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 is rebounding today – it rallied about $30 higher in today’s pre-market trading. Is the decline over, or is this nothing to call home about?
In short, it’s most likely the latter. If you recall the analogy to how gold performed almost a decade ago, then it’s clear that what we see here is quite normal. I described this analogy previously, but since this is particularly relevant today, it seems useful to go through the details once again.
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 didn’t even rally to its declining short-term resistance line.
Gold was declining almost each day recently, and no market can move up or down without periodic breathers – that’s exactly what seems to be taking place today. 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 that the USD Index has just invalidated its small breakout below the September low.
Yesterday, I commented on the above chart in the following way:
At the moment of writing these words, the U.S. currency is testing its previous lows. It’s slightly below the previous intraday low and this tiny breakdown is definitely not confirmed.
Given the Thanksgiving seasonality, it’s doubtful that there are any bearish implications at all.
Speaking of cyclicality, please note that the U.S. Dollar Index tends to reverse its course at the turn of the month. That happened early in the months of January, February, May, July, August, September, and November – thus occurring in over half of the year. Today is the last day of November and given the above regularities, it seems that the USD’s breakdown will be invalidated shortly.
Besides, that’s not even the most important detail from the precious metals investors’ point of view.
The most important detail is that all these bearish moves in the USDX failed to trigger any decent rallies in gold, which shows that the latter simply doesn’t want to rally from here.
That’s exactly what we saw – the USD Index’s breakdown was indeed invalidated.
What does it mean? It means that while gold, silver, and mining stocks might move higher this week, one shouldn’t expect this counter-trend rally to last long. As the USD Index rallies, precious metals and miners are likely to fall – perhaps much more dramatically than they fell in the past several days.
Unlike gold, silver moved to its declining short-term resistance line. Silver is showing strength on a very short-term basis, which – as you may know, if you’ve been following my analyses for some time – could be viewed as bearish, especially if miners are weak.
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.
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. Today’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
