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.
Gold’s rebound continues and mining stocks soared back to their October lows – is the bottom in? Most likely, it’s just an interim one.
In yesterday’s analysis, I emphasized that a corrective upswing right now would be in perfect tune with the previous similar medium-term downtrend and this comment remains intact:
The history rhymes, but this time, the similarity is quite shocking.
We copied the short-term chart and pasted it over the long-term chart above and next to the 2011 top.
They are very similar to say the least. Yes, these patterns happened over different periods, but this doesn’t matter. Markets are self-similar, which is why you can see similar short-term trends and long-term trends (with regard to their shapes). Consequently, comparing patterns of similar shape makes sense even if they form over different timeframes.
After a sharp rally, gold declined quickly. Then we saw a rebound, and a move back to the previous low. Some time later gold moved close to the most recent high and started its final decline. This decline was less volatile than the initial slide. That’s what happened when gold topped in 2011 (and in the following years), and that’s what also happened this year.
The patterns with this level of similarity are rare, and when they do finally take place, they tend to be remarkably precise with regard to the follow-up action.
What is likely to follow based on this pattern, is that we’re likely to see the end of the slower decline, which will be followed by a big and sharp decline – similarly to what we saw in 2013.
The above similarity also shows that gold’s decline might initially have counter-trend rallies – just as we saw in early 2013. Consequently, seeing such a rally could be viewed as a bearish confirmation of this self-similarity.
Well, that’s exactly what we see today – a counter-trend rally.
Does it change anything from the short-term point of view? Absolutely not. Gold just moved above its declining resistance line, but it didn’t move to its September low just yet. Consequently, what we see right now is just a rebound and quite likely a verification of the breakdown.
Gold was declining almost each day recently, and no market can move up or down without periodic breathers – that’s exactly what happened yesterday and it seems to be taking place today as well. Not only is it not a game-changer; it’s actually in tune with how gold declined in 2013 – with periodic corrections.
Back in 2013 these corrections ended at some point and then the gold market truly plunged. This means that it seems best not to try to time each and every correction, but focus on the bigger move, instead.
Especially considering that the U.S. Dollar Index (USDX) could invalidate its breakdown any day now.
Yesterday we saw the first daily close below the September low. This means that the breakdown is not confirmed, and if the USDX closes below this level also today and tomorrow, it will be. However, at the moment of writing these words, the USDX is trying to rally back up – if it is successful, gold would be likely to plunge.
Still, to be precise, since gold just managed to rally above the declining resistance line, it might have enough momentum to reach the September low (at about $1,850) before turning south once again.
The breakdown in the USDX is not confirmed and it could be invalidated any hour now, but… What if it’s not? What if – despite invalidation being likely and the USDX moving up – what we’ve seen in the last couple of months was not the broad bottom in the USD Index, and the latter is going to decline from here?
These are important questions. First of all, if the above is indeed the case, it won’t mean that technical analysis became useless or less useful. It would mean that a different part of history is likely to be repeated to a certain extent, and not the ones that I featured and referred to previously.
The above wouldn’t invalidate the very bullish implications of the long-term breakout in the USDX in 2015.
So, what would be likely to happen if the USDX declines in the next few days?
In this case, it seems likely to me that the USDX would repeat its 2017 – 2018 decline to some extent. The starting points of the declines (horizontal red line) as well as the final high of the biggest correction are quite similar. The difference is that the correction was now smaller than it was in 2017.
Since back in 2018, the USDX’s bottom was at about 1.618 Fibonacci extension of the size of the correction, we could expect something similar to happen this time. Applying the above to the current situation would give us the proximity of the 90 level as the downside target.
But would gold soar in this case? Well, if the early 2018 pattern was being repeated, then let’s check what happened to precious metals and gold stocks at that time.
In short, they moved just a little higher after the USDX’s breakdown. We marked the moment when the U.S. currency broke below its previous (2017) bottom with a vertical line, so that you can easily see what gold, silver, and GDX were doing at that time. They were just before a major top. The bearish action that followed in the short term was particularly visible in case of the miners.
Consequently, even if the USD Index is to decline further from here (and – again – the breakdown could be invalidated shortly), then the implications are not particularly bullish for the precious metals market.
Let’s keep the situation in the stock market in mind as well. On Monday, I commented on it in the following way:
Stocks are testing their previous highs. Will this test be successful? Growing Covid-19 cases and an increasing number of hospitalizations suggest that this will not be the case.
Please note that back in 2018 stocks moved above their previous high before sliding. The fact that they moved above their previous highs is therefore not as bullish as it first appears.
Moreover, please note that back in early September, stocks topped at the vertex of the triangle created by the rising red and blue lines. The blue line is based on the 2020 bottom and the June bottom. The analogous line, based on the 2020 bottom and the September bottom also creates a triangle with the rising red line, and this triangle has a vertex practically right about now.
Stocks moved practically to the vertex and declined. At the moment of writing these words, the S&P 500 futures are trading back below their November 9 high. Perhaps the U.S. stock market soared thanks to help from the USD Index (after all, a lower dollar makes U.S. exports more competitive). The turnaround and the vertex might indicate a turnaround also for other markets, including the USDX and PMs.
Finally, let’s keep in mind the analogy to the U.S. presidential election - gold tends to decline in these years shortly after (or before) Thanksgiving.
Gold’s Performance around Thanksgiving
Thanksgiving is on the fourth Thursday of each November, which means that the holiday always falls between November 22and 28. What’s usually happening to the price of gold before and after this period? Let’s check gold’s seasonality for Q4.
During this period, gold is usually just before forming a short-term top and starting the biggest decline within the final quarter of the year.
Please note that the accuracy measure as to when the top is likely to be is relatively low, but soars right before gold’s plunge. This means that while it’s not that clear when gold is likely to top, it’s quite probable that we are going to see some kind of important top regardless of when exactly that takes place. Could it be slightly ahead of Thanksgiving? Yes. Could it be slightly after it? That’s possible as well.
But this year is not like other years, and I don’t mean the pandemic. This year, particularly this November, is special because of the U.S. presidential elections. Therefore, instead of taking into account the average of the previous periods around all recent Thanksgivings, one should focus on the Thanksgivings which were concurrent with presidential elections.
Gold and Thanksgiving during the Presidential Election Years
Let’s examine the last four cases, when gold was already after the 1999-2000 bottom and within its secular bull market.
Starting with the most recent case:
Back in 2016, the decline simply continued after Thanksgiving, and gold bottomed in the second half of December.
Four years earlier, in 2012, gold topped right after Thanksgiving and – just like in 2016 – it bottomed in the second half of December.
In 2008, gold topped right before Thanksgiving and it bottomed in the first half of December.
Finally, in 2004, gold topped shortly after Thanksgiving, and it formed an initial bottom in the first half of December. However, it then declined once again, further reaching bottom in January and February 2005 (two separate bottoms).
Consequently, Thanksgiving during the U.S. presidential election year had a bearish follow-up for gold in practically all four cases. Sometimes it was a bit early and at other times a bit late, but overall, it seems that one should be prepared for declines in the yellow metal during the final days of November and early part of December.
This pattern fits in line with my other thoughts on the gold market. As the USD Index appears to have ended forming its broad bottom pattern, it’s likely to rally, causing gold to slide. At some point gold is likely to stop responding to the dollar’s bearish indications, and based on the above analysis, we expect this might take place in December.
Moreover, let’s keep in mind that the situation continues to be excessive on the forex market.
The recent plunge was dramatic, and the USD Index even managed to invalidate its previous short-term breakout. This was bearish, but there are more powerful bullish forces that remain intact, so the above didn’t change the outlook.
Regardless of the above, please note that in all four cases there was a very short-term move higher immediately after Thanksgiving. Even in 2008, there was a slight uptick higher for one day. What does it mean? It further emphasizes that the current move higher in gold is likely just a temporary, counter-trend bounce.
As far as mining stocks are concerned, yesterday, I wrote the following:
At the moment of writing these words, miners are up by 3.11% in today’s pre-market trading (at $35.76), while silver is up by 4.03% (23.50). So, miners are not very weak, but they are not particularly strong relative to silver either. However, let’s keep in mind that miners were very weak in November, so it’s quite normal to expect some kind of bounce if gold bounces as well.
How high could miners go? Perhaps only to the previous lows and by moving to them, they could verify them as resistance. The previous – October – low is at $36.01 in intraday terms and at $36.52 in terms of the daily closing prices. No matter which level we take, it’s not significantly above the pre-market price of $35.76, thus it seems that adjusting the trading position in order to limit the exposure for the relatively small part of the correction is not a good idea from the risk to reward perspective – one might miss the sharp drop that follows. Please note how sharp the mid-November decline was initially.
The above remains mostly up-to-date. The additional commentary that I’d like to make today is that if gold moves to $1,850, then miners might move very briefly above the above-mentioned $36.52 – perhaps even correcting to the mid-November high of about $38. Still, it’s likely that this is just a temporary phenomenon. The outlook for the next few weeks remains bearish.
Letters to the Editor
Q: For how long will this down fall remain? When will the price go above 2000 USD/ounce?
A: It’s not crystal clear at this time, as it depends on when gold starts to be particularly strong despite the USD’s strength. At this time – based on the above-described patterns and seasonality – it seems that we might see the final bottom as early as in mid or late December, and then another rally. This way, gold could be back above $2,000 in Q1 or Q2 of 2021.
Q: (…) My question however is deflation vs inflation.. I watched a podcast today with Harry Dent, whose view I don’t particularly like, however, his argument for deflation coming vs Peter Schiff, and the plethora of other analysts who all say inflation is coming because of the stimulus.
Harry, however, put forward an excellent argument today in his view that deflation will prevail in the short to medium term and the medium forecast for gold in his opinion is 2200-2300 in the next rally, but then deflation in the economy will drag gold down to extreme lows over the next few years...around 1100?
This seems to be in stark contrast to the general consensus that gold will rise & rise with dips and pull backs along the way but in the coming years see higher highs?
Jim Curry's report seems to indicate a large correction around Feb/March of next year but then higher highs...
I am extremely interested in your view for the next 24-48 months - do you feel we will be seeing inflation (Although I do understand inflation alone is not required to increase the price) however do you, in your opinion, feel gold is on an upward basic trajectory in the coming years?
A: In general, I don’t agree with Harry Dent, and I actually wrote an article about 3 years ago, where I invalidated his predictions for gold. You can read it here. Long story short, gold is neither a commodity, nor does it move in 30-year cycles. Gold just proved my points from that article by moving above the 2011 high recently.
Gold may very well rally to $2,200 - $2,300 in the next medium-term upleg, but I definitely don’t see gold then declining to $1,100 or so. The latter prediction is likely connected with the 30-year cycle that I disproved in my previous article.
Will we see inflation? Globally - I think that’s very likely. The entire world is printing money like crazy, stimulating economies and so on. This is likely to result in inflation sooner or later.
However, will the inflation hit the U.S. to the same extent? This is a different matter; if the USD rallies relative to other fiat currencies, this might offset some of the inflationary forces. Ultimately, inflation stems from oversupply of money. But rising USD values will be triggered by increasing demand for this type of money, which would offset the inflationary consequences of money printing. How it all plays out is relatively unclear. Right now, it seems to me that the inflation might be limited in the U.S., but I think that it will still be present.
And yes, I think that once this decline is over, gold is going to rally with only periodic corrections – once gold breaks above $2,000 again and confirms this breakout, it might not move below it – ever – again.
Q: Thanks for the info on when to enter a long gold position. At what price do you think we should consider entering a long silver position? I know you believe that silver is going to have a ridiculous drop, which is good. I was just wondering at what level we would want to consider buying it. Thanks!
A: Unfortunately, I don’t have a precise response to this question. Silver can move very fast in the last part of the move, and I really think that looking at gold and its strength relative to the USDX is better than looking at silver alone, even if it’s the white metal that one wants to buy. My Monday’s comments on the above topic remain up-to-date:
What seems likely is that if gold is to decline below $1,700, then the part of the decline below this level could be characterized by rapidly declining silver prices. You know, if gold is about to slide all the way back to its 2020 low, then silver might do the same thing and slide below $12, especially if we see more weakness in the general stock market.
Sounds crazy? This could be the case, but please note that gold’s decline from above $2,000 to below $1,800 is also quite extravagant given a move lower in the USD Index in the meantime. If the USD Index rallies – and its likely to rally significantly in my view – then PMs are likely to slide.
Let’s keep in mind that silver has more industrial uses than gold, which makes it more likely to get the bearish push from stocks – if the latter decline that is.
Q: My point is that you seem to be disregarding a significant amount of differences between the 2020 election and the 2016 election (e.g., Democratic win vs. a Republican win, loosening credit cycle vs. a tightening credit cycle, recession vs. mid-cycle growth, high unemployment vs. low unemployment, pandemic vs. no pandemic, higher indebtedness vs. lower indebtedness etc.), which should at least be recognized and discussed instead of just completely disregarded.
A: The situation was different in 2016 than it is in 2020. It was also different in 2012, 2008, and in 2004. And yet, in all these years gold performed in a relatively similar manner after Thanksgiving. Discussing all the issues that you described (there are definitely even more fundamental aspects that one could take into account) and comparing them between the years is something that would require a small (or big) book to complete. And by the time we’d be done with this, the situation would have already changed, and the opportunity provided by these analogies would be long gone.
If we based something on just one similar situation in the past, then it would make much sense to compare the details. However, since there were different situations in the previous similar cases, and yet the price performed similarly despite those different factors, then that strongly suggests that those fundamental differences are not that important and we might not need to pay that much attention to them at this time (at least with regard to the post-Thanksgiving pattern).
Q: If we decide to short silver wouldn't the over-the-counter stock DSLVF be the best one since it is 3X bearish instead of 2X like ZSL.
A: Not really, because that’s just the remainder of the DSLV stock that is being delisted. Please note how thinly traded the stock is – the liquidity has almost dried up, which makes the risk associated with using this stock big. One might not be able to get out of the trade at the price that they “should” get based on silver’s price moves.
Q: I have a question in regards to indicators that affect Gold prices like Real Interest Rates and Dollar Price of course. You've done a great analysis on the Dollar and I would like to ask you - what is your perspective on Real Interest Rates and if you consider it important in your analysis and why. Are there other ones you consider important besides the ones that you talk about lately – the coronavirus, debt, etc?
A: Thank you for the compliments on my USDX analysis – much appreciated. In general, the real interest rates don’t follow the rules of the technical analysis, so there’s not much that I could infer by analyzing its charts. As far as the fundamental implications of the real interest rates, as well as other fundamental details are concerned, then they are covered by Arkadiusz Sieron, PhD, in our Gold Market Overview (monthly) reports. Some of his fundamental analyses get into the flagship Gold & Silver Trading Alerts (usually posted on Monday) – the ones that I definitely agree with (which is almost always the case) – and then I’m briefly summarizing the fundamental aspects. However, they change little over time, as the fundamental situation for gold has been great for a long time. I simply think that gold is going to decline based on the rising USDX and because it got ahead of itself earlier this year. Then it’s likely that we’ll see higher prices once again.
Q: Thank you for your response. I don't think I made myself clear to you. In the event that we are selling our position from JDST to going short on silver, do I buy ZSL?
Also, in the event that the election is going to be deemed a fraud, what is going to happen in our position?
A: The above (selling JDST to buy ZSL) might indeed be a way to participate in the price moves that I described. I can’t recommend any individual security to any individual, though. Still, depending on how the situation develops, it might be useful to stay out of the market for a short while – between those positions – or even get long in the meantime. As always – we’ll keep you – our subscribers – informed.
As far as the U.S. elections are concerned, if they are invalidated, then gold might gain some safe-haven appeal as the above would mean more political turmoil. In this case, our positions might be adversely affected – if we are holding them at that time. We might already be after a change in the positions when that happens – if that happens. It seems relatively unlikely, given the news hitting the markets in the recent days. As above – I’ll keep my eyes open, and report to you accordingly.
Q: I am planning to buy physical gold, in 24 carat gold, in India.
Today, when am writing this query, gold is trading above $1800 - what is the expected downside and by when?
I want to buy physical gold jewelry in India.
A: As indicated in the main part of the analysis (and in particular, in Monday’s flagship analysis), gold is likely to bottom at least at $1,700, but it might move all the way down to $1,450 - $1,500 before finally bottoming. This might happen very soon – perhaps in mid- or late-December. However, I would once again like to stress that it is not the price of gold itself that will be the key thing to watch. It’s the strength that gold would exhibit relative to the USD Index – that’s also what indicated the bottom in March. I’ll be watching the market for this signal and report to you – my subscribers – accordingly.
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 within the next 1-5 weeks or so), I 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 short 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 – 3 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 simultaneously broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,700 - $1,750. If – at the same time – gold moves to about $1,700 - $1,750 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. However, it could also be the case that we’ll wait for a rebound before re-entering short position in silver – it’s too early to say at this time. It’s also possible that we’ll enter very quick long positions between those short positions.
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 lower in the precious metals market is definitely underway and it seems that it will take another 1-5 weeks (likely in mid-December or in its second half) before the decline ends. It seems that the part of the slide in gold that takes place below $1,700 is going to see a silver catching up with the decline in gold and miners. This week’s upswing seems to be a relatively normal bounce within a bigger decline.
Please note that even Warren Buffett is limiting his exposure to gold.
As the USD Index appears to have ended forming its broad bottom pattern, it’s likely to rally, causing gold to slide. At some point gold is likely to stop responding to dollar’s bearish indications, and based on the above analysis, it seems that we might expect this to take place in December.
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 1-5 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
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 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: 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 Radomski, CFA
Founder, Editor-in-chief
