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.
After we published yesterday’s analysis, nothing really changed. Ok, miners declined in a profound manner, but it was quite obvious that they would do that given a $30 pre-market decline in gold. So, what news can I give you today? I can tell you about some of the clues that yesterday’s decline provided and about one from today’s pre-market USD and gold trading.
Let’s start with the latter.
In today’s pre-market trading, the U.S. Dollar Index moved slightly lower, and at the moment of writing these words, it finds itself a bit below the mid-August bottom.
The invalidation of the intraday breakdown below this level was what triggered the biggest part of gold’s decline on Monday (Nov 23). This might happen again very soon, but this is not the clue that I was writing about earlier. Today’s clue is that since the USD Index might be breaking lower here, gold should have reacted with a visible rally – if it was past a bottom.
Gold didn’t react with a visible rally. Conversely, gold reacted with a small decline. This subtle clue tells us that gold hasn’t formed a bottom yet. And since gold doesn’t want to rally from here, and it seems that it’s about to get a bearish push from the USD Index (I expect the tiny breakdown to be invalidated just like the previous 3 attempts), we have a quite bearish combination of factors for the yellow metal.
Please note that moves in both the USD Index and gold were relatively small (so they could be invalidated before you read this) but this lowers the bearish implications only a little – after all, for some time in today’s pre-market trading gold was definitely moving a bit lower while the USDX was a bit lower as well.
What about the clues from yesterday’s session? They are visible on the mining stock chart.
Miners moved lower and while they tried to bounce back, they failed to do so, creating a bearish reversal during the day. This kind of shape during the day’s session is bearish in nature. It’s especially the case when we see it after a rally (it’s a shooting star candlestick or a gravestone doji candlestick in this case), but even during a decline it indicates more weakness. Please note that we already saw that a few times recently: on November 12 and 13, and on October 26.
The shape of yesterday’s session is one clue, and the steady buildup in volume as prices decline is another. The August, September, and October bottoms were characterized by a relatively average volume during the declines preceding them, and then a huge spike in volume at the bottom. This time, the volume is also significant in absolute terms, but not in relative terms. The volume is simply increasing as the price moves lower as more and more people become convinced that gold is no longer in a bullish mode.
The RSI indicator is approaching the 30 level, which some might view as bullish, but let’s keep in mind that back in March, the bottom was not yet in until the RSI moved into its low 20s.
So, while it’s clear that there are counter-trend rallies within any move, it seems that the precious metals market is not yet ready to launch a counter-trend rally right now. And even if it does start this kind of move, it’s unlikely that it would be significant. The outlook for the precious metals market remains bearish for the next few weeks.
Letters to the Editor
Q: At what price point do you expect that we may want to buy gold? At about $1700? Or higher at $1750?
A: At about $1,700 or below. Gold is just about $100 away from this level and the rally in the USD Index hasn’t started yet. Gold is likely to react to the USD’s rally by declining in a rather big way. As I expect the rally in USDX to outlast the decline in gold, the key thing to watch will not be the exact price of gold itself, but its relative strength to the USDX. When it stops declining despite rallies in the USDX, we’ll likely have THE bottom.
Q: I’m quite pleased with the advice on my account. I have a question since you are recommending the possibility of a sharp decline in Silver. I am not setup for trading silver futures. What, aside from a few Silver stocks and ZSL, are the options to take advantage of a sudden selloff in silver stocks?
Also, aside from a breakout of the longer term USD chart and strong resistance at 92.5, what makes you think the dollar will rally? I am just trying to understand - is this all technical? The dollar seems to be in a down trend, doesn’t it?
A: Thanks, I’m happy to read that you enjoy the results of our work. As far as silver trading vehicles are concerned, there are also silver options, options on silver stocks, and CFDs (but they are available only in some countries; the U.S. is not one of them). Theoretically, there might also be silver forwards, but futures would likely be easier to come by, so I suppose this is out of the question. One could also decide to simply short any of the long ETFs for silver like SLV (provided that one’s brokerage account allows shorting).
It’s also important to note and clarify - we’re not providing investment advice (let alone, individual investment advice), just our opinions of general nature.
As for the USD Index, it was indeed in a medium-term downtrend, but I think that this trend has ended. The very long-term trend is up, and the USD Index is after a major breakout that was confirmed a few times already. You will find more details in Monday’s flagship Gold & Silver Trading Alert. The additional factor is the excessive bearishness present on the futures market.
The above chart shows the netted version of the positions shown in the Commitment of Traders report. Please note how lows in the blue line correspond to major medium-term bottoms in the USD Index. We once again find ourselves in this situation.
On the fundamental front, please keep in mind that for the currency markets it’s not important how “things are going in the U.S.”, but how they are doing relative to the rest of the world, and most importantly, relative to the Eurozone and Japan (currency exchange rates against the euro and the yen have the biggest weights in the USD Index, which is ultimately a weighted average of currency exchange rates). Are things about to get much worse in the U.S. compared to them? No. In risking oversimplification, let’s say that while things are bad pretty much all around the world, they might actually get calmer in the U.S. as the post-presidential election turmoil subsides.
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 $1,750. If – at the same time – gold moves to about $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.
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 mid-December or in its second half) before the decline ends. For now, the miners are still declining significantly, while silver is showing relative strength – we expect this to reverse in the final part of the decline.
Please note that even Warren Buffett is limiting his exposure to gold.
As the USD Index appears to have ended forming its broad bottom pattern, it’s likely to rally, causing gold to slide. 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.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
