Briefly: in our opinion, full (100% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward point of view at the moment of publishing this Alert.
You might be wondering what (if anything) changed in the outlook for the precious metals sector, given that the USD Index finally declined over 0.5% today.
In our view that's quite likely, even though silver didn't outperform gold yet. Several days ago, we mentioned that there are two factors in play with regard to the relative performance of gold and silver. In general, silver tends to outperform at the end of a given rally. However, the virus-scare factor is likely to make gold shine particularly bright, not silver. At least that's what happened during the ebola scare in 2014. Consequently, it could be the case that this particular top is going to take place without silver's outperformance.
It would be a great confirmation if silver outperformed, but given what's triggering the gold gains recently, this factor might indeed be absent.
Now, the USD Index finally moved lower. While we previously wrote that the USDX could decline all the way to the 98 level, it might be the case that it bottoms at much higher levels and it could be the case that the bottom is already being reached as the USD Index is verifying the breakout above the 2019 highs.
The GDX ETF - important proxy for the mining stocks - moved very close to its 2019, and 2016 highs and it moved right to the resistance line based on these two major highs taken together. Without a breakout here, the outlook for the next several weeks is very bearish, especially given all the medium-term factors that we outlined on Tuesday.
What is also very important is that gold soared mostly before the USD Index declined. When the USDX was still trading at about 99.60 - 99.65, gold was already trading at about $1,645. At the moment of writing these words, the USDX is trading at 99.20, while gold is at $1,648. This means that gold seems to have rallied on the expectation of a pullback in the USDX and now, when the pullback is indeed taking place, it's not really willing to react much more.
This might seem similar to what happened in silver quite a few years ago. Back in 2006, silver soared on the expectations that the SLV ETF will be launched and that this will allow many new investors to invest in silver and thus cause silver price to soar. And what did silver do right after the SLV ETF was indeed launched? It moved up for about 2 weeks and then it plunged, erasing more than one third of its value.
In case of the USDX pullback and gold's reaction, the scale is much smaller, so the reaction is likely to be much smaller as well. What happened days back in 2006 in case of silver, could take hours now with regard to USD and gold. And it seems that we see something similar right now.
This means that even if the USD Index declines more here, the gold price is unlikely to rally significantly higher. This, in turn, creates a good risk/reward opportunity for entering short positions.
Consequently, we are opening a speculative short position in gold, silver and mining stocks. It's important to send you this info ASAP, so we are not calculating stop-loss or target prices right now. We will feature them on Monday.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (100% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective.
The popular and 3x leveraged instrument to take advantage of lower prices of gold that you might consider is DGLD
The popular and 3x leveraged instrument to take advantage of lower prices of silver that you might consider is DSLV
The popular and 3x leveraged instrument to take advantage of lower prices of mining stocks that you might consider is DUST. The unleveraged version would be shorting the GDX ETF.
The popular and 3x leveraged instrument to take advantage of lower prices of mining stocks that you might consider is JDST. The unleveraged version would be shorting the GDXJ ETF.
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
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
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