Briefly: in our opinion, no speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
In yesterday's Alert, we explained that the reversals might be misleading and that while the end of the rally is likely near (in terms of time, not necessarily in terms of price), it's not necessarily over yet. Gold, silver, and mining stocks all closed higher yesterday, and we can say that miners' performance is still relatively strong compared to gold. But there's one thing that makes being long gold particularly risky at this moment...
It's the simple fact that each time in the recent years that gold closed the week at the current price levels, it then declined on the following week. The week ends today, so whatever price we get when we hear the closing bell, is quite likely going to mark a weekly high for the following weeks.
Gold Hanging in the Balance
You already know this chart from our previous analyses, but it seems worth quoting this part of analysis also today:
Gold is approaching its long-term resistance created by the previous highs. There is one very interesting rule regarding this resistance. No matter how volatile or promising the rally above the red resistance line was, it was always (in the last couple of years) invalidated in the following week. Given today's pre-market rally in gold, it seems that we might see a weekly close above it. This means that the next week would quite likely include the invalidation of the current breakout and the beginning of another slide lower.
In other words, the above suggests that we shouldn't remain out of the market (i.e. without a short position) for long and that it would be best to get back in before the week is over. But, does anything else support the situation in which gold reverses shortly?
The jobs report is going to be released today, which might trigger a sizable move, depending on how surprising the data is. If it generates a big upswing, it might provide us with a great opportunity to re-enter short positions at better prices.
The Scenarios to Be Ready For
Gold is very close to its February 2019 high and we can't rule out one more move to this level. In fact, it might even be the case that gold breaks above this level on a temporary basis. Why? Some market participants may want to push the price over this level to trigger stop-loss selling and then - once the price moves higher based on the latter - enter their own short positions. Yes, such a stop-run smells of market manipulation, and this might really take place.
On a side note, the above kind of behavior is why waiting for a given breakouts' or breakdowns' confirmation is usually a good idea.
The breakout on its own is not a bearish factor, but if we see it along with significant strength in silver and - ideally - with some kind of weakness in the mining stocks, it would be a bearish sign.
Moreover, let's keep in mind the situation on the long-term XAU Index chart.
The very long-term and very strong (based on multiple important tops) declining resistance line is at about 75. The XAU Index just closed at 74.41. While a temporary move above this line is quite possible - after all, it happened earlier this year - a big move above it is very unlikely. Invalidation of the small breakout would be much more likely, and another powerful slide would likely be in the cards.
USD Is Bidding Its Time
The USD Index once again stopped at the rising green support line and once again it moved below it on an intraday basis. Moving back to Tuesday's low in terms of closing prices suggests that yesterday's reversal was... not really a reversal, but just a pause. The move to the rising black support line became more probable.
The above chart shows that the area between $96.25 and 96.50 also includes the 38.2% Fibonacci retracement based on the September 2018 - May 2019 rally. Coupled with the support provided by the April lows, it adds to the strength of this support area. In light of the possible surprising news from the jobs report, the USD Index might reach this level even later today.
But, how high could gold go?
Breaking above the previous 2019 highs would likely result in another quick upswing that could push gold toward the long-term resistance line and previous highs. The slightly declining resistance line is at about $1,363, which is where gold might reverse. It could also move a bit higher, but it's unlikely that it would break above the 2016 highs.
The key thing would be to monitor the market for confirmations from silver and mining stocks. Ideally, we would like to see silver to soar and miners to somewhat disappoint. This would paint a perfectly bearish picture and we would most likely re-enter our short positions at that time.
Summary
Summing up, it seems that we are close to seeing the true top in gold and the rest of the precious metals sector, but we have yet to see the critical confirmations. Since the employment numbers are to be released today, we might see some volatile price action that takes PMs and miners temporarily higher. While the move lower may not start immediately or on Monday, based on the long-term situation it seems that gold will close the next week much lower than it finishes this one. Consequently, we will be monitoring the market for signs of weakness and we expect to get back on the short side of the market very soon - perhaps even today or on Monday. Naturally, you may want to re-open the position right now, but we prefer to wait for additional confirmation from silver (its outperformance), and/or mining stocks' weakness, and/or bearish action in the gold-USD link.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): No positions in gold, silver, and mining stocks are justified from the risk/reward perspective. We will likely re-enter the short positions at higher prices.
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
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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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Ladies and Gentlemen, we have a tie! The current expansion already lasts as long as the economic boom that started in March 1991 and ended in March 2001. We invite you to read our today's article, which compares both expansions and find out whether the current boom will be better for gold than the 1990s.
1990s vs. 2010s. Which Expansion Will be Better for Gold?
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
