Briefly: in our opinion, full (250% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this Alert.
We only have three charts for you today, but it doesn’t mean that nothing happened yesterday and that there are barely any signals or indications as to where the market is likely to move. Conversely, there are multiple techniques that point to much lower precious metals prices, but since they simply remained intact, there’s not much new that we can say about them. The outlook is bearish even if we take into account only what we’ve written previously, but – with the aim of keeping you informed – we want to discuss the most recent developments that can also impact the following price moves.
We are generally looking more thoroughly for things that would invalidate our outlook so that we can check if they really do invalidate it. However, the new developments that we would like to discuss are things that actually confirm the bearish outlook. The point that we would like to emphasize is that we are not featuring them because we want to feature confirmations while ignoring factors that might invalidate it, but because out of factors that we view as reliable nothing new (nothing that we discussed previously) points to higher prices.
Let’s start with the simpler issue.
Gold’s Reversal
On the above chart we see that gold (continuous futures contract) moved slightly above the previous high, practically touching the $1,250 (the intraday high was $1,249.90) level. This is interesting because of two reasons.
First, silver and mining stocks didn’t follow gold to new highs, which has bearish implications. The reasons are that it confirms that the gold:silver ratio’s breakout remains an important factor, and gold stocks underperform gold. In particular, the latter is clearly visible. Gold moved above its October highs, while the HUI Index was unable to close even above the mid-November high.
Second, the slight move above the previous high in gold means that the entire August – December upswing can now be divided into 5 Elliott waves. While, in general, we don’t find the Elliott Wave Theory as a particularly reliable technique for precious metals investment, its elements can be useful at times. In this particular case, we might have just seen the final of the five waves, which would imply that the entire corrective upswing is now over.
Plus, the above chart may not show the intraday action in all its detail, so here’s an intraday chart from kitco.com.
The red line shows yesterday’s performance and it’s quite clear that it was a major reversal. Gold rallied sharply, but was unable to hold its gains and it reversed, closing almost exactly where it had closed on the previous day.
Having said that, let’s move to the more sophisticated issue.
USD Index and Its Self-Similar Pattern
The situation in the USD Index has been developing in a very interesting manner recently. The USD Index has been following reflective pattern, where the 2017-2018 decline was reflected in the shape of the 2018 rally. The areas marked with red and green show similar patterns (head-and-shoulders and inverse head-and-shoulders patterns).
However, in the last few weeks, the pattern is somewhat unclear. While the move preceding the entire pattern (the decline up to July 2017) was an almost a straight line lower, the current price moves take form of a consolidation. The start of the pattern was quick, but the end of the pattern is prolonged. Why would that be?
It looks like if someone (or several investors / institutions / central banks) really doesn’t want to let the USDX to break above the neck level of the inverse head-and-shoulders pattern. The pattern is big and clear, and it’s quite obvious that breaking above the neck level thereof would very likely result in much higher USDX values. We have no proof that this is indeed the case, but it certainly looks that way – whenever the price moves close to the neckline, the USD gets pushed lower. It rallies again, and it gets hammered again. And again. The situation becomes very tense, like a coiled spring, and once the USDX finally breaks out, it’s likely to rally fast. After all, the market forces always prevail in the end.
Putting the “why” behind the price moves aside, let’s take a look at something that would be important even if the “why” behind the recent back-and-forth trading was entirely different.
The shape of the recent sideways trading is very similar to what we saw in the first half of the year, when the USD Index was bottoming. We marked the subsequent tops and bottoms with numbers from 1 to 6. The top number 3 was the highest one in both cases and all lows were higher than the previous ones.
The most interesting thing is that the similarity doesn’t end with the USD Index. It was the time when gold moved a bit above its previous high in intraday terms, while silver didn’t. It was also the time when the mining stocks underperformed gold in a visible way. We have exactly the same thing right now. The implications are bullish for the USD Index, and they are even more bearish for the PMs than they are bullish for the USDX.
Gold vs. Palladium – Quick Update
Before summarizing, we would also like to point out that the points that we made with regard to palladium on Wednesday have already been proven by the market. The gold to palladium ratio reversed after touching the key 1 level. We entitled the analysis “Gold and Palladium Shake Hands” and it turned out that it was a very brief handshake. Let’s keep in mind the other implication of the above – that the entire precious metals sector is likely to move significantly lower in the upcoming weeks / months.
Summary
Summing up, the outlook for the precious metals market remains very bearish for the following weeks and months and short position remains justified from the risk to reward point of view, even if we see a few extra days of back and forth trading or even a small brief upswing. There is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. The strongly bearish analogies to 2013 and 1999, miners’ underperformance, the number of intraday reversals in the GLD ETF, the triangle-based reversals in gold and silver, the outlook for the USD Index as well as the situation in the gold to palladium ratio are only several of multiple reasons pointing to much lower precious metals’ prices in the near future.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,062; stop-loss: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
- Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. In case one wants to bet on junior mining stocks’ prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $17.52; stop-loss: $31.23
- JDST ETF: initial target price: $154.97 stop-loss: $51.78
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
Important Details for New Subscribers
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 the in the trading section we describe the situation for the day that the alert is posted. In other words, it 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, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
Plus, 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 on a daily basis 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. Additionally, 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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
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