented companies.
But the two are obviously connected, and the chart below proves it.
AI Investment Interest
The above chart features the AI stock price, which, primarily due to the symbol that it has on NYSE, we’re going to use as a proxy for the sector. The company (quoting their website) is an enterprise AI software provider for building enterprise-scale AI applications and accelerating digital transformation.
The value of the shares of this company has been declining in the previous years, but that definitely wasn’t the case this year!
What’s particularly interesting is how rallies followed peak interest.
I marked the Google-based peaks in interest with black arrows in the main part of the above chart.
What followed in both cases is that the price initially declined a bit, but then it picked up and soared with a vengeance. It took several weeks in both cases, and in both of them, the rally took an exponential form.
That powerful and unsustainable rally ended last time when the following happened:
- The MACD indicator moved above 3
- The RSI indicator moved above 70
- The AI price itself rallied on huge daily volume
That’s also exactly what we saw yesterday!
Yes, I know, one swallow doesn’t make a summer, and that’s just one similar situation from the past, BUT it’s one situation from the past that has remarkable number of similarities. It’s not just “one thing” like the RSI. It’s the whole package.
Since AI seems to be the driving force of the recent rally in stocks (just look at the headlines on any mainstream financial website for proof), the is likely an indication that stocks have just topped or are very close to their turning point.
That’s exactly what happened in early February when the previous top in AI formed. And it has some specific trading tips for gold stocks, and the stock market in general.
Implications for Stocks and Miners
Thanks to the vertical dashed lines, you can easily see what happened during those two specific times to stocks, junior miners (GDXJ), and FCX, which I’m using as a proxy for copper and gold (and which is interesting on its own due to how hard it fell in 2008, and due to the fact that we currently have a profitable position in it).
At that moment, in early February, stocks topped, and it was a pause in case of the GDXJ and FCX.
The aftermath was bearish in cases of all: AI, S&P 500, GDXJ, and FCX. It was particularly bearish for silver prices, too.
That was also the time, when the USD Index (which you can see at the bottom of the above chart) consolidated a bit and then moved higher once again. Interestingly, back then, the USD Index was after a breakout above the first of the declining support lines, and now it’s after its second breakout. This time, the importance of the breakout is much greater, so it’s normal that we saw a bigger rally thereafter.
So, what does all this AI-hype tell us?
That it’s probably over in the short- and/or medium term. I continue to see great potential in the AI sector in the long run, though.
And that the stocks are likely topping here, which, in turn, is likely to lead to lower mining stock values.
This also indicates that the miners might move lower and that betting on their rally in the very near term based on an oversold RSI is not as much of a “sure bet” that many think right now.
Back in 2008, after the pre-slide rally, mining stocks “seemed” like a good buy as well, and that didn’t end well at all.
Moving on to the short-term side of things…
The FCX declined yesterday, so Friday’s short position became profitable almost instantly.
In my analysis yesterday, I commented on the above GDXJ chart in the following way:
The self-similar pattern continues, and if it is to continue some more, we’re likely to see some back-and-forth movement in the very near term, and then another move lower.
Given gold futures’ move higher, it seems quite likely that junior miners could move a bit higher and then continue their decline.
That’s exactly what happened during yesterday’s trading. We saw some back-and-forth trading, but overall miners were weak. This suggests more declines ahead.
As I wrote in yesterday’s extra note,
From the short-term point of view, miners are already oversold, but it seems more and more likely that they will get even more oversold before we see a meaningful rebound.
This is great, because it implies that we MIGHT have a great opportunity to go long miners - if they become extremely oversold and we see some good signs of reversals that is. If the GDXJ quickly moves below $33 without correcting in a visible manner beforehand, it will likely be a buying opportunity (for the short term only, of course).
The above chart shows why I meant the possible quick move below $33 as a buying opportunity. It’s where the previous 2023 lows and the 61.8% Fibonacci retracement are right now. If we combine this with a sharp move to those levels and a very oversold reading in the RSI, we get an opportunity to flip the current position for a very short time. Of course, it’s just a possibility, not something that needs to happen, but I wanted to give you an early heads up so that you’re not surprised if I do decide to flip the position in the not-too-distant future.
The medium-term outlook for the precious metals sector (and for the FCX) remains to be extremely bearish and the profit potential for short positions in junior miners and FCX remains enormous. While I can’t promise any kind of return (nobody can), in my opinion, the recent profitable position in the FCX will soon be joined by even more profits, and the winning streak of trades that started in early 2022, will continue.
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
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, the medium-term outlook for the precious metals sector (and for the FCX) remains to be extremely bearish and the profit potential for short positions in junior miners and FCX remains enormous.
We took massive profits from our second FCX trade last week, and after a daily rebound and over 3% rally, we re-entered those short positions to capitalize on the next move lower in the company’s shares. And we’re already profiting on it.
While I can’t promise any kind of return (nobody can), in my opinion, the recent profitable position in the FCX will soon be joined by even more profits, and the winning streak of trades that started in early 2022, will continue.
If I didn’t have a short position in junior mining stocks, I would be entering it now.
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 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: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; 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 profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (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 to of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
