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.
Gold, silver, and mining stocks plunged yesterday as a response to USD's breakout. For several times, we wrote that PMs tend to react to breakouts and breakdowns in the USDX more than they do compared to other moves in the index, and yesterday's action served as the perfect confirmation for it.
The USD Index moved clearly and significantly above the declining resistance line. The three consecutive daily closes did not confirm the breakout, but traders still seem to think that a daily close above the resistance happens to be significant.
People might have thought that we were wrong to expect higher USDX values for weeks now and that our mid-year USDX broad bottoms theory is flawed. Last Friday, we even told you that the early breakout invalidation could not be taken at its face (bearish) value. This breakout proves that we were not that crazy after all. Thereby, the action that will likely follow will serve as the final proof.
The long-term USD Index chart above points out to the critical situation and how tiny the rally was so far. And yet, silver declined over $2 yesterday.
We've previously commented on the USDX chart above as follows:
The USD Index is at a powerful combination of support levels. One of them is the rising, long-term, black support line that's based on the 2011 and 2014 bottoms.
The other major, long-term factor is the proximity to the 92 level - that's when gold topped in 2004, 2005, and where it - approximately - bottomed in 2015, and 2016.
The USDX just moved to these profound support levels, and it's very oversold on a short-term basis. It all happened in the middle of the year, which is when the USDX formed major bottoms on many occasions. This makes a short-term rally here very likely.
While it might not be visible at the first sight (you can click on the chart to enlarge it), the USD Index moved briefly below the long-term, black support line and then it invalidated this breakdown before the end of the week. This is a very bullish indication for the next few weeks.
Based on the most recent price moves, the USDX is once again below the above-mentioned strong rising support line, but we doubt that this breakdown would hold. We expect to see an invalidation thereof that is followed by a rally.
The above is still valid, especially if we keep USD's yesterday's breakout into consideration.
The implications for the precious metals market are very bearish.
The same goes for the decline's general stock market implications that followed its breakout invalidation to new highs. Who would have thought that the rally would not hold, right? It's not as if the world was enduring its worst economic downturn in many years...
Being in the third week when the general stock market is below its early-2020 highs, we were expecting stocks to decline right after the invalidation, and that's precisely how they've started this week.
The only recent situation comparable to this invalidation is what we saw in late 2018. The size of the preceding rally and its sharpness was considerably smaller than what we see right now, so the reaction we're about to see will probably be bigger than what we witnessed in the final months of 2018. That doesn't bode well for the precious metals sector, as it plunged along with the leading stock indices in March. And history has a habit of repeating itself.
As far as gold is concerned, we previously wrote the following:
(...) Gold rallied one more time, but it managed to do so back above the previously broken resistance. Therefore, the breakdown was confirmed, and the outlook remains very bearish, especially given the indications from gold's long-term chart and its self-evident pattern.
The next support is at $1,700, where gold approximately topped and bottomed multiple times earlier this year. That's also the 61.8% Fibonacci retracement based on this year's upswing.
Please note that gold has yet another impending triangle-vertex-based reversal just a few days away (tomorrow or Wednesday). Given today's pre-market breakout in the USDX, it seems quite likely that gold would decline shortly and perhaps form a brief bottom tomorrow or on Wednesday, after which the slide would continue. Simultaneously, the USDX could be taking a breather, verifying the breakout in the process.
The above remains valid as well. We might see some breather or a small rebound throughout the week, after which the decline would probably continue - most likely in a sharp manner.
Silver provides us with yet another bearish indication. Namely, yesterday, silver broke below its rising support line, and in today's pre-market trading, it's moving back and forth below it, thus verifying the breakout.
The breakout's implications are bearish, but at the same time, it should be pointed out that we might see some type of consolidation here, similar to what happened in early March.
And what about the miners?
The miners declined as well. Probably the only reason due to which miners didn't drop more was the intraday stock market rebound. As gold continues to decline (perhaps after taking a short breather), miners are likely to decline profoundly.
Please keep in mind that the most significant part of the March decline (actually, most thereof) took place over just a couple of days. Therefore, currently, it seems to be a terrible idea to stop following this market.
It goes without saying that we will keep you, our subscribers informed on the ongoing situation and its developments.
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 later than in 6 weeks, perhaps near the end of the year - just like it happened in 2015), we expect silver to decline more than miners. That would be aligned 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, but it doesn't make the short-term decline improbable. Soon, markets can and will get ahead of themselves and then decline - sometimes very profoundly - before continuing with their upward march.
The plan is to exit the current positions in miners after they decline far and fast, but at the same time, when silver drops just "significantly" (we expect this to happen in 0 - 5 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. This is a very soft and broad instruction, so additional confirmations are necessary. I expect this confirmation to come from gold, reaching about $1,800. If - at the same time - gold moves to about $1,800 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. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to successfully execute such a strategy.
Summary
Summing up, it seems that after reversing $4 above our upside target, gold has finally topped and that it already ended its post-top consolidation. As the situation continues to develop similarly to what it was in 2013, the outlook is very bearish, but on a much shorter timescale. The silver breakdown and the USDX breakout confirm the precious metals sector's extremely bearish outlook in the following weeks (we might see a pause and/or a small rebound this week, though).
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 to increase its size if it wasn't already sizable, it's now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it's a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.
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 1-6 weeks, so it's important to stay alert to any changes.
Needless to say, the most important thing is to 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 make much more in the following weeks and months), but you have to be healthy to really 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 profiting from the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing those details anyway. In our point of view, currently, 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
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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 more 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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
