Briefly: in our opinion, full (200% 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.
Yesterday’s flagship Gold Trading Alert was large and comprehensive, and since very little happened during yesterday’s session, today’s analysis is going to be rather brief.
In short, the markets moved a bit lower, thus increasing profits on our current short positions in junior miners.
After the initial decline, the markets paused, hesitating over what to do next.
In today’s pre-market trading, gold is up, and it even moved to this week’s high.
Does it change anything? Absolutely not.
As I emphasized several times in the previous days, the point of the recent long position was to catch the easy part of the corrective upswing regardless of whether it was something tiny or small (I don’t think it will be anything big, whatever happens). And that’s exactly what we did.
Even if gold, silver, and mining stocks move higher from here, it doesn’t mean that it’s worth keeping a long position open. In short, it’s all about the risk-to-reward ratio. The risk component is key here. We both spent a lot of time on the reasons why gold, silver, and – in particular – mining stocks (and especially junior mining stocks) are likely to move lower in the following months and weeks. I spent this time writing about myriad reasons, and you spent this time reading about it.
So, you are well aware of how likely the decline is and how profound it’s likely to be. If it’s not clear, please read yesterday’s Gold Trading Alert, and in particular the parts about the HUI Index and about world stocks – along with the comparison of the $MSWORLD index and the XAU Index (proxies for gold and silver stocks). The situation is extremely bearish for the medium term.
Consequently, it’s imperative – in my view – not to miss the opportunity that this provides us with. In light of the strong downtrend, a long position was a risky bet, and we managed to pull it off anyway. This might have seemed easy, but trading against a strong trend is anything but easy, and in most cases, it’s not even a good idea to engage in such trades at all.
That’s the perspective on the recent upswing and the current short position. In my view, aiming to stretch the profits from the long positions here would really be “pushing it.” It might work or it might not work. However, I’d view this more as a gamble than a justified trade, and I don’t want to gamble with money – neither my own, nor anyone else’s.
So, that’s why I’m back in the short position at this time – the risk-to-reward ratio no longer favors a long position in my view; it favors a short position.
The medium-term downside target of about $26 remains intact. This is not the final target for this decline. After this target is reached, I will probably (!) limit / exit / switch the short position in order to re-enter it at higher prices (just like what we did this week). However, it’s too early to say right now.
All in all, the medium-term outlook remains extremely bearish, and the profit potential for the current short position is still enormous.
And as soon as the situation changes, I’ll keep my subscribers informed.
There are a few other things that I would like to tell you today:
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First, it is giving you a little heads up that I stumbled upon what might be an extraordinary opportunity (even compared to the above), and I will consider taking advantage of it using options. Of course, it will not be for everyone, but since I’m considering participating myself, I will also let you know, and some of you might also want to participate in it as well. I want to think about it some more before I provide you with details. You can expect a follow-up from me (probably early) next week.
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Second, I want to emphasize what I can do and what I can’t do (and what doesn’t make sense) through the newsletter format with regard to sharing my opinions on specific positions.
The key thing to keep in mind is that there are many people reading this, and each person is different.
There are people with a long-term approach who don’t care at all about even the medium-term trend and are here just to get insights regarding the ultimate buying opportunity in the precious metals sector.
There are people here that want to profit from the medium-term decline by shorting it, and they don’t care about the short-term rebounds.
There are also other people here that want to trade the short-term rebounds but don’t care about intraday moves. Some of those people prefer to trade with stop-loss levels, and some don’t.
There are those that engage in many trades in many markets and take a look at my analyses to get to know targets and see how they align with their own targets.
There are those who might follow what I’m writing to the letter.
And, of course, each category can be mixed with another to some extent. On top of that, some investors can’t invest in junior miners and have to use (or simply prefer) gold or silver instruments. Or they trade commodities. Or currencies/stocks.
The reason why I’m mentioning this is to emphasize that I can’t reply to the question “what you should do with your trade.” It depends on your preferences / strategy / availability of options / risk tolerance / and many more characteristics that are unique to you. I can tell you what I think the market is going to do and what my preferred way of approaching what’s likely is. But it is up to you to decide how you’re going to use that information. Please start with yourself and then apply my insights, not the other way around.
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Third, the position that is justified from the risk-to-reward point of view depends on both the above-mentioned factors: you (and your approach, etc.) and the outlook.
What it does not depend on is the status of your trade. Is it profitable? Is it not profitable? Was it entered in January? Or October? Or May?
There might be exceptions in cases of tax consequences, in cases of very large traders that can’t simply enter/exit the market as they please as they would move the market, and in case of some rare and unique circumstances. Most likely, in 95%+ of cases, it’s not relevant.
Whatever the entry position was, the move in tune with your position or against your position will have exactly the same impact on your portfolio.
Simple simulation:
Bought at $10, and the current price is $13. The price is extremely likely to move to $15. Should I sell?
No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $13 = $2. The initial $10 is irrelevant.
Bought at $10, and the current price is $13. The price is extremely likely to move to $8. Should I sell?
Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $8 - $13 = -$5. The initial $10 is irrelevant.
Bought at $10, and the current price is $7. The price is extremely likely to move to $15. Should I sell?
No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $7 = $8. The initial $10 is irrelevant.
Bought at $10, and the current price is $7. The price is extremely likely to move to $4. Should I sell?
Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $7 - $4 = -$3. The initial $10 is irrelevant.
In no case does the initial value (purchase price) impact the decision.
People tend to overcomplicate things, which then makes it harder for them to stay objective and apply the above simple mechanism.
For example, they will add labels like “the trade is profitable” or “the trade is at a loss.” And then something like “loss aversion” will kick in. You see, emotionally, when one is at a loss, they don’t care that much if the loss gets bigger (they do, but it’s more important if they “frame” it as a loss or win). Try this: what makes a bigger difference – a move from a -10% loss to a 10% profit, or a move from a 20% profit to a 50% profit? Probably the former “feels” more important, right? Because the framing changes. However, from the portfolio point of view, the latter is much more important.
Let me paste the above example with extra info about the labels.
Bought at $10, and the current price is $13. The price is extremely likely to move to $15. Should I sell?
No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $13 = $2. The initial $10 is irrelevant, as is the fact that the position was profitable.
Bought at $10, and the current price is $13. The price is extremely likely to move to $8. Should I sell?
Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $8 - $13 = -$5. The initial $10 is irrelevant, as is the fact that the position was profitable.
Bought at $10, and the current price is $7. The price is extremely likely to move to $15. Should I sell?
No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $7 = $8. The initial $10 is irrelevant, as is the fact that the position was not profitable.
Bought at $10, and the current price is $7. The price is extremely likely to move to $4. Should I sell?
Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $7 - $4 = -$3. The initial $10 is irrelevant, as is the fact that the position was not profitable.
So, again, please start with yourself and your approach, and then check the outlook (based on my analyses or also on those of others, if you so choose). Then enter/close/adjust your position accordingly so that it reflects the current situation. That – in my opinion – is the right approach to trading in general.
Overview of the Upcoming Part of the Decline
- It seems to me that the corrective upswing is over or about to be 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 – 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 Gold Trading Alerts space.
Summary
To summarize, in my view, the real interest rates are up and about to soar higher, the USD Index most likely bottomed and is likely to soar, while the precious metals topped (or at least the easy part of the rally is over) and are now likely to slide – either shortly or soon enough.
The corrective upswing was rather quick and quite lucrative given that the capital was used for it for just a few trading days. And let’s not forget that we were able to re-enter the short positions at higher levels, so the benefits are actually even bigger than they seem at the first sight. Congratulations once again!
I have a very pleasant surprise for you. We are staring a quick “promotion” that allows you to extend your subscription for up to three (!) years at the current prices… With a 20% discount! And it would apply to all those years, so the savings can be substantial. Given inflation this high, it’s practically certain that we will be raising our prices, and the above would not only protect you from it (at least on our end), but it would also be a perfect way to re-invest some of the profits that you just made.
The savings can be even bigger if you apply it to our All-inclusive Package (Stock- and Oil- Trading Alerts are also included). Actually, in this case, 25% discount (even up to three years!) applies, so the savings are huge!
Now, if you enjoy my analyses, but on one hand you don’t necessarily want to participate in the short-term trades, and on the other hand, you’re looking for most cost-effective solutions, I also have great news – the above “promotion” also applies to my Gold Investment Updates. In short, Gold Investment Updates are those weekly, flagship analyses – like the one you’re reading right now – but without trading details (and without intraday follow-ups regarding positions). Of course, you can still engage in discussions below analyses.
To clarify – the Gold Investment Updates do not have any additional information over the flagship Gold Trading Alerts, so this analysis is included in Gold Trading Alerts (and in All-inclusive Package), and therefore your Gold Trading Alerts subscription covers it. I’m just mentioning it if you’ve been wondering if we have a lower-priced service.
My Gold Investment Updates can be yours with the 20% discount, which will give you greatest savings in case of the yearly plan (feel free to go with monthly, though) and you can apply it for up to three years.
If you’d like to upgrade your plan (e.g. to All-inclusive Package) and take advantage of the discount, please use this link to continue.
If you’d like to extend your subscription (and perhaps also upgrade your plan while doing so), please contact us – our support staff will be happy to help and make sure that your subscription is set up perfectly.
If anything about the above is unclear, but you’d like to proceed – please contact us, anyway :).
As always, we'll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (200% 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 (the volatility is too big to justify a stop-loss order in case of this particular trade)
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 (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.):
Silver futures downside profit-take exit price: $17.83
SLV profit-take exit price: $16.73
ZSL profit-take exit price: $32.97
Gold futures downside profit-take exit price: $1,743
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47
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
