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.
What if the Fed doesn’t increase the rates this week? What if it lowers them? It’s natural to expect gold to soar in these scenarios, especially in case of the latter. And given the softening voice in previous comments from the Fed officials, it seems more likely than previously. Will the Fed decrease the rates or at least take a pause in increasing them given the stock market decline? How should gold investors and traders position themselves in this situation?
Scary scenario isn’t it? At least for those on the short side of the market. As you have likely guessed based on the position in our “Briefly” paragraph above, it’s not likely to materialize. The Fed emphasized many times that they are on the path of gradual rate hikes and the only thing that really changed in the recent days is what is being focused on by the mass media. We commented on it earlier this month, and the long story short version is that the Fed didn’t really indicate any change in their approach. They only made the comments a bit more investor-friendly (in light of the falling S&P) and market overreacted.
What does it mean? It means that if the Fed does what it indicated and what is really likely and increases the rates, people will be surprised. And if investors are surprised, the prices move. In case of gold, that would be a move lower.
But what if the Fed does take a breather in the series of rate hikes (the scenario in which the Fed lowers the rates on Wednesday is extremely unrealistic)? Then some investors will also be surprised and prices will also move. But, as far as the precious metals market is concerned, they would likely move higher only temporarily.
What action is best to be taken? In our view, it’s simply keeping the current position intact. Here’s why:
If the Fed increases the rates, gold might decline 1-3% and then decline by 12-14%. Probability of this scenario in our view is more than 70% (estimated; not calculated with significant precision, but estimation is enough as most important is that its well above 50%).
If the Fed keeps the rates unchanged, gold might rally 1-2% and then decline by 16-17% (and the follow-up decline might start very soon after the rally – the rally could even be an intraday phenomenon). Probability of this scenario in our view is less than 30%.
There are several implications of the above. The first one is that it’s much better to focus on the “then” part as it’s a big decline in both cases. This is practically enough for most people to make the decision to simply stay short. However, those who are more short-term-oriented, might want to discuss getting out because of the possible upswing. Still, the probability well below 50% of it taking place suggests otherwise. There would be a bigger chance of missing a bigger move lower than to save on a smaller chance of taking advantage of a smaller move higher. Naturally, everyone can decide what they want to do with their capital, but, in our view, keeping the position intact is justified from the risk to reward point of view, especially that if things go wrong way, it will be easy to wait it out because of the long- and medium-term factors that remain in place.
Having said that, let’s take a look at what the charts are saying. This time we’ll start with a chart that doesn’t feature the price, but something else.
On a side note, please keep in mind that charts and their analysis is not something different than the “real world”. Price moves reflect real world as the real-world price changes are based on both: fundamental logic and emotionality along with multiple cognitive biases. Charts are a way to look at the reality and analyze it in a complex way. Besides, in case of gold, chart analysis is justified from the fundamental point of view.
The above chart features the interest in gold price in the social media and on the Internet in general. We’re using the brand24.com service for the above and we’ve been gathering data for gold-price-related phrases for over a year now (the line in the background is close to 0 before September 2017 not because nobody was interested in gold, but because we didn’t gather the data). Google Trends offers something similar, but the data that’s available for long-term analysis is smoothened out and doesn’t include the quick spikes. Therefore, it is not that useful for us as what we can get from brand24.com service.
On a side note, Google Trends allows one to discover several interesting statistics outside of the financial realm. For instance, on this page you can see how interest in Stoicism beats the interest in the formerly competing school of thought – Epicureanism. And on this page we can see how Mariah Carey’s All I Want for Christmas song has once again reached its peak popularity, and that it will very likely be forgotten once again in about 2 weeks (until early November next year). Let’s move back to gold.
Theoretically, we should see spikes in the interest when people get too excited and since people get too excited at market price extremes (mostly tops), the spikes in the interest should correspond to good shorting opportunities. Naturally, this is the case if the interest spike is preceded by a price rally. Seeing it during a decline might suggest extremely negative sentiment and thus a price bottom.
We just saw a spike in the interest, which suggests that we have just seen a major top. But did lower prices follow the previous spikes as well (especially those that fit the above-mentioned rule)?
Yes. We left the little pop-up window with description of the biggest spike o this year. That was in late March and that was indeed one of the major tops and a very good shorting opportunity. The previous big spike was in mid-February, which was also very close to the top and which was a great shorting opportunity. The other highs also provided meaningful implications. Consequently, we just saw a confirmation of gold’s bearish case from outside of our regular price-and-volume-based analysis.
As far as price-and-volume charts are concerned, last week was quite interesting, as overall, we saw weekly reversals across the PM market.
Weekly Reversals
Gold declined $11 last week after almost (it was $0.10 away) touching the 40-week moving average.
Silver declined only $0.06, but it did so after initially rallying visibly higher, so last week’s action was actually a weekly reversal, which is bearish.
The HUI Index – proxy for gold stocks – also moved higher during the week, but ended it lower. The HUI fell by 1.27 last week, but it closed the week almost 5 index points below the intraweek high.
These are above all bearish signs, but not very strong ones, as the volume that corresponded the entire weekly price movement was rather weak while reversals should be confirmed by strong volume.
Still, the volume was strong in case of the GDX ETF, which also reversed its course last week.
On the above chart we marked the situations, in which gold miners reversed in a way that’s similar to what happened last week. All 5 cases were good shorting opportunities, but they were not necessarily the perfect ones. In most cases miners moved a bit higher and declined only after this small move higher. The important thing is that the following decline was many times bigger than the preceding upswing.
But, does the decline have to be preceded by another move higher? No. Unlike the previous cases, the current reversal was accompanied by significant volume which greatly increases the strength of the bearish signal.
Platinum’s Weakness
Meanwhile, platinum’s price continues to disappoint. When it previously moved below the 2015 and 2016 lows, we saw a quick comeback higher and then back and forth movement that ultimately led to breakout’s invalidation. Despite the invalidation, platinum moved lower and is now breaking below the previous lows for the second time. And it seems that this breakdown will be successful. The move is decisive and steady and volume confirms it. There was no single-week spike in volume when platinum declined. The volume was significant when platinum moved lower and then it remained high while during the following weekly declines. That’s what a strongly bearish move lower looks like.
Let’s take a look at the short-term charts.
Gold closed the day (and week) below the previously broken 38.2% Fibonacci retracement level and thus this breakout was invalidated. The implications are bearish.
In Thursday's Alert, we wrote the following:
Silver’s rally without gold’s help means strong outperformance of the former. It’s a full-size repeat of the sign that we saw on an intraday basis on Tuesday. Silver tends to outperform gold on a short-term basis (sometimes only on an intraday basis) right before big declines. This has been the case multiple times and yet people – especially beginning investors – are still surprised by this phenomenon. We remember very well how bullish many people became in mid-June, when silver soared. We wrote that it was just a sell confirmation and it was quite difficult to believe. Yet, that was the top that started the $3+ decline in the white metal.
On June 12th, we wrote the following:
Silver has indeed moved higher yesterday, and it erased some of the gains in today’s pre-market trading ($16.84 at the moment of writing these words), so it’s already back below the previous June high. Did the move make the outlook significantly bullish? Not at all as it was not accompanied by strength in the gold market (extremely low volume during a small upswing in the GLD ETF is the opposite of strength) and the accompanying mining stocks’ rally was not as significant as it may appear at the first sight.
The above seems to be up-to-date also today. In particular, the part that we put in bold as gold’s volume was once again very low.
Silver moved higher, outperforming gold, it reached its resistance level and it all happened at silver’s triangle-vertex-based reversal. That’s a bearish, not bullish combination.
Silver reversed practically right at its triangle-vertex-based reversal, just like it was likely to. The implications are bearish.
Gold stocks invalidated their breakout above the October highs in terms of the daily closing prices and the implications are bearish as well.
The USD Index continues to trade within the triangle pattern that started in early November, and the outlook didn’t change based on the last few days – it remains bullish.
We previously discussed in greater detail why the situation in the USDX is bullish, but we didn’t feature the simple fact that triangles, especially ascending ones, tend to be bullish continuation patterns. This is yet another reason to expect higher USD values in the following weeks.
Summary
Summing up, this prolonged correction within the big downtrend has been very tiring, but based on the long-term factors being patient was very well worth it, and based on the short-term signs, it seems that the waiting is over or about to be over. 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. It's confirmed by multiple factors, i.a. weekly reversals, silver’s recent outperformance and reversal exactly when it was most likely, gold’s performance relative to the general stock market, USD’s self-similar pattern that’s confirmed by PMs performance, and many more.
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: $1,272; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $47.17
- 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 $24.87
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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