Briefly: in our opinion, full (250% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The precious metals sector moved higher in the previous several days as the USD Index declined. It all changed yesterday, as the USDX moved higher and the PMs declined. Silver and mining stocks declined enough for this entire week to be a decline. The precious metals rollercoaster is about to start the next big slide. Is your seatbelt fastened?
Let’s jump right into the charts (charts courtesy of http://stockcharts.com).
In yesterday’s Alert, we commented on gold’s, silver’s, and mining stocks’ relative performance in the following way:
The rally that we see in mining stocks is still very small compared to the size of the previous decline and at the same time it’s small compared to the size of the corrective upswing in gold and silver. No matter how one looks at it, mining stocks are underperforming, which is a very important sign confirming that what we saw was indeed just a counter-trend corrective upswing and not a beginning of a new medium-term rally.
The above remains up-to-date. One might have thought that mining stocks had simply lost some of their leverage during the upswing and that they would not be volatile to the downside as well. Yesterday’s session already proved that to be wrong. It was not a decline in volatility. It was continuous weakness and a crystal-clear sign that the decline is not over.
The issue of silver’s outperformance and underperformance might also be troubling. We have often stated that silver tends to outperform right at the end of a given rally and that we expect silver to decline faster than gold close to its final bottom. Consequently, one might be wondering if the decline in silver and the recent (last 2 months) underperformance is a sign of an upcoming bottom.
This question can be answered thanks to the chart featuring the gold to silver ratio.
The gold to silver ratio is rallying and… It’s most likely far from ending the rally. We wrote about it in greater detail in January and what we wrote remains up-to-date. In short, the really long-term resistance for the ratio is close to the 100 level. The 2003, 2008, and 2016 highs are important, but the true resistance is higher.
The 3 above-mentioned highs are important, but they are not the key long-term resistance. The latter is much higher, at about 100.
This means that silver is likely to magnify gold’s gains in the next several weeks, while the ratio rallies. The ratio tends to have very sharp upswings, so even though we expect THE bottom in gold and silver to take place in early October (perhaps in late September), it doesn’t rule out a major rally during this relatively short period.
Silver’s magnification of gold’s moves to the downside is likely to be the new normal for some time. Consequently, silver’s short-term underperformance is not yet a bottoming sign – the gold to silver ratio is not high enough.
In fact, since silver is magnifying gold’s declines, it means that things are developing in tune with our expectations and the implications remain bearish.
Speaking of things that develop in line with our expectations, let’s take a look at the USD Index.
In the previous Alerts, we emphasized that the most recent decline in the USDX was likely nothing more than a verification of the breakout above the neck level of the medium-term reverse head-and-shoulders pattern. It was extremely likely not to be anything more than that not only because the pattern was already confirmed by multiple daily closes above the neck level.
It was also likely to be followed by a rally thanks to the reason that triggered the final part of the decline, and what followed something analogous previously is likely to follow now:
Quoting a finance.yahoo.com article:
“The dollar fell under pressure after Trump’s interview with Reuters, where he reiterated that he is “not thrilled” by the actions of the Fed and prefers a policy of low-interest rates. The dollar index lost 0.7% over the past 24 hours. EURUSD up to 1.1530, the maximum in the last 2 weeks.
Previously Trump used similar verbal interventions in an attempt to stop the U.S. Dollar rally. Such comments were made on July 19, which restrained the dollar from growth for several weeks. Investors were waiting for Powell’s reaction to the president’s dissatisfaction. However, the Fed has not changed the rhetoric, hinting at the willingness to raise rates as soon as September. In addition to raising the rate of the Fed, the dollar is also supported by Trump’s policy.”
To be clear, the daily decline that followed the July 19 comments was practically the end of the declines. The time after the daily decline was a perfect moment for one to position themselves for profiting from higher USD values and lower precious metals values.
Back then, investors were waiting for Powell’s reaction and they now know that Trump’s comments didn’t change anything regarding the interest rate decision.
Consequently, it’s highly likely that yesterday’s decline in the USDX was emotional and temporary and the overall trend didn’t change – and the trend for the U.S. currency is up.
The breakout has been verified. The outlook is clearly bullish, and the implications are clearly bearish for the precious metals sector.
Important Analyses
Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:
- Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
- Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
- Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
- Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
- Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.
We will also be posting another issue of the “Preparing for THE Bottom” series shortly (likely next week). The title will be “Buy-and-hold on Steroids”. Stay tuned.
Summing up, the USD Index seems to have formed an important bottom this week, verifying the breakout and completion of the reverse head-and-shoulders formation. This means that the pause in precious metals and mining stocks is over or very close to being over and that another big slide is likely just ahead. Based on what we can infer from the 2013 decline, it is the time that we should pay extra attention to the PMs as their decline is likely not close to being over since no meaningful support has been reached in the case of gold and mining stocks.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,062; stop-loss: $1,221; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $54.27
- Silver: profit-take exit price: $12.72; stop-loss: $15.56; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $28.87
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.81; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $30.87
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find more detailed explanation in our August 1 Alert. In case one wants to bet on junior mining stocks’ prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $17.52; stop-loss: $30.72
- JDST ETF: initial target price: $154.97 stop-loss: $62.78
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
Important Details for New Subscribers
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 the in the trading section we describe the situation for the day that the alert is posted. In other words, it 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, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis 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. Additionally, 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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