Briefly: in our opinion, no speculative short positions in the precious metals sector are justified from the risk/reward point of view at the moment of publishing this Alert. We will probably re-enter the short positions soon (most likely at higher prices), thus increasing our overall profits from this medium-term decline.
Some might consider an additional (short) position in the FCX.
The situation in the Middle East is getting worse, and we’re likely moments away from a full-blown military operation. What’s gold likely to do?
In short, gold is likely to rally, but that is not the full or most useful reply.
Before getting to the analysis itself, I want to provide a bit of background on the markets in general and how it translates into the current situation. “Market buys the rumor and sells the fact.” is one of the Wall Street sayings.
This is the case, as the markets are forward-looking, and they keep discounting various versions of the future. As something becomes near-certain (and it’s generally known), it’s already discounted in the price.
Let’s keep in mind that people tend to get too emotional about things – this mechanism also applies to the markets. So, as people keep discounting the possible fact or event, they also exaggerate in their expectations. In consequence, the price might move too far relative to where it should move.
And then, when the fact arrives, or the event finally does materialize, the market gets more realistic, and the price moves back to where it “should” be. It’s then moving in the opposite direction to what “makes sense” based on the event itself.
For example, when the SLV ETF was launched many years ago, everyone and their brother were forecasting that the silver price would shoot to the moon due to the increased investment demand. It made sense. Silver price kept rallying before the ETF was launched. And you know what it did after the launch? Silver price topped shortly, and then it collapsed.
Why am I mentioning this today? Because the key driver behind gold’s recent decline is the fear and expectations of war in the Middle East.
At this point it seems very likely that Israel will launch a military operation shortly. When this became very likely on Friday – after the warning from Israel – gold price truly soared.
Now, given what I wrote above about how prices, expectations, and events work, and knowing what happened to the silver prices after the key event materialized, what’s likely to happen to the prices of gold after the military operation starts?
The forecast for gold price is actually bearish. To be clear, gold is not that likely to decline right away, but it is likely to decline soon.
It’s usually very difficult to convince people about the above mechanism as it seems anti-intuitive, so let’s check what happened when we saw a previous war outbreak – and one on a much bigger scale.
The Russian invasion on Ukraine was launched in late February 2022, and I marked that with a red dashed line. That was also when interest in “war” peaked – when there were many searches for “war” Google. Back then, gold topped in less than 2 weeks.
However, please note that the situation with Russia and Ukraine was vague – much more so than what we currently have in the Middle East, so the entire move from expectation or news to fact could be faster.
The area of conflict is much smaller in this case, but it doesn’t make it any less tragic, and it doesn’t make the fear and concern any smaller. The data confirms it as well.
This chart (the below charts are courtesy of Google Trends) shows that the number of searches about “war” is soaring right now.
It happened a few times in the past, and the biggest peak was in February 2022.
The analogy gets more interesting when we focus on the U.S. searches, and we focus on news only.
In this case, it’s obvious that the current situation is similar to just two times from the recent history – to February 2022 and to late December 2019.
I marked both cases on the first chart – featuring gold price. What happened in both cases? Gold kept rallying for several days but for not longer than 2 weeks, and then it topped.
Then, in early 2020, gold price continued its upward trend (but after declining in the short term, and in 2022, gold price started a multi-month decline.
What’s likely to happen now? The fear / concern / expectations are already enormous, and the gold price is already after a rally. Did it top already? Most likely not (and it’s good that we took profits from our previous short positions in miners before gold truly shot up), as the momentum was extremely strong. However, it seems that we’re not far from the top.
The previous trend in gold was to the downside, which means that after the short-term top, the gold price is likely to decline once again – and the same is likely for silver and mining stocks.
How soon can the reversal take place? Probably several days or no longer than 2 weeks after the actual attack. Both could happen as early as this week.
The above is confirmed by the place where the two resistance lines cross (on the gold price chart). The vertexes of triangles created by such resistance lines tend to mark the times when the price reverses. The most recent move was to the upside, so it’s quite likely that the next several will happen either this week or the next week. What this technique doesn’t say is how high gold can rally before it reverses, and that’s a different question.
Given the very emotional nature of the recent price moves, it’s currently unclear how high gold can rally before it tops. Seeing gold top at about $1,960 would not be surprising, though.
What’s very interesting is that mining stocks point to a reversal in about a week as well.
The triangle-vertex-based reversal in the GDXJ is due at the end of this week, and it seems likely that the GDXJ would top right below the $36 level if gold’s momentum upward continues.
There’s also the possibility that junior miners will top very soon – below $35 – but given gold’s and miner’s strength and momentum that we saw on Friday, it’s not the most likely outcome.
Moreover, please note that despite the fundamental situation now being very different than what we saw earlier this year, junior miners continue to move very similarly to the previous periods marked with green ellipses. In other words, the situation developed in tune with my previous comments:
The GDXJ ETF declined by over 3% yesterday, which might seem bearish, but at this time – given Wednesday’s invalidations in miners and stocks – it’s not clear if this breakdown can be trusted.
The above chart features an additional reason for this lack of trust. The thing is that current quick decline is extremely similar to the declines that we saw in the middle of the previous short-term corrective upswings.
I marked all of them with green ellipses. They all followed a bottom that was preceded by decline, which in turn was preceded by a consolidation that I marked with orange. The situations are simply alike. Yesterday’s decline was just like the declines that happened in the middle of the previous corrective upswings and I marked that with black arrows.
This has bullish, not bearish implications.
All in all, it seems that we’ll be able to return to the short position in the junior miners at higher prices, thus increasing the overall profitability of this decline. Perhaps as early as this week.
As always, we’ll keep you – our subscribers – informed.
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Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- 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.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- 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 prices close to $1,400 and GDXJ close to $15 . 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.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, the medium-term trend in the precious metals sector remains clearly down but based on the possible escalations of the conflict in the Middle East, and the technical invalidations of breakdowns in junior miners and in the S&P 500 index, it seems that miners might move even higher this week – and quite possibly top this week as well.
That the extremely bearish outlook remains in place for the medium term, and thanks to the bullish outlook for the very short term, it seems that we’ll be able to re-enter our short positions at higher levels, which would imply increasing our overall profits from the medium-term decline.
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Finally, please note that we just took profits from 11th profitable trade in a row, which is not a small feat – congratulations! And since we’re likely to re-enter our short position at higher levels, this year’s profits are likely to grow even further! Please keep in mind that the possibility to extend your subscription for up to three years (at least by one year) with a 20% discount from the current prices is still open.
Locking in those is a great idea not only because it’s perfect time to be ready for what’s next in the precious metals market, but also because the inflation might persist longer than expected and prices of everything (including our subscriptions) are going to go up in the future as well. Please reach out to our support – they will be happy to assist you and make sure that your subscription days are properly extended at those promotional terms. So, for how many years would you like to lock-in your subscription?
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): No speculative in the precious metals market are currently justified from the risk to reward point of view.
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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.
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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
