Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
In the previous weeks we've been featuring multiple factors that are likely to usher in a sizable gold, silver and mining stocks' moves. Has the very recent downswing been the opening act? The USD Index closed flat on Friday, yet the metals declined across the board. Is it a meaningful clue of upcoming action?
Yes, it is. In the previous weeks we've been featuring multiple factors that are likely to result in lower gold, silver, and mining stock values in the following months. The very recent downswing is likely only the beginning of what's to come. There are even more signals pointing in this direction, though. There's one more similarity to the past that we would like to discuss. It's not something that is as important as the analogy to mid-90s, because the latter is confirmed by not only gold but the rest of the precious metals sector and the USD Index, but it's quite important anyway.
One of the famous technical analysis sayings is that time is more important than price - when the time comes, the price will reverse. This means that making gold predictions with regard to time is more important than making gold predictions with regard to prices. There is definitely some truth to it. For instance, when silver outperforms gold close to a cyclical turning point, it's difficult to say how high it will go, but it's relatively easy to correctly estimate that this move is going to be short-lived.
The analogy in terms of time that we would like to discuss was featured in this article, and we will describe it in the long-story-short format below.
About Those Gold Tops
There was only one case from the past decades that was similar to the 2011 price spike in gold - the 1980 high. Consequently, it's natural to check for similarities behind these tops. After all, history tends to repeat itself. The similarity that we would like to emphasize here is that the current top formed in close tune with what happened in the late 80s.
Gold topped in January 1980 and it also topped in December 1987. That's almost 8 years between these tops.
Gold topped in August 2011 and it also topped in August 2019. That's exactly 8 years between these tops.
The decline that started in 1987 lasted over a decade. And it took almost 20 years for gold to come back above the 1987 high. There are many people that are invested in the gold market for the long run, but not many of them would be invested in it, if they knew that they have to wait over 15 years to realize any profits.
Now, we are not saying that gold will decline for as long as it did in 80s and 90s. In fact, it's more likely that gold's decline will be even sharper than what we saw in the second half of the 90s due to USD's upcoming powerful rally. But, we are saying that being "long and strong" and patiently waiting for gold to rally once again might be a very costly proposition. And that's regardless of what any CoT data would show in the meantime.
Also, let's keep in mind that the decline is likely to be much worse in case of the mining stocks, just like it was the case in the late 90s.
Our August 19th comments on them remain up-to-date:
It's not easy to compare the two periods, because the most popular proxies for the mining stocks that we have right now (HUI Index and the GDX ETF were not available at that time). The HUI Index was launched on March 15, 1996, so a bit after the top in gold.
Fortunately, there are other proxies that we could use. The XAU Index for instance, has been around since January 1979 (interestingly, both were launched close to the major tops, and let's keep in mind that SLV ETF's launch marked a major top in silver as well).
The Index topped close to the previous major high (1987), but not at or above it.
Right now, the XAU Index topped relatively lower, but in a somewhat similar manner. The recent top formed a bit above 100, which is above the 61.8% Fibonacci retracement level. The high has therefore formed below the previous (2016) high but not at or above it.
And what happened next in the XAU Index in the 90s? The XAU Index topped a bit above 150 and then it declined to about 65, taking a bit more than 2 years to do so. It finally bottomed below 42 in 2000. It moved below the previous extreme low. Applying the same to the current situation suggests a move to about 30. Yes, it can happen, and it already did.
While we won't be able to check what the HUI Index did before 1996 as it wasn't trading yet, we can see how big the decline was in case of this particular index. The Index was launched at 200, a bit after the top, so the price at the top would have likely been a bit higher. The final bottom formed with the HUI at 35.31.
The most recent high was about 237, which might have been very close to the HUI's price at gold's February 1996 top, had it been trading at that time. Consequently, if the decline was to repeat itself, the target of 40 or so is not out of the question. Before dismissing it as impossible, please note that this kind of decline had already happened.
And that's definitely not something one wants to wait out while holding on to the long-term investments.
And what about the short-term price moves?
Precious Metals on Friday
The entire trio: gold, silver, and mining stocks declined. Silver even temporarily moved to a new monthly low. The decline was normal and expected. What didn't happen, though, was the breakdown below the neck levels of the head and shoulder patterns in case of gold and the HUI Index. This means that these formations were not yet completed, and we might still see some back and forth movement instead of the continuation of the decline. Completion of the formations will make the next short-term slide very likely.
Then again, let's keep in mind that the above-mentioned decline in the precious metals market happened without USD Index's help.
USD Index Went Nowhere on Friday
Despite the intraday movement, the USDX ended the session completely flat. Given the above, it would be normal for the PMs not to decline or rally. And they did decline, so they showed daily weakness, which generally does not bode well for their future performance. The head-and-shoulders formations may have not been completed last week, but the odds are that they will be still completed shortly.
On Friday, we commented on the gold to silver ratio chart and in today's analysis we would like to provide you with a quick update.
No, the implications didn't change. We simply noticed something new about this chart and wanted to share it with you. Let's start with a quote from Friday's analysis.
Gold to Silver Ratio Chart Outlook
Over 2 years ago, when the gold to silver ratio was trading at about 78, and practically everyone was writing that the ratio moved to a resistance and was about to decline strongly, we wrote an article in which we argued that the 80 level and the most recent highs are not the ultimate long-term resistance and that the real resistance is the 100 level. In the following months, the ratio continued to climb and even soared above 90. It declined sharply after that, which begs the question whether this decline actually changes anything.
Absolutely not, tt doesn't change anything. As we already wrote, no market can move up or down in a straight line and what we saw recently, was just a corrective downswing. It might have appeared to be an important short-term development, but it's not correct to evaluate it in this way. It was a long-term breakout (above the previous highs at about 80) that we saw recently, so one should look at the decline from this point of view. And what does the above very long-term picture tell? That the recent decline is barely visible. The ratio is trading at about 85 at the moment of writing these words, which means that the breakout above the previous highs was just successfully verified.
The implications of the current situation in the gold to silver ratio are bullish for the ratio. And they are bearish for the entire precious metals sector as gold, silver, and mining stocks tend to move - on average, and in the long run - in the opposite way to the ratio's direction.
Once the gold to silver ratio hits 100, it might be a good idea to back up the truck with gold, silver and quality mining stocks, but we're far from this moment at this time.
The thing that we would like to add today is that both massive rallies that ended at about 100 were characterized by a specific development. Namely, there was a visible pullback from the 80 level. We saw the very same thing in 2016. At that time, the corresponding rally in silver seemed like a big rally - perhaps even a game-changer. Yet, the bullish silver forecasts didn't play out as expected - silver is well below its 2016 high. It's even quite visibly below this year's high. The corresponding decline in the gold to silver ratio was a very normal development. What is more, this correction was smaller than the previous ones, suggesting that the uptrend is even stronger this time. The bullish implications for the ratio and the bearish implications for the precious metals sector clearly remain in place.
Summary
Summing up, the big decline in the precious metals sector appears to be finally underway, and the temporary USD-reversal-caused rally in gold and silver is likely over. Let's keep in mind that once the USDX takes off, it will likely serve as fuel to the fire-like decline in the PMs that's already underway. The similarity to mid-90s continues to support much lower gold prices in the following months. All in all, it seems that what we see right now is the beginning of the final stage of the prolonged decline in the precious metals sector that started in 2011. On a short-term basis, it seems that we might get some temporary strength once gold moves to about $1,330 - perhaps within the next several weeks.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,332; stop-loss: $1,583; initial target price for the DGLD ETN: $39.87; stop-loss for the DGLD ETN: $25.17
- Silver: profit-take exit price: $14,62; stop-loss: $20,16; initial target price for the DSLV ETN: $32.96; stop-loss for the DSLV ETN: $11.67
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $22.62; stop-loss: $32.37; initial target price for the DUST ETF: $17.28; stop-loss for the DUST ETF $5.48
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: $30.32; stop-loss: $45.42
- JDST ETF: profit-take exit price: $38.36 stop-loss: $11.26
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 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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The U.S. Consumer Confidence number release caused a lot of confusion for the markets on Tuesday. And it was worth paying attention to our last week's News Calendar. This week, the new quarter begins, and we will have series of important economic data announcements. So let's take a look at these possible market-moving events.
Important Economic News Calendar: September 30 - October 4, 2019
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
