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.
NOTE TO READERS
While we usually post longer analyses on Fridays, this week we’re moving this to today, as the markets are closed in the U.S. tomorrow (Good Friday), so the trading week effectively ends today. There will also be no regular analysis posted on Monday, as that’s when some other markets are closed and the trading is likely to be limited, anyway. However, the emphasis here goes for “regular” – if anything major happens on the market, I’ll keep you updated through quick intraday Alerts, anyway.
Having said that, let’s start today’s analysis with a recap of what recently happened on the fundamental front.
The Weekly Fundamental Roundup
As another week comes to a close, the winds of change are blowing across the financial markets. However, while many investors and analysts can see only sunny days ahead, fundamental storm clouds should rain on their parade over the medium term, and it’s quite possible that it’s going to happen shortly.
To explain, this week culminated with the USD Index soaring above 100, the U.S. 10-Year real yield hitting a new 2022 high, and Goldman Sachs’ Financial Conditions Index (FCI) hitting its highest level since the global financial crisis (GFC). However, the PMs paid no mind yet. In fact, investors across many asset classes continue to ignore the implications of these developments. So far.
With sentiment poised to shift when the economic scars begin to show, the “this time is different” crowd may regret not heeding the early warning signs. For example, the Bank of Canada (BoC) announced a 50 basis point rate hike on Apr. 13., and with the Fed likely to follow suit in May, the domestic fundamental environment confronting the PMs couldn’t be more bearish.
Please see below:
Source: BoC
Moreover, BoC Governor Tiff Macklem (Canada's Jerome Powell) said: "We are committed to using our policy interest rate to return inflation to target and will do so forcefully if needed."
Furthermore, while he added that the BoC could "pause our tightening" if inflation subsides, he cautioned that "we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target."
However, with the latter much more likely than the former, the BoC's decision is likely a preview of what the Fed should deliver in the months ahead.
Please see below:
Source: Reuters
To that point, while investors continue to drown out officials’ hawkish cries, I warned on Apr. 13 that the Fed knows full well about the difficulty of the task ahead. I wrote:
Fed Governor Lael Brainard said on Apr. 12: “Inflation is too high, and getting inflation down is going to be our most important task.”
She added: “I think there’s quite a bit of capacity for labor demand to moderate among businesses by actually reducing job openings without necessitating high levels of layoffs.” As a result, she’s telling you that Fed officials will make it their mission to slow down the U.S. economy.
With phrases like “capacity for labor demand to moderate” and “reducing job openings” code for what has to happen to calm wage inflation, the prospect of a dovish 180 is slim to none. As such, this is bullish for real yields and bearish for the PMs.
More importantly, notice her use of that all-important buzzword?
Source: Reuters
And:
Source: Reuters
Moreover, where do you think she got it?
Source: Reuters
Echoing that sentiment, Chicago Fed President Charles Evans (a relative dove) said on Apr. 11 that more than one 50 basis point rate hike could be on the horizon. "Fifty is obviously worthy of consideration; perhaps it's highly likely even if you want to get to neutral by December."
As a result, with the USD Index and the U.S. 10-Year real yield already soaring, what do you think will happen if the Fed pushes the U.S. federal funds rate "to neutral by December?"
Please see below:
Source: Reuters
Even more hawkish, Fed Governor Christopher Waller said on Apr. 13: “I think we’re going to deal with inflation. We’ve laid out our plans. We’re in a position where the economy’s strong, so this is a good time to do aggressive actions because the economy can take it.”
He added: “I think we want to get above neutral certainly by the latter half of the year, and we need to get closer to neutral as soon as possible.”
As a result:
Source: CNBC
Now, if we presented these quotes to the permabulls, they would say: "So what? We already know that the Fed is going to raise interest rates."
However, while a higher U.S. federal funds rate is now the worst-kept secret, the impact on U.S. economic growth is far from priced in. With investors assuming the Fed will normalize inflation without hurting the U.S. economy, they are positioned for an unrealistic outcome. Stagflation, anyone?
Moreover, with the gold and silver prices ignoring everything the Fed throws at them, they're attempting to re-write the history books.
However, with Brainard and Waller telling you that their goal is to create a bullish environment for the USD Index and the U.S. 10-Year real yield, the PMs have fought this battle before and lost this battle before.
To explain, I wrote on Apr. 6:
Please remember that the Fed needs to slow the U.S. economy to calm inflation, and rising asset prices are mutually exclusive to this goal. Therefore, officials should keep hammering the financial markets until investors finally get the message.
Moreover, with the Fed in inflation-fighting mode and reformed doves warning that the U.S. economy “could teeter” as the drama unfolds, the reality is that there is no easy solution to the Fed’s problem. To calm inflation, it has to kill demand. As that occurs, investors should suffer a severe crisis of confidence.
To that point, Fed officials aren’t even pretending anymore. Waller said on Apr 13:
“All we can do is kind of push down demand for these products and take some pressure off the prices that people have to pay for these products. We can’t produce more wheat, we can’t produce more semiconductors, but we can affect the demand for these products in a way that puts downward pressure and takes some pressure off of inflation.”
Likewise, Waller was even more realistic when he spoke on Apr. 11: He said:
“With housing, can we cool off demand for housing without tanking the construction industry? Can we cool down the labor demand without causing employment to fall? That’s the tricky road that we’re on.”
As a result, while Fed officials understand how difficult it will be to normalize inflation, investors remain in la-la land. However, when the “collateral damage” eventually unfolds, the shift in sentiment should result in the profound re-pricing of several financial assets.
Please see below:
Source: Bloomberg
Thus, investors’ uninformed state of denial will likely seem obvious in the months ahead. (Yes, I know, it’s difficult to remain rational while surrounded what’s irrational, and that’s the very thing that makes investing “simple, but not easy”). Moreover, while Macklem cautioned that the BoC could “pause our tightening” if inflation subsides, the same rule applies to the Fed. However, with inflation still raging, the Fed and the BoC are unlikely to change their hawkish tones anytime soon.
Case in point. The U.S. Bureau of Labor Statistics (BLS) released the Producer Price Index (PPI) on Apr. 13.,and with outperformance across the board, green lights were present for all of the wrong reasons. For context, the gray figures in the middle column were economists’ consensus estimates.
Please see below:
Source: Investing.com
Likewise, the NFIB released its Small Business Optimism Index on Apr. 12. The report revealed:
“The NFIB Small Business Optimism Index decreased in March by 2.4 points to 93.2, the third consecutive month below the 48-year average of 98. Thirty-one percent of owners reported that inflation was the single most important problem in their business, up five points from February and the highest reading since the first quarter of 1981. Inflation has now replaced ‘labor quality’ as the number one problem.”
How about this divergence?
“Owners expecting better business conditions over the next six months decreased 14 points to a net negative 49%, the lowest level recorded in the 48-year-old survey.”
“The net percent of owners raising average selling prices increased four points to a net 72% (seasonally adjusted), the highest reading recorded in the series.”
Moreover, “a net 50 percent plan price hikes (up 4 points).”
Please see below:
Source: NFIB
On top of that, “a net 49 percent reported raising compensation, down 1 point from January’s 48-year record high reading. A net 28 percent plan to raise compensation in the next three months, up 2 points from February.”
Please see below:
Source: NFIB
Thus, while the Fed hopes to rein in inflation, U.S. small businesses plan more price hikes and wage increases than in February. Therefore, officials’ hawkish intentions are not nearly hawkish enough. As a result, the medium-term outlook for the U.S. federal funds rate, the USD Index and the U.S. 10-Year real yield couldn’t be more bullish. As mentioned, let’s not forget how optimism often turns to pessimism when the drama unfolds.
The bottom line? Investors lack the foresight to see how the Fed’s rate hike cycle will likely unfold. Moreover, with Fed officials warning of the “collateral damage” that occurs when they curb demand to reduce inflation, the permabulls have simply closed their eyes and covered their ears. However, when sentiment is built on a foundation of sand, it often collapses when reality re-emerges.
In conclusion, the PMs rallied on Apr 13 as momentum remains the name of the game. However, while sentiment remains robust, gold, silver, and mining stocks’ fundamentals are worse now than at any point in 2021. As a result, history shows that not only are the current prices unsustainable, but profound drawdowns are required for the PMs to reflect their intrusive values.
What to Watch for Next Week
With more U.S. economic data to be released next week, the most important ones are as follows:
- Apr. 21: Philadelphia Fed manufacturing index
With the regional data providing early insight into April’s inflation dynamics, continued price increases will put more pressure on the FOMC.
- Apr. 22: S&P Global’s U.S. manufacturing and services PMIs
Unlike the Philadelphia Fed’s index, S&P Global’s data covers the entire U.S. As a result, the performance of growth, employment, and inflation will be of immense importance.
All in all, economic data releases impact the PMs because they impact monetary policy. Moreover, if we continue to see higher employment and inflation, the Fed should keep its foot on the hawkish accelerator. And if that occurs, the outcome is profoundly bearish for the PMs.
Let’s start today’s technical discussion with a quick check on copper prices.
Copper recently invalidated another attempt to move above its 2011 high. This is a very strong technical sign that copper (one of the most popular commodities) is heading lower in the medium term.
Right now, copper is trying to break above its 2011 high once again, but given the previous invalidations, it’s doubtful that this attempt will be successful, especially given the situation in interest rates.
The interest rates are going up, just like they did before the 2008 slide. What did copper do before the 2008 slide? It failed to break above the previous (2006) high, and it was the failure of the second attempt to break higher that triggered the powerful decline. What happened then? Gold declined, but silver and mining stocks truly plunged. The GDXJ was not trading at the time, so we’ll have to use a different proxy to see what this part of the mining stock sector did.
The Toronto Stock Exchange Venture Index includes multiple junior mining stocks. It also includes other companies, but juniors are a large part of it, and they truly plunged in 2008.
In fact, they plunged in a major way after breaking below their medium-term support lines and after an initial corrective upswing. Guess what – this index is after a major medium-term breakdown and a short-term corrective upswing. It’s likely ready to fall – and to fall hard.
So, what’s likely to happen? We’re about to see a huge slide, even if we don’t see it within the next few days.
In fact, the outlook for the next few days is rather unclear, as different groups of investors can interpret yesterday’s developments differently. However, once the dust settles, the precious metals sector is likely to go down significantly.
What happened recently?
Gold rallied, which seems bullish at first sight, but not so much once one notices that it’s the regular course of action after major tops and subsequent declines. The same happened in 2020. In fact, back then, the corrective upswing was even bigger. The same thing happened also in 2011.
If one focuses too much on the individual trees, they may lose sight of the forest. When one looks at day-to-day price swings too often, they might forget about the context and what a given rally really is. Looking at hourly price changes (say, the last 100 hours), it seems that gold is in a major uptrend. However, that’s a short-sighted interpretation. In reality, it’s a part of a more complex pattern that points to declines being just around the corner.
Speaking of the timing of the reversal, I’d like to point out that while it’s impossible to tell when exactly (what day / hour) the reversal will take place, it IS the case that it’s likely that the PMs will decline soon. I don’t mean just the bearish medium-term fundamentals (clarification: they are very positive for the long run, but not for the medium term) in the form of rallying real interest rates and the USD Index, but also the technical patterns.
Yes, some previous technical patterns “didn’t deliver” as they should have, but unfortunately, that’s the reality in the case of financial markets, investing and trading in general. Nobody (not even Warren Buffett) can predict the future with 100% certainty, and no indicator (however useful and efficient in the past) can have 100% efficiency. Things like comments from politicians, unexpected news surrounding wars, etc. can distort the patterns or cause delays.
The question, of course, is whether the deviation from the previous patterns is significant enough for one to think that the analogy or pattern is no longer up-to-date. That’s why I keep returning to review the same patterns over and over again and comment on their existence. What does the gold chart tell us right now?
Despite the very recent uprun, it continues to tell us that whatever happened recently (higher prices) is not a big deal. In fact, it’s a repeat of what we’ve seen in the past after similar situations. Since they were then followed by declines, declines are likely this time as well.
In particular, I’d like to draw your attention to the fact that back in 2020, gold corrected to approximately the previous initial low. The above ended the corrective upswing (at least the initial one), and we just saw the same thing yesterday. Gold moved to the levels to which it had declined when it invalidated its breakout above $2,000. I can’t promise that, but since history rhymes, this could be “it”.
So far, gold is down by ~$8 today and GDXJ is down by 0.3% in today’s London trading, so this could really be the beginning of the decline.
However, there’s also a good reason why gold and the rest of the precious metals sector could postpone their decline to next week. It’s the simple fact that it’s a long weekend and many people will take their thoughts off the day-to-day price swings, so they will be better able to realize what’s really going on.
While people might not necessarily recognize the long-term analogies on the charts (or they might – my point is that the following is more likely to be the topic of conversations), they could realize (especially as they spend time with and talk with their families and friends) that the situation in interest rates and the USD Index doesn’t support higher, but much lower stock, commodity, and gold prices in the following months and (probably) weeks. In other words, the extra day off from the markets might help people re-focus on what’s actually going on instead of simply following the momentum.
Moreover, let’s keep in mind that between 2020 and now, quite a lot happened, quite a lot of money was printed, and we saw a war breaking out in Europe. Yet, gold failed to rally to new highs.
In fact, it’s trading very close to its 2011 high, which tells you something about the strength of this market. It’s almost absent.
Truth be told, what we see in gold is quite in tune with what we saw after the 2011 top, and in particular, shortly after the 2012 top. The long-term gold price chart below provides details.
It seems that if it weren’t for the war in Europe, gold wouldn’t be able to move above $2,000 and instead it would have topped close to its previous highs, which provided strong resistance.
The extraordinary thing about that is that that’s exactly what happened in 2012. Gold moved higher but only until it reached its previous highs, which happened in the second half of 2012.
This time the RSI was a bit higher, but it was close to 70, just like what we saw in 2012.
The moves that we see in the long-term MACD indicator (lower part of the above chart) also confirm the analogy between now and 2012. The indicator is between 25 and 50, and it’s above its previous local top (early 2012 and mid-2021), and this local top formed after a profound decline from the ultimate top.
Yes, this time gold moved back to the previous high, but:
- This happened based on a geopolitical event (war in Europe) and geopolitically-driven rallies are generally unsustainable;
- When gold reached its previous highs, it also formed a profound weekly reversal, which formed on huge volume, and that’s very bearish.
So, the current outlook for gold is very bearish – the recent back and forth movement (the consolidation) appears analogous to the back-and-forth part of the decline that we saw right after the 2012 top. That was the beginning of a huge medium-term downswing.
Meanwhile, silver is correcting too. The white metal moved to approximately its previous high, which provided resistance.
Since silver reached a resistance level, it could now decline - provided that gold declines too.
Silver is known for its fake breakouts, so the fact that we just saw one isn’t really bullish. In fact, I wrote about that several days ago – it was possible that it would happen, and it did. It didn’t change the outlook – what we see is in near-perfect tune with what we saw in 2012 – that’s the back-and-forth decline in gold and silver and the consolidation in the mining stocks.
This is bearish, and it’s in tune with other indications that we have gotten previously from the price of the white metal.
First of all, when silver got really popular in early 2021, it still failed to hold the breakout above the previous highs. Back then, very few people wanted to listen to this, but I warned that this is the exact wrong moment to buy silver and that better buying opportunities are likely ahead. Well, it turns out that those buying close to $30 have bought close to a yearly+ top. As practically everyone interested had already gotten in, the price declined as there was nobody (of course, that’s just an oversimplification) else who wanted to buy, and the market needs to attract fresh buying power if the price is to rally.
Anyway, after that invalidation, silver never managed to get very close to the $30 level.
Sure, it will likely surpass it, and then the previous all-time high, and then move to three digits, but it doesn’t mean that it has to happen very soon, as well as that silver can’t slide profoundly before that happens.
In fact, gold is not the only precious metal that is repeating its 2012 performance right now, and you can see more details on silver’s long-term chart.
As you can see on the above chart, silver corrected about 50% of the previous downswing, and this correction ended at about $30, a long time ago. Ever since, silver has been declining, and even the outbreak of war in Europe didn’t make silver rally above that level.
On the above chart, you can see how silver first topped in 2011, then declined and formed another top at the cyclical turning point. Next, it declined once again – to the previous lows. After that, silver rallied (in 2012 and 2022), and it topped between its 50-week moving average (marked in blue) and the previous top. Now silver is declining in a back-and-forth manner (you can see it more clearly on the previous short-term silver chart).
Back in 2012, these were just the early days of a gargantuan decline, and the same appears likely to be the case this time. Interest rates are going up after all, and the Fed is determined to quench inflation.
Let’s not forget that rising interest rates are likely to negatively impact not just commodities, but practically all industries. This will likely cause silver’s price to decline profoundly, as silver’s industrial demand could be negatively impacted by lower economic growth (or a decline in economic activity).
Besides, please note that silver didn’t even manage to rally as much as copper (which tried to move to new highs recently) or most other commodities, thus being rather weak.
Consequently, it seems that silver will need to decline profoundly before it rallies (to new all-time highs) once again.
Having said that, let’s take a look at what happened in junior mining stocks.
The GDXJ ETF moved higher, but ended the day just slightly above its recent high, and slightly above its 50% retracement based on its 2020-2022 decline. These moves are not confirmed, and given the current volume readings, it’s very doubtful that they will be confirmed.
Juniors were helped by rising stock market prices, but the latter are likely just correcting within a downtrend.
Please note that just like juniors, stocks moved higher on relatively low volume. That’s what we saw in the second half of March, when the rally was ending. And as stocks return to their downturn, the same would be likely for junior miners.
To clarify: gold will be the most important driver in the case of miners’ prices, but stocks will also play a temporary role, especially in the case of junior miners.
Also, let’s not forget about the forest while looking at individual trees. By that, I mean looking at how gold stocks perform relative to gold. That’s one of the major indications that the current situation is just like what we saw at the 2012 top. In other words, my last week's comments on the chart below remain up-to-date.
Gold stocks (GDX, GDXJ, and HUI Index) have recently been quite strong relative to gold. OK, but is this necessarily bullish? It might be, until one considers the fact that we saw the same thing at the 2012 top! This changes everything, and it does so, because the links between now and that top are almost everywhere: in gold, in silver, in gold stocks, and even in their ratios.
As it turns out, the gold stocks to gold ratio is behaving almost identically as it was behaving at the 2012 top in the precious metals sector.
In both cases, the ratio moved below the rising medium-term support line, then formed a double-bottom below the line, and invalidated the breakdown, which resulted in a counter-trend rally. The rally ended shortly after the ratio moved above its 200-day moving average (marked in red). That’s what happened recently. What happened next in 2012? The decline not only continued – it accelerated!
Consequently, the recent action in the ratio is not really bullish. In other words, the fact that gold stocks were recently (in the short run only) strong relative to gold doesn’t make the medium-term outlook for the precious metals sector bullish. However, it remains bearish.
Interestingly, the ratio itself moved to its declining resistance line (and it even moved slightly above it, but the move is too small to be viewed as reliable yet), indicating that the corrective upswing might already be over or almost over. We get the same indication from the RSI indicator. It’s not above 70, but in the case of most local tops, the RSI didn’t have to move above 70. It just moved to more or less the same levels – I marked it with a horizontal blue line.
The above is actually a confirmation of the analogy that is visible directly in all three key components of the precious metals sector: gold, silver, and mining stocks.
I already discussed the ones in gold and silver, so let’s take a look at the analogy in the HUI Index – a proxy for gold stocks.
If you look at the areas marked with red circles (especially now, 2012/2013, and 2008), you’ll notice that they are very similar. These are the sizable short-term rallies that we saw after / in the final parts of the broad head-and-shoulders patterns.
The moves were quite sizable – the 2012 rally was even bigger than the current one, even though there was no war in Europe at that time.
Based on how broad the pattern is and the self-similarity present in gold, it seems that the analogy to what happened in 2012 is most important right now.
Looking at the moving averages, we see that the 50-week moving average (blue) and 200-week moving average (red) performed quite specifically in late 2012, and we see the same thing this year.
The distance between 50- and 200-week moving averages is currently narrowing, while the former is declining. Back in 2012, the top formed when the HUI rallied above its 50-week moving average, which just happened once again.
The RSI indicator (above the price chart), based on the HUI Index’s weekly chart, provides us with another confirmation of the analogy, and the same goes for the stochastic indicator (below the price chart). The former is just below the 70 level – exactly what we saw at the 2012 top, and the latter is above 90 – again, something that we saw at the 2012 top.
As history tends to rhyme, gold stocks are likely to slide, similarly to how they declined in 2012 and 2013.
Still, if the general stock market slides, and that appears likely for the following weeks and months, then we might have a decline that’s actually similar to what happened in 2008. Back then, gold stocks declined profoundly, and they have done so very quickly.
The dashed lines that start from the recent prices are copy-paste versions of the previous declines that started from the final medium-term tops. If the decline is as sharp and as big as what we saw in 2008, gold stocks would be likely to decline sharply, approximately to their 2016 low. If the decline is more moderate, then they could decline “only” to 120-150 or so. Either way, the implications are very, very, very bearish for the following weeks.
Also, we saw a fresh sell signal from the weekly stochastic indicator, which (unlike its 4-hour version) is quite efficient. This is a very bearish development for the medium term. After all, the last two times we saw this signal, were at the 2021 and 2020 tops.
Let’s take a brief look at the stock market indices.
The technical picture in the case of world stocks remains extremely bearish, and my previous comments on it remain up-to-date:
World stocks have already begun their decline, and based on the analogy to the previous invalidations, the decline is not likely to be small. In fact, it’s likely to be huge.
For context, I explained the ominous implications on Nov. 30. I wrote:
Something truly epic is happening in this chart. Namely, world stocks tried to soar above their 2007 high, they managed to do so and… they failed to hold the ground. Despite a few attempts, the breakout was invalidated. Given that there were a few attempts and that the previous high was the all-time high (so it doesn’t get more important than that), the invalidation is a truly critical development.
It's a strong sell signal for the medium- and quite possibly for the long term.
From our – precious metals investors’ and traders’ – point of view, this is also of critical importance. All previous important invalidations of breakouts in world stocks were followed by massive declines in mining stocks (represented by the XAU Index).
Two of the four similar cases are the 2008 and 2020 declines. In all cases, the declines were huge, and the only reason why they appear “moderate” in the lower part of the above chart is that it has a “linear” and not a “logarithmic” scale. You probably still remember how significant and painful (if you were long, that is) the decline at the beginning of 2020 was.
Now, all those invalidations triggered big declines in the mining stocks, and we have “the mother of all stock market invalidations” at the moment, so the implications are not only bearish, but extremely bearish.
What does it mean? It means that it is time to get out of the short position in mining stocks to get a few extra dollars from immediate-term trades that might be risky. The possibility that the omicron variant of COVID makes vaccination ineffective is too great to be ignored as well. If that happens, we might see 2020 all over again – to some extent. In this environment, it looks like the situation is “pennies to the upside and dollars to the downside” for mining stocks. Perhaps tens of dollars to the downside… You have been warned.
World stocks have declined to their previous highs, and when something similar happened in 2008, it meant that both stocks and gold and silver mining stocks (lower part of the chart) were about to slide much further. In particular, that’s when the corrective upswing in the miners ended and the huge slide started. The implications for mining stocks are extremely bearish.
I already briefly discussed the situation on the U.S. stock market, but let’s take another – broader look.
On March 30 (and the following days), I wrote about the above chart:
The S&P 500 rose yesterday and even managed to move above its February highs. At first sight, this appears bullish, but is it really so? Given that the riskiest stocks rallied the most, not necessarily.
Besides, stocks closed below the final of their regular Fibonacci ratios – the less known, but still important 76.4%, so they might reverse as early as today, once this resistance is reached. If that happens and the – unconfirmed (!) – breakout above the February/late-January highs is invalidated, we’ll have a strong sell signal.
While stocks rallied and the investing public (probably) entered the market, they might have also moved other assets that have been performing poorly recently. By “other assets”, I mean mining stocks. Yes, they rallied along with gold, but they were weak relative to it. Gold moved to its previous all-time high recently, and junior miners were able to rally just above their late-2021 high. They are now below this high, anyway.
Stocks just failed to break above the February high, and this invalidation is a strong sell signal for the near term. The decline in stocks is likely to have a particularly bearish effect on junior mining stocks.
Stocks have not yet declined significantly below the previous lows, but it seems that they are on the verge of doing so (the rates are rising and they are about to rise much more based on the fact that inflation has gotten very political). If 2020 could teach us anything, it would be that the following slide could be huge and sharp.
The volatility won’t necessarily match the 2020 one, but the decline is likely to be significant, anyway.
Let’s keep in mind that interest rates are likely to go higher, and that sanctions on Russia could impact global trade in multiple ways, thus negatively affecting the stock market.
This would be likely to have a very negative impact on the precious metals market, in particular on junior mining stocks (initially) and silver (a bit later).
Having said that, let’s take a look at the USD Index as it’s been breaking to new yearly highs recently.
In my previous analyses, I commented on the USD Index in the following way:
If we focus on the USD Index alone, we’ll see that yesterday’s decline was absolutely inconsequential with regard to changing the outlook for the USDX. It simply continues to consolidate after a breakout above the mid-2020 highs. Breakout + consolidation = increasing chances of rallies’ continuation. A big wave up in the USD Index is likely just around the corner, and the precious metal sector is likely to decline when it materializes.
As the war-based premiums in gold and the USD appear to be waning, a high-interest-rate-driven rally in the USD is likely to trigger declines in gold. The correlation between these two assets has started to decline. When that happened during the last two cases (marked with orange), gold plummeted profoundly shortly thereafter.
The USD Index had rallied recently, but it declined yesterday. This daily decline didn’t change anything, though, as it’s been often the case that the USDX corrected to (approximately) its previous highs before moving higher once again.
Once the verification is complete (perhaps as early as next week), another big wave up is likely to follow. This might be the trigger that pushes the precious metals sector into full-decline mode.
All in all, technicals favor a decline in the precious metals sector sooner rather than later. Perhaps as early as next week.
Overview of the Upcoming Part of the Decline
- It seems to me that the post-decline consolidation is now over or very close to being over , and that gold, silver, and mining stocks are now likely to continue their medium-term decline.
- It seems that the first (bigger) stop for gold will be close to its previous 2021 lows, slightly below $1,800 . Then it will likely correct a bit, but it’s unclear if I want to exit or reverse the current short position based on that – it depends on the number and the nature of the bullish indications that we get at that time.
- After the above-mentioned correction, we’re likely to see a powerful slide, perhaps close to the 2020 low ($1,450 - $1,500).
- 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 – perhaps with gold close to $1,600.
- 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 close to $1,350 - $1,400. I expect silver to fall the 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 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 $1,375, but at the moment it’s too early to say with certainty.
- 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 is likely to bottom about three months after the general stock market tops.
- 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 or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.
Letters to the Editor
Q: Hi PR,
I was glad to see you address reader emotions today. I suspect that for many of us, emotions are elevated because we've been expecting the PM's next moves to be a downswing, but based on the last few days, it's looking more and more likely to be a significant upswing instead.
I read in today's analysis that you said that the PMs still have plenty of room to run over the medium term. This seems to conflict with the overview, where you say that the post-decline consolidation is now over or very close to being over, and that gold, silver, and mining stocks are now likely to continue their medium-term decline.
If the former is more reflective of your current sense, I wonder if you might also change the overview to reflect the same. I would rather be told something to the effect of ‘yeah it might suck for a while, but the payoff should be worth it’, rather than continually expecting a turnaround at any moment while PMs continue to climb.
Appreciate your analyses and continued responsiveness.
A: To clarify, when I wrote this sentence yesterday:
“Moreover, while real yields and financial conditions imply much lower prices for the PMs, they still have plenty of room to run over the medium term.”
I meant the “financial conditions”, not “prices of PMs” as the thing that has plenty of room to run over the medium term. In other words, I meant the real yields and the FCI index that were featured a bit above the above-quoted text. I’m sorry for the confusion.
To further clarify: the medium-term outlook for the precious metals market remains bearish – significantly so.
Q: I'll keep the message short.
His reports are sensational, but gold does not stop rising. Russia's ruble is linked to gold... and it does not fall. We just need China to invade Taiwan and gold will go to 3000 or 5000.
A: Thanks for the compliment! I’m happy that you enjoy reading my analyses.
I already discussed the link between the ruble and gold (it was bullish for the ruble, not really for gold), so today I would just like to point out that Russia literally invaded Ukraine and war broke out in Europe for the first time in decades, and… Gold failed to move to its new all-time highs, while silver and mining stocks didn’t manage to correct more than half of their respective declines from the 2011 tops (in particular, please consider these two markets while assessing the strength of the entire sector).
Given this kind of weakness in the precious metals sector, it’s extremely unlikely that China invading Taiwan would trigger a rally in gold that would take it to $3,000. If the latter happens, it might create turbulence and a price rise in gold, but since people are already concerned about it, I wouldn’t rule out a situation in which gold actually falls based on the fact that it seems to have already rallied based on the expectation that the above might take place. I don’t think that it would be likely to happen shortly, anyway. If it happens in the final part of the year, it could be the case that PMs and miners are already after their final bottoms, and China’s invasion would contribute to PMs’ comeback. For now, I don’t think that this is an important bullish factor.
Q: An analyst on BNN yesterday said the gold price chart was in the process of forming a “double handle” formation.
What does that mean for the price of gold?
A: Probably nothing. The “double handle” probably refers to the cup-and-handle formation that one might “see” in gold based on its moving to its previous high and then correcting. However, we saw the same thing in 2012 – that was not a bullish cup-and-handle pattern in gold, but rather the beginning of a massive price decline. The latter kind of interpretation is confirmed by what we see in silver and mining stocks, so I view it as much more reliable.
Besides, a formation doesn’t have any implications until it’s completed. Gold would need to confirm its breakout above previous all-time highs for the above pattern to have bullish implications. That hasn’t happened so far, so, like what I wrote above, it probably means nothing for the price of gold at this time.
Summary
Summing up, despite the recent rally in gold, the outlook for junior mining stocks remains exactly as I described previously.
Investing and trading are difficult. If it was easy, most people would be making money – and they’re not. Right now, it’s most difficult to ignore the urge to trade along with the crowd that’s ignoring two critical factors:
- rising real interest rates,
- rising USD Index values.
Both of the aforementioned are two most important fundamental drivers of the gold price. Since neither the USD Index nor real interest rates are likely to stop rising anytime soon (especially now that inflation has become highly political), the gold price is likely to fall sooner or later.. Given the analogy to 2012 in gold, silver, and mining stocks, “sooner” is the more likely outcome.
It seems that our profits from short positions are going to become truly epic in the coming months.
Moreover, let’s keep in mind that we are not patient with this trade to just get out of it close to being even or with a reasonable (10%-30%) profit. Of course, I can’t promise anything, but this entire short trade is likely to end with gold below $1,500 and junior miners close to or below their 2020 lows. The upside potential for the inversely trading instruments is likely enormous. Yes, we might adjust the trade or exit it temporarily, only to get back to it shortly thereafter, but the overall potential remains gargantuan. It’s quite likely that none of those gains will be reaped by precious metals perma-bulls.
After the sell-off (that takes gold to about $1,350-$1,500), I 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.
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: $34.63; 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 JDST (2x leveraged) and GDXD (3x leveraged – which is not suggested for most traders/investors due to the significant leverage). The binding profit-take level for the JDST: $14.98; stop-loss for the JDST: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the GDXD: $25.48; stop-loss for the GDXD: 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 downside profit-take exit price: $19.12
SLV profit-take exit price: $17.72
ZSL profit-take exit price: $38.28
Gold futures downside profit-take exit price: $1,683
HGD.TO – alternative (Canadian) inverse 2x leveraged gold stocks ETF – the upside profit-take exit price: $11.79
HZD.TO – alternative (Canadian) inverse 2x leveraged silver ETF – the upside profit-take exit price: $29.48
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
