Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Another day, another rhyme. Even yesterday’s rebound in gold stocks was just like what we saw in 2008. And that’s just one of the confirmations.
I wrote about it in yesterday’s Gold Trading Alert #2, and I provided an extra follow-up in the comments section, but in order to keep it all in one place, here it is again:
Meanwhile, gold stocks are moving higher, as well, but… they are moving higher pretty much like they did in 2008.
The HUI Index just moved a bit above the 61.8% Fibonacci retracement based on the initial downswing, and then it declined again, closing the day visibly below it.
Back in 2008, the HUI Index corrected 61.8% of the initial decline.
This time the moves were quicker, so it’s no wonder that they were bigger (on an intraday basis) – quicker moves are more emotional.
So, while this volatility might appear to be a game-changer, it most likely isn’t. It didn’t invalidate the bearish link with 2008.
The extremely favorable bearish potential of the current situation in junior mining stocks remains intact.
The additional implication here is that the next several days can be quite similar – we could see back-and-forth movement, but this is most likely just the early part of a really huge move that is likely to accelerate as the time passes.
Another thing that I discussed in yesterday’s intraday Gold Trading Alert was the relative performance of gold, silver, and mining stocks. Let’s take a closer look.
Silver is clearly outperforming gold on an immediate-term basis, which is the perfect cherry on the bearish cake.
Junior miners attempted to rally above their recent high yesterday, and they failed. This shows that it’s likely the final part of the upswing. The worst performer – junior mining stock sector – is catching up as it was “cheapest.” It’s likely being bought by those who don’t care if it was cheap for a reason. But I already wrote about it yesterday.
Based on the link to 2008, we can see some back-and-forth movement in the GDXJ in the following days as well, but that’s not really important because the ultimate follow-up action is likely to take the juniors MUCH lower. And I don’t mean just erasing the March rally. I mean moving to, and then below, the 2022 lows.
To put it into perspective, let’s zoom out.
The short-term downside target is at about $26, so entering the short position above $35 is likely to prove very beneficial in the near future, in my view.
The move above it was, well, small. Gold moved up visibly, it was all accompanied by panic due to the situation in the banking system, but the reality is that junior miners didn’t move up substantially. They only briefly corrected 61.8% of their 2023 downswing, which is a relatively normal technical phenomenon.
So, what’s next in store, given the link to 2008?
Gold might move sideways in a rather volatile manner; however, gold stocks (including juniors) have probably already topped.
The stock market has also likely formed a local top, and it can now decline. At first, it would be likely to decline in a measured way, and then to slide – pretty much like the miners.
The USD Index has probably either bottomed or is very close to bottoming.
Please take a look at the RSI – it just jumped above 50 for the second time after the major top. The same thing happened in September, 2022. And what happened next? Stocks plunged!
So, if history is be similar to a smaller extent to 2008 and to a bigger extent to 2022, stocks might slide right away, or very soon.
When that happens, miners – and especially junior miners – would be likely to follow.
This means that we might (as I wrote above) or might not have a measured decline in juniors, and we might have a more volatile drop soon.
Which one will it be? I’m not sure, and I don’t care that much, because the position that we have is likely to become extremely profitable (in my view) in the following weeks, regardless of which of the above scenarios plays out.
As far as the USD Index is concerned, the long-term chart continues to point to a similarity with what happened in 2008.
If you look at what happened in mid-2008 – before the near-vertical rally – you’ll see that the back-and-forth movement at the bottom was normal. There was not a single bottom, but a few of them. So, seeing a quick decline here, doesn’t make the current picture bullish.
In fact, if you look at the RSI indicator, you’ll see that the final small decline that led to the final bottom started with the RSI at about 50.
That’s exactly the level that was just hit, before USD’s recent short-term decline.
And when did that final short-term decline end in 2008? Above the previous lows, when RSI moved to… the levels that it’s at right now.
Yes, the situation is bullish for the USDX, even though it doesn’t seem like it based on what’s going on in the world. The sentiment was very similar back in 2008, and we all know what happened next.
The outlook for junior mining stocks remains extremely bearish, and the profit potential for our short positions remains enormous.
Stay strong.
Overview of the Upcoming Part of the Decline
- It seems that we’re seeing another – and probably final – corrective upswing in gold, which is likely to be less visible in the case of silver and mining stocks.
- 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 – perhaps with gold prices close to $1,500 - $1,550.
- 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), and 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, after all), so that more people can contribute to the reply and then enjoy the answer. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, we recently took profits from the additional FCX trade (right before the trend reversed!) and the current short position in junior mining stocks is – in my view – poised to become very profitable in the following weeks, and perhaps days.
Things might appear chaotic in the precious metals market right now, but based on the analogy to the previous crises (2020 and 2008), it’s clear that gold, miners, and other markets are pretty much doing the same thing all over again.
The implications of this “all over” are extremely bearish for junior mining stocks. Back in 2008, at a similar juncture, GDXJ’s price was about to be cut in half in about a week! In my opinion, while the decline might not be as sharp this time, it’s likely to be enormous anyway and very, very, very profitable.
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To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; stop-loss for the JDST: none.
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.):
Silver futures downside profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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.
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
