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.
In Monday’s analysis, I wrote that the market situation is likely to become more specific right before, during, and perhaps shortly after the U.S. presidential elections. And by “specific”, I mean that the markets could begin moving against their previous trends.
Well, that’s precisely what we’ve witnessed so far. The overnight volatility is significant as the markets try to estimate the elections outcome, with the odds keep changing quickly. Let’s start today’s market examination with the USD Index.
Yesterday, I indicated that I wouldn’t be surprised to see a corrective move lower that would trigger a brief move higher in the precious metals and mining stocks. I’ve also indicated that such a move would only be temporary, and most likely, it won’t last more than several days.
That’s what we have witnessed. Indeed, the USD Index has moved lower, almost touching the previously broken red resistance line. Yes, it rallied back up but then declined once again in today’s pre-market trading. Given the current political uncertainty, this is a relatively normal post-breakout behavior. The key point is that the USDX didn’t invalidate the short-term, let alone the medium-term breakout. This means that – as I indicated yesterday – these moves are not a game-changer, but instead, they are a relatively normal uncertainty-based phenomenon.
Gold moved higher yesterday, which erased those gains in the last few hours. So, is the uncertainty-based rally already over? It’s unclear. Given how great the uncertainty is, and regardless of the outcome, it’s likely to be taken to the Supreme Court (or at least heavily protested), the uncertainty might not disappear today.
And what about gold miners?
Miners rallied, almost touching their declining resistance line and the 50-day moving average.
On Thursday, after gold’s significant Wednesday decline, I’ve indicated the following:
Miners have been undermining gold, which is bearish, and they have also broken below the recent lows, which is also bearish. Moreover, miners have just declined on strong volume after opening the day with a price gap, which at first sight, is bearish.
The theory is that such sessions are particularly bearish, as they supposedly show the bears' strength. But, before applying any trading tip into practice, it’s important to check if it had indeed worked on a given market, especially in the recent past. And the aforementioned did work… In the opposite way!
For the third time, miners are declining substantially during one day on a strong volume. We saw the same thing happening in mid-August and late-September. None of them were followed by lower miner prices. Instead, we’ve witnessed corrective upswings that didn’t change the overall downtrend.
So, from here on in, will miners rally or decline? Overall, the very near term (until the elections in the U.S. and a day-two after that) is unclear. At this point, a temporary rebound here would not surprise me at all, and if we see one, I expect it to be followed by a major slide. That’s precisely what happened right before and after the elections in 2016.
The summary above remains 100% valid. Miners moved higher, and given today’s pre-market move lower in gold, it seems that they will decline today. However, given how quickly things are changing regarding the political outlook, it wouldn’t be surprising to see a quick turnaround in gold and a daily rally before it finally plunges. So, it’s not a sure bet that miners have formed their top yesterday.
Back in 2016, right after the U.S. presidential elections, miners corrected to almost 38.2% Fibonacci retracement level based on the preceding decline, and they moved briefly above their 50-day moving average. Both levels are close to each other this time as well, with the retracement being slightly higher.
Yesterday’s move to $39.62 was below both levels. If GDX is to move above the 50-day M.A. once again, it would have to exceed $40.02, at least temporarily.
Back in 2016, GDX declined from about $25 to about $20 (20% decline) in few days. Could this happen again? It seems quite possible. This time, GDX is close to $40, so if it declined 20%, it would trade at about $32, which is the upper border of our target are and the February high.
There’s one more thing that tells us that while we might have seen the top yesterday, it was not necessarily the case.
Namely, silver didn’t outperform gold yesterday, and miners were not week relative to it (on a day-to-day basis). These are signals that very often herald short-term turnarounds.
Their absence in yesterday’s trading is a clue pointing to the possibility that PMs and miners will move higher before topping. To be clear, we’re not talking about weeks here, but rather days, or perhaps hours. If silver comes back up strongly today while miners underperform, it will be an apparent signal that the short-term top is already in. Of course, the above is not a sure bet, as PMs and miners could decline right away based on their medium-term breakdowns, but it’s not 100% clear that yesterday was the ultimate short-term top.
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 later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we 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 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 – 5 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 at the same time, a broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 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. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to successfully execute such a strategy.
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 in the precious metals market is likely to be to the downside, but how metals’, miners’ and the USD Index are behaving right now as well as the analogy to 2016 (previous presidential elections in the U.S.) suggest that we might see one final pop up higher in the next few days (or hours) before the slide gains momentum.
Considering gold's breakout invalidation above the 2011 highs, it's evident that the big rally (that ended $4 above our upside target) is entirely over. Given this invalidation and the confirmed USD Index breakout, gold will probably slide much lower over the next few weeks. There are indications that the corrective upswing in the precious metals market and the pullback in the USDX are close to being over. Thus, the decline could resume any day – or hour – now.
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 1-6 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
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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: 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 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
Editor-in-chief, Gold & Silver Fund Manager
