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.
Not every day has to have new meaningful signals. Sometimes, though, a pause is just as meaningful, and that’s what happened yesterday.
Sometimes the market simply takes a breather and verifies what happened previously. Will the previous moves be invalidated? Or will it hold? That’s what we saw yesterday, and that’s what you can see on the below charts.
Starting with the USD Index – one of gold’s key price drivers – we see that there was no move below the 50% Fibonacci retracement level nor the declining red support line.
The takeaway is simple. The moves above those levels were meaningful and are most likely the start of another move higher in the USD Index. This – due to strongly negative correlation between them – has profoundly negative implications for the precious metals market.
The U.S. dollar was not the only market out there that confirmed its previous moves. We saw the same thing in the case of the junior mining stocks.
Juniors (the GDXJ ETF serves as a proxy for them) moved sharply higher on Tuesday and then moved back down. As I explained yesterday, the lower border of the price gap stopped the decline, but there was something else that also happened.
The thing is that the GDXJ ETF failed to move back above the December 2022 highs on a sustainable basis. The only attempt that had been mase was shortly followed by a move back below those highs.
That’s how price moves become verified.
This means that while – theoretically – nothing happened on the above-mentioned markets (and the same goes for the gold and silver prices), actually something changed. The risk-to-reward ratio for the move lower improved because, due to the verification of the breakdown, the uncertainty regarding the downtrend decreased.
In other words, since we got yet another bearish confirmation, the outlook for gold just became even more bearish.
Before summarizing, I would like to include one of my replies right here in the analysis, as it seems to me that it’s something that everyone (or most) is interested in.
Q: (…) I had a question about the future of the $6000 price of gold. So if we’re not looking so much at stagflation but at entering a decent recession, or worse, then gold doesn’t necessarily have the incentive to go higher in a depression or recession, unless there is inflation.
So, do you think the reason we're going to have a $6000 gold or more is because you think they're going to really turn on the quantitative easing while lowering rates all at the same time, causing more inflation to return, and at that future timing, we may not be able to handle inflation again but actually move into hyperinflation or some form of that or some degree of that, causing gold to go to the moon? I'd love to hear your full thoughts on the subject, and even a little teaser soon, please.
Thank you, PR. I’ve been loving all your recent insights!
A: My take is that given the existence of cryptos and the fact that governments and monetary authorities already try to figure out how to use the system to their advantage (to have a firmer grip on how things are going in the economy), it’s very difficult to predict what the monetary and economic future will really look like.
Inflation has become political some time ago, so that’s what the monetary authorities will fight. The jobs reports show strength in the economy, so there’s little reliable reason to expect the Fed (at least the Fed) to stop raising interest rates, given that inflation is still high. They might be cautious, but they are likely to keep raising them, thus making the real interest rates soar. This is indeed very likely to result in a recession.
My take is that at some point, the situation will become so bad and so perplexing to everyone that very few people will realize what’s going on, but almost everyone will hate the economic/monetary system. Then, at this point, the new government-backed crypto might be introduced as the “savior,” and whoever says this idea with the loudest voice will initially be called a “hero.”
I don’t want to debate whether this would really be something good, because there are quite many reasons for a government-backed crypto (e.g., financial aid for the poor could be spent on most things, but not all, for example, not on gambling) and quite many against it (you didn’t vote for the current ruling party in the last elections – “whoosh!” Your money is now worth half of what it used to be worth – sadly, I’m only half joking). Given enough transparency, the system might work, but… Is the world truly and brutally ready for "enough transparency"?
Whatever happens, it’s likely to be very chaotic, and during those times (note: I’m not talking about the next few weeks or months, but about the following years), it’s great to own gold and silver. Whether it’s chaotic through hyperinflation, massive bankruptcies, stagflation, or even a complete changeover in the monetary system, it is of secondary importance in my view. The technical analysis will help one forecast what’s likely around the corner well before the fundamental news catches up with the price formations – as is almost always the case. The key thing is to know where – in those technicals – and at what to look.
There are many pitfalls and anti-intuitive behaviors out there (like silver soaring and breaking higher just before sliding – over and over again). In order to avoid them, one should know themselves, their motivations, and have a plan (both in general and for their investments/trading) as well as make sure they understand what’s happening on the charts and what’s likely to happen next. It’s been a great honor to be providing you with my observations and insights on gold, silver, and mining stocks for well over a decade.
All in all, the outlook for the precious metals market remains bearish, and yesterday’s inaction after important weekly reversals and other bearish confirmations simply confirms the bearish case.
Overview of the Upcoming Part of the Decline
- It seems to me that the corrective upswing is over (or about to be over) and that the next big move lower is already underway (or that it’s about to start).
- 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
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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 in a spectacular manner and are now likely to slide – either shortly or soon enough. The rally in gold, silver, and miners was indeed sizable, but… it’s over.
What’s next? Something exciting (and, in my view, very lucrative) or something scary – depending on how positioned and informed one chooses to be.
Also, please note that (paraphrasing Sun Tzu) “understanding the enemy without understanding your true self is only half a victory.” Before applying any insights into actionable practice (and placing or adding to your trades), please make sure that the position that you’re about to enter and its size are aligned with your approach, your investment goals, and your risk tolerance.
In other words, I suggest starting with yourself, and tailoring the trade to you, not the other way around. Please consider your motivation for this trade and how it aligns with the rest of your approach and life in general.
Hint: don’t go for the easy answer like “money” or “profits,” but consider why the result of the trade is important – is this a part of your well-designed strategy and “you have it,” or is it something you “must absolutely do” – in other words, “it has you”…)
This will save you lots of stress, which is not only end in and of itself (your happiness and health are both closely linked to your stress levels), but it also helps you become a more profitable investor as less stress (or none thereof) means more objectivity and less risk of “running for the hills” right before a given trade becomes profitable (perhaps extremely so).
Given the above, gold’s invalidation of the temporary move above its very long-term resistance (the 2011 high!), and the situation in the USD Index, it seems that the next big move lower in the precious metals sector is already underway.
Now, as more investors realize that interest rates will have to rise sooner than expected, the prices of precious metals and mining stocks (as well as other stocks) are likely to fall. In my opinion, the current trading position is going to become profitable in the following weeks, and quite possibly in the following days. While I can’t promise any kind of performance, I fully expect it to become very profitable before it’s over and to prolong our 2022 winning streak.
After the final sell-off (that takes gold to about $1,350-$1,500), I expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.
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 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: $20.32; 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: $22.87; 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: $14.32
SLV profit-take exit price: $13.42
ZSL profit-take exit price: $48.87
Gold futures downside profit-take exit price: $1,504
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $16.47
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $36.87
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
