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. Moreover, we are increasing the stop-loss level for silver.
The precious metals market soared yesterday as the USD Index profoundly declined. Consequently, we sent an intraday Alert, and in today’s analysis we will expand the analysis from that message. We will also discuss the similarity in silver to the 2001 – 2003 bottom.
Let’s start by quoting what we wrote in yesterday’s intraday message and supplement it with appropriate charts:
USD Index’s Verification
Today’s session was quite volatile, so we don’t want to keep you waiting until tomorrow and we are sending a brief commentary right away.
In short, it seems to have been just another daily correction and not a game-changer. It’s very likely the case, not only because of the level reached by the USD Index. It’s also the case because of how mining stocks performed relative to gold and silver.
In today’s regular Gold & Silver Trading Alert, we wrote the following about the USD Index:
Unless the USD closes below the neck level of the previously confirmed inverse head-and-shoulders pattern (currently at about 95.9), the outlook will remain bullish, and the short-term decline will be nothing more than a correction within an uptrend.
Today, the USDX moved lower in a visible way, but the intraday low was 96.20 - there was definitely no breakdown back below the neck level of the inverse head-and-shoulders pattern in terms of the intraday prices, let alone in terms of the closing prices. Since the inverse H&S pattern was not invalidated, it continues to have very bullish implications going forward. This means that the implications for the precious metals sector remain strongly bearish.
The above was based on finance.yahoo.com’s prices and as you can see on the above chart the USDX moved closer to the previously broken neck level of the inverse H&S pattern, but it didn’t break below it anyway. Consequently, the above-mentioned analysis remains up-to-date.
Interestingly, the USD Index moved lower in today’s pre-market trading (finance.yahoo.com’s low is 95.989 at the moment of writing these words and the current price is 96.26), which means that we have just seen a move back to the rising neck level of the inverse H&S pattern, without a meaningful invalidation. This means that the breakout above it is simply being confirmed – its bullish implications remain in place.
Moreover, it’s important to note that during USD’s pre-market decline, gold and silver didn’t rally visibly higher. Gold futures are (at the moment of writing these words) $2.80 below yesterday’s closing price. This means that gold is not willing to react to bullish news from the USDX (its decline), but is willing to react to the bearish news. This is exactly what we would like to see as a bearish confirmation.
Miners’ Relative Weakness
Speaking of relative performances, let’s move back to quoting yesterday’s intraday Alert:
As far as the relative performance of the mining stocks is concerned, please note that gold and silver moved more or less to their late-October highs. But not mining stocks. The GDX ETF is only halfway back up. This is a clear sign of underperformance, even though on a stand-alone basis, miners’ price move doesn’t appear bearish at all - it rallied over 3%. But, it should have rallied about twice as much given the size of the upswing in gold and silver, and given today’s upswing in the main stock indices. It didn’t and thus, today’s rally didn’t show strength of the mining stocks, but their weakness. Again, we realize that viewing a rally as something bearish may sound absurd, but this is really the case - monitoring strength of the rallies and comparing it with the strength that should have been seen is one of the most reliable and stable (over time) signals that we have for the short term.
Consequently, even though today’s upswing appeared bullish, it doesn’t change anything regarding the outlook, which remains bearish.
We applied the Fibonacci retracement tool to the most recent downswing to show you the relative performance of the miners – they have indeed corrected half of the preceding decline while gold and silver moved approximately back to their previous highs. Miners have underperformed, which is bearish.
Having said the above, let’s move to a question that we just received about the possible bullish similarity in silver – to the 2001 – 2003 bottom. To put it in proper context, we’ll analyze silver along with the USD Index.
Silver’s “Similarity” to the 2001 – 2003 Bottom
In short, there is a weak similarity in the shape of the price moves, but the corresponding details either invalidate the bullish implications, or have actually bearish implications. Please take a look at the above chart for details.
Comparing somewhat similar situations in the USDX and in silver, we see that if there is any analogy to the current situation, its bearish. The reason is that once the USD Index was after the short-term rally, silver was already well after its decisive move. It was a breakout in 2003 and now it’s a breakdown.
Please note that the situations are only somewhat similar as in the past the USDX was in a medium-term bear market and it now appears to be in a medium-term bull market.
The position of the 50-week and 200-week moving averages is also interesting. Back in 2003, we saw a move of the 50-week MA above the 200-week one. This year, we saw the opposite – the 50-week MA moved below the 200-week one. Applying the same technique would have provided one with the opposite implications. Back then silver rallied significantly. This time, silver is likely to take a major plunge.
Important Analyses
Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:
- Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
- Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
- Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
- Preparing for THE Bottom in Gold: Part 7 – Buy-and-hold on Steroids - description of a strategy dedicated to significantly boosting one’s long-term investment returns while staying invested in the PM sector.
- Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
- Gold: What Happened vs. What Changed - discussion of the latest extreme readings from gold’s CoT report
- Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.
- The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
- Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.
- Changing One's Mind - Why, When, and How – discussing the way of analyzing the market that helps to stay focused on the growing one’s capital while not being influenced by the loss aversion bias. This essay might be particularly useful in light of the recent upswing in the PMs.
- Inverse H&S Patterns and Something Even More Extreme - gold targets for the current decline in terms of price and time.
Summary
Summing up, the outlook remains strongly bearish for the precious metals sector and yesterday’s upswing in the metals and miners appears to have been nothing more than yet another corrective (and temporary) upswing within a bigger downtrend. The current back and forth trading is tiring, and/or boring depending on one’s perspective (tiring from the short-term one, and boring from the long-term one), but it’s very likely that the patience here will be well rewarded.
Moreover, since silver moved lower to our stop-loss level and the outlook didn’t change, we are increasing it.
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: $12.72; stop-loss: $15.76; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $27.37
- 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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