Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

For quite a few days, I’ve been writing that the USD Index might not have completed its downswing, while emphasizing that a short-term decline in the USDX might cause not much more than a (likely final) comeback to the September lows in case of gold. I also wrote several times that the mining stocks are not likely to show strength. Yesterday, I added that even if silver breaks above the declining resistance line, it might not mean much as silver is known for fake breakouts right before big declines.

In short, it’s all developing as outlined above.

The USDX closed yesterday’s session visibly below the previous December low and it’s also moving lower in today’s pre-market trading. At the moment of writing these words, the intraday low in the USDX is 90.047, which is very close to the downside target that I featured previously and which remains visible on the above chart.

Based on the Fibonacci extension of the mid-2020 correction, the downside target is at about 89.8 – 90. Why use this approach? Because the same technique would have correctly predicted the target for the decline in early 2018 and the 2018 and 2020 declines are very similar with regard to starting points, the situation in the CoT reports (futures positions), and the overall shape of the moves.

This breakdown in the USDX should have theoretically caused gold to soar. Did it?

Yesterday, gold closed below the September low in terms of the daily closing prices (marked with the dashed line), and in today’s pre-market trading gold moved practically right to it.

If gold was just reacting without weakness and without strength, relative to the USDX, it should have already been well above the December high – Instead, it’s below it.

Consequently, the analogy to 2018 that I described previously remains up-to-date:

The USD Index broke below its previous 2020 lows and this breakdown was confirmed. However, since the recent low was 90.47, it seems that the target for the bottom – the 90 level – is at hand. Therefore, the implications for gold as not as bullish as they might seem at the first sight.

Why would the bottom in the USD Index form at about 90? Because this would be yet another way in which the history could rhyme. In case of the USD Index, we have more of a 1:1 repeat of what we already saw a few years earlier.

Namely, it appears that the USD Index is repeating its 2017 – 2018 decline to some extent. The starting points of the declines (horizontal red line) as well as the final high of the biggest correction are quite similar. The difference is that the recent correction was smaller than it was in 2017.

Since back in 2018, the USDX’s bottom was at about 1.618 Fibonacci extension of the size of the correction, we could expect something similar to happen this time. Applying the above to the current situation would give us the proximity of the 90 level as the downside target.

“So, shouldn’t gold soar in this case?” – would be a valid question to ask.

Well, if the early 2018 pattern was being repeated, then let’s check what happened to precious metals and gold stocks at that time.

In short, they moved just a little higher after the USDX’s breakdown. I marked the moment when the U.S. currency broke below its previous (2017) bottom with a vertical line, so that you can easily see what gold, silver, and GDX (proxy for mining stocks) were doing at that time. They were just before a major top. The bearish action that followed in the short term was particularly visible in the case of the miners.

Consequently, even if the USD Index is to decline further from here, then the implications are not particularly bullish for the precious metals market.

Having said that, let’s take a look at silver.

The white metal closed yesterday’s session right at its declining resistance line. It moved sharply higher today, soaring above both: its declining resistance line and its December high.

This is exactly what silver tends to do right before significant declines – it’s exceptionally strong – more than gold and mining stocks. Why would this be the case? Because silver is a relatively thin market, where many institutional investors can’t go as there’s not enough silver for them. The “big players” generally go for gold, and silver is favored by the investment public. The silver manipulation theories are making the demand among the investment public even stronger,

and the investment public (as a general group, not any individual person) tends to enter the market close to the tops.

The above-mentioned factors – along with the relatively small size of the silver market – make the white metal perform very well (too well) near the local tops. Of course, this doesn’t work each and every time, just like any other trading technique, and one should also look for additional confirmations before making a trade (like weak miners, which tend to react differently than silver).

It does imply, however, that it’s best not to take silver’s strength at its face value, and definitely not to view it as bullish unless it’s confirmed by the rest of the precious metals sector. Today’s breakout in silver and lack thereof in gold is not a bullish development, but a bearish one.

Moving on to the performance of the mining stocks, let’s take a look at the chart below.

The GDX ETF – proxy for precious metals mining stocks – moved higher yesterday, more than nullifying the previous day’s decline. But, overall, was it really strong? Absolutely not. In today’s trading on the London Stock Exchange, the GDX is up only a bit above Tuesday’s intraday highs, and it corrected only a bit more than a half of the December decline.

Simply put:

• Gold is relatively weak compared to what’s happening in the USD Index
• Silver is relatively strong to gold and breaking above the previous resistance levels without confirmations from neither gold, nor mining stocks
• Gold and silver mining stocks are weak compared to what’s happening in gold

The above is a perfectly bearish combination on the relative strength front. Combining this with USDX’s proximity to its target area makes the overall implications for the precious metals market very bearish.

Overview of the Upcoming Decline

As far as the current overview of the upcoming decline is concerned, I think it has already begun.

During the final part of the slide (which could end within the next 1-5 weeks or so), I expect silver to decline more than miners. That would align with how the markets initially reacted to the Covid-19 threat.

The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run, which does not make the short-term decline improbable. Markets can and will get ahead of themselves and decline afterward – sometimes very profoundly – before continuing with their upward climb.

The plan is to exit the current short positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 3 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is a soft, but simultaneously broad instruction, so additional confirmations are necessary.

I expect this confirmation to come from gold, reaching about $1,700 - $1,750. If – at the same time – gold moves to about $1,700 - $1,750 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. However, it could also be the case that we’ll wait for a rebound before re-entering short position in silver – it’s too early to say at this time. It’s also possible that we’ll enter very quick long positions between those short positions.

The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.

Summary

Summing up, the next big move lower in the precious metals market is definitely underway and it seems that it will take another 1-5 weeks (likely in the second half of December) before the decline ends.

However, I would like to emphasize that the signals that we continue to see almost on a daily basis (gold’s relative weakness to the USD Index, miners’ weakness relative to gold) are more important than the above-described prediction with regard to timing of the bottom. Unless the precious metals sector manages to show relative strength, it’s not likely to form a major, let alone final bottom.

This corrective upswing might have already ended, but it’s possible that we will see one additional move higher – based on the USD’s decline – before the very short-term top is in.

Despite a recent decline, it seems that the USD Index is going to move higher in the following months and weeks, in turn causing gold to decline. At some point gold is likely to stop responding to dollar’s bearish indications, and based on the above analysis, it seems that we might expect this to take place in December.

Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway. 

After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely earn much more in the following weeks and months), but you have to be healthy to enjoy the results.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:

Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $32.02; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $28.73; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $42.72; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $21.22; stop-loss for the JDST ETF: 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. In our view, silver has greater potential than gold does):

Silver futures downside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.

Gold futures downside profit-take exit price: $1,703

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