Briefly: in our opinion, full (200% of the regular position size) speculative long positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
NOTE TO READERS:
Dear Subscribers,
Due to PR’s travel schedule, there will be no technical parts in the Gold & Silver Trading Alert today. The fundamental part will be posted normally.
However, if anything major happens in the markets and it changes the outlook in the market or makes us think that a change in the trading/investment positions is justified from the risk/reward point of view, we’ll send you a quick intraday Alert.
Most likely, though, the GDXJ will simply move higher this week and, at least initially next week, correcting the recent powerful decline. Let’s keep in mind that the Fed’s interest rate decision is next week, and that’s when (approximately) PMs and miners could top.
Stay tuned!
Introduction
The PMs were in rally mode on Jul. 21, with gold ending the session up by 0.78%, silver up by 0.27%, the GDX ETF up by 1.90% and the GDXJ ETF up by 3.04%. Moreover, with the USD Index declining by 0.14% and the general stock market continuing its upswing, the GDXJ ETF recouped all of its daily losses from Jul. 20. Therefore, the short-term outlook remains bullish, and more upside should be on the horizon.
The Weekly Fundamental Roundup
While this week was a rollercoaster across all asset classes, unanchored inflation, a hawkish Fed, and recession fears in the Eurozone made large intraday swings more prevalent than usual.
However, with the GDXJ ETF rallying sharply and outperforming most risk assets on Jul. 21, the junior miners closed back above $31. Moreover, with equity optimism helping to lead the charge, I warned on Jul. 20 that predicable rallies with low volatility could enhance systematic funds’ appetites. I wrote:
To explain, systematic funds apply strict volatility controls to prevent major drawdowns. Therefore, if calm prevails in the financial markets, systematic funds could enhance the upward momentum by increasing their risk exposure. For example, the green rows on the left highlight how average daily market moves of 0% to 2% should result in net purchases by systematic funds over the next month.
Moreover, average moves of 1% or less (most common) mean less volatility and often culminate in the largest inflows. In contrast, the red rows on the right show how large average daily swings of 2.5% or more often push systematic funds to the sidelines. As a result, “a ‘Summer doldrums’ environment” where a lot of the bad news is already priced in could provide the perfect backdrop for the GDXJ ETF to move higher.
Thus, with the S&P 500 capping its gains at less than 1% during the last two sessions, the CTAs are back in business. Furthermore, I warned on Jul. 19 that the recent pullback caused short sellers to press their positions too much. I wrote:
Source: Goldman Sachs
To explain, the light blue line above tracks hedge funds’ short-selling activity across indexes and ETFs, while the dark blue line above tracks their activity across single stocks. If you analyze the right side of the chart, you can see that index positioning is roughly neutral, while stock-specific shorts are near their 2022 highs.
Therefore, if the macroeconomic data or this week’s earnings releases elicit a small bout of optimism, the fundamental fuel could help uplift the NASDAQ 100, the S&P 500, and the GDXJ ETF.
To that point, with the most shorted stocks materially outperforming the S&P 500, the short squeeze arrived as expected.
Please see below:
To explain, the black line above tracks the S&P 500, while the blue line above tracks an index of the 50 most shorted stocks as of Jul. 20. If you analyze the right side of the chart, you can see that the high beta, IPO, profitless tech, etc. companies have led the relief rally. Moreover, the basket increased by 3.72% on Jul. 20, while the S&P 500 rallied by 0.59%. Therefore, with a likely continuation unfolding on Jul. 21, liquidity-beneficiaries like the GDXJ ETF were supported by the re-rating.
In addition, the technical backdrop remains supportive and signals higher junior miners’ prices in the days ahead. The only caveat is that weak corporate earnings from Snap Inc. sent ripples across the financial markets after hours on Jul. 21. For example, the stock declined by more than 26% after the bell and dragged down other online advertisers like Meta Platforms (Facebook) and Alphabet (Google).
As a result, while the negativity may impact today’s session, we still expect the GDXJ ETF to rally in the days ahead.
Source: Google
Inflation’s Alive and Kicking
While many technical, sentiment, and positioning metrics point to higher prices for the GDXJ ETF in the short term, fundamental clouds are growing darker by the day. For example, Blackstone – one of the largest private equity firms in the world – released its second-quarter earnings on Jul. 21. CEO Steve Schwarzman said:
“We're cautious on inflation which we think could stay higher for longer than most expect and central banks will have to continue responding. It will be a difficult balancing act in combating inflation, while trying to minimize the negative impact on economies (…).”
“We've been preparing for an environment of rising rates and a normalization of market multiples for some time. And the facts on the ground across our global portfolio suggested inflation would be higher and more persistent than many believed.”
Thus, while I’ve been warning for months that inflation would surprise to the upside, please note that Blackstone has a $320 billion real estate portfolio. Moreover, with the Shelter Consumer Price Index (CPI) accounting for more than 30% of the headline CPI’s movement, Schwarzman’s revelation about “rent growth” is bullish for inflation.
Please see below:
Source: Blackstone/Seeking Alpha
Likewise, Hasbro released its second-quarter earnings on Jul. 19. For context, it's one of the largest toy companies in the world. CEO Chris Cocks said during the Q2 earnings call:
“We were very cognizant of the inflationary environment we were operating in, both from a consumer takeaway as well as its impact on our supply chain.” CFO Deb Thomas added, “While product and freight costs are up, we're beginning to see a reduction in port congestion delays. And lead times have come down, although they remain two times higher than historical levels.”
More importantly, with “price increases taken at the beginning of the quarter,” Hasbro executives aren’t waiting for the inflation environment to normalize. For context, “CP” stands for consumer products, and the segment accounted for 55% of Hasbro’s Q2 net revenue.
Please see below:
Source: Hasbro/The Motley Fool
Sending a similar message, Tractor Supply – which sells products for home improvement, agriculture, lawn and garden maintenance, livestock, equine and pet care – released its second-quarter earnings on Jul. 21. CEO Hal Lawton said during the Q2 earnings call:
“On inflation, I would start by just saying it continues to be persistent and consistent. Certainly, seeing some moderation, if you look at a few of the metrics, fuel costs, slightly down, spot rates on containers, down a bit, commodities moderating, but still, if you look at even on a year-over-year (YoY) basis and certainly on a two-year and three-year basis, kind of record highs.”
He added:
“I think the thing we are both watching at a very high macro level is [the Producer Price Index]. And PPI has got to come down first, just generically speaking, across retail before CPI is going to come down.”
“It’s going to take [time] because retailers got to turn through their higher cost inventory for two months, three months, four months at a minimum before you start to see any reduction on the CPI retail side. So, I think inflation is going to hold and continue to be consistent really through the CPI kind of retail level, certainly through the balance of this year.”
Thus, with Tractor Supply executives not waiting for the inflation environment to normalize either, the company raised its prices by ~12% in Q2. As a result, does it seem like inflation is about to ride off into the sunset?
Source: Tractor Supply/Seeking Alpha
The Bottom Line
While the GDXJ ETF should continue its ascent in the days ahead, weakness from Snap Inc. may depress overall sentiment somewhat. However, we still remain short-term bullish. In contrast, the medium-term outlook continues to worsen, as inflation should keep the Fed hawked up. Moreover, while the consensus assumes that a 2.5% to 3% U.S. federal funds rate will be enough to calm the pricing pressures, the data suggests otherwise.
In conclusion, the PMs rallied on Jul. 21, and the GDXJ ETF led the charge. Moreover, with a tactical buying opportunity still in place, the junior miners should enjoy more upside before their medium-term downtrend resumes.
What to Watch for Next Week
With more U.S. economic data releases next week, the most important are as follows:
- Jul. 25: Dallas Fed manufacturing survey
The Dallas Fed’s survey is a leading indicator of inflation and employment activity in Texas.
- Jul. 26: Richmond Fed manufacturing and Dallas Fed services surveys
Both regional surveys will highlight the growth, employment, and inflation dynamics in their respective regions. Therefore, they are also leading indicators of future government data.
- Jul. 27: FOMC meeting, Chairman Jerome Powell’s press conference
With the FOMC meeting headlining the week, a 75 basis point rate hike is widely expected. However, with Powell previously noting that he wants positive real interest rates “across the curve” (which hasn’t materialized at the short end), his comments will be of immense importance.
- Jul. 28: Q2 GDP, KC Fed manufacturing survey
It will be interesting to see if the U.S. economy is in a technical recession or not. With the Atlanta Fed’s latest estimate predicting another quarter of negative real growth, a realization may materialize. In addition, the KC Fed’s data will provide insights similar to the other regional surveys.
- Jul. 29: PCE Index, Chicago PMI
While the CPI and the PCE Index are roughly interchangeable, the latter is the Fed’s preferred measure of inflation. As such, it’s essential to monitor the results. Likewise, the Chicago PMI is another regional survey that helps paint a portrait of the U.S. employment and inflation outlooks.
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. If that occurs, the outcome is profoundly bearish for the PMs.
Overview of the Upcoming Part of the Decline
- It seems to me that we’re going to see a corrective upswing here (probably ending in the final week of July) that will then be followed by a very big decline in the precious metals sector.
- 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 prices 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 $1,400. 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 $1,400, 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.
Administrative Announcement
Due to PR’s travel schedule this week, there will be no technical parts in the Gold & Silver Trading Alert today. The fundamental part will be posted normally.
However, if anything major happens in the markets and it changes the outlook in the market or makes us think that a change in the trading/investment positions is justified from the risk/reward point of view, we’ll send you a quick intraday Alert.
Most likely, though, the GDXJ will simply move higher this week and, at least initially, next week, correcting the recent powerful decline. Let’s keep in mind that the Fed’s interest rate decision is next week, and that’s when (approximately) PMs and miners could top.
Summary
Summing up, it seems that while the medium-term trend in the precious metals sector remains down, we are likely to see a corrective upswing soon. Based on the confirmations that we have seen recently, the short-term outlook is bullish.
In my opinion, the GDXJ will most likely move higher this week and at least initially next week, correcting the recent powerful decline. Let’s keep in mind that the Fed’s interest rate decision is next week, and that’s when (approximately) PMs and miners could top.
It seems likely that the profits that we earned from the last couple of trades will increase even further in the near future.
After the final 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 long positions (200% 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: $33.87; 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 JNUG (2x leveraged). The binding profit-take level for the JNUG: $36.78; stop-loss for the JNUG: 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 upside profit-take exit price: $20.28
SLV profit-take exit price: $18.78
AGQ profit-take exit price: $24.57
Gold futures upside profit-take exit price: $1,776
HGU.TO – alternative (Canadian) 2x leveraged gold stocks ETF – the upside profit-take exit price: $13.46
HZU.TO – alternative (Canadian) 2x leveraged silver ETF – the upside profit-take exit price: $9.18
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.
Thank you.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
