Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Welcome to this week's flagship Gold & Silver Trading Alert. As we’ve promised you previously, in our flagship Alerts, we will be providing you with much comprehensive and complex analyses (approximately once per week), which will usually take place on Monday.
Predicated on last week’s price moves, our most recently featured outlook remains the same as the price moves align with our expectations. On that account, there are parts of the previous analysis that didn’t change at all in the earlier days, which will be written in italics.
To begin, I want to discuss the cross-asset implications that could affect the precious metals in the coming weeks.
As a reliable piece of gold’s puzzle, the copper/U.S. 10-Year Treasury yield ratio is signaling further weakness for the yellow metal. Despite bouncing by 0.93% last week – with gold following suit and rising by 0.56% – the ratio is poised to move lower.
I wrote previously:
When the copper/U.S. 10-Year Treasury yield ratio is rising (meaning that copper prices are rising at a faster pace than the U.S. 10-Year Treasury yield), it usually results in higher gold prices. Conversely, when the copper/U.S. 10-Year Treasury yield ratio is falling (meaning that the U.S. 10-Year Treasury yield is rising at a faster pace than copper prices), it usually results in lower gold prices.
Over the long-term, notice the strong relationship?
Figure 1
And if we zoom in, the top in the copper/U.S. 10-Year Treasury yield ratio actually preceded the 2020 top in gold.
Please see below:
Figure 2
Even more ominous, and signaling a continuation of the downtrend, the U.S. 10-Year Treasury yield isn’t slowing down. The benchmark has been on a tear since August and is trading at its highest level in nearly a year.
Please see below:
Figure 3
The bottom line?
If the U.S. 10-Year Treasury yield continues its ascent, it’s likely to pressure the copper/U.S. 10-Year Treasury yield ratio. And given their tendency to move in the same direction, the prospect spells trouble for the yellow metal.
Also casting a shadow over gold (and the PMs in general), the FED/ECB ratio should continue its descent in the coming weeks/months. With Europe’s economic plight exceeding that of the United States, the European Central Bank’s (ECB) bond-buying program will continue to accelerate.
More importantly though, if you analyze their long-term trends, relative outprinting by the ECB tends to be negative for the EUR/USD.
Please see below:
Figure 4
For context, I wrote previously:
The red line above depicts the movement of the EUR/USD, while the green line above depicts the FED/ECB ratio. As you can see, when the green line rises (FED is outprinting the ECB), the EUR/USD also tends to rise. Conversely, when the green line falls (the ECB is outprinting the FED), the EUR/USD tends to fall.
And if we zoom in, the EUR/USD’s recent strength has come amid a sharp decline in the FED/ECB ratio (roughly 18% since June).
Figure 5
As a result, Europe’s excess money printing is likely to pressure the EUR/USD over the medium-term. And because the EUR/USD accounts for nearly 58% of the movement of the USD Index, a profound decline in the currency pair will help support the USDX. In turn, the PMs’ strong negative correlation with the USDX is another piece of the bearish puzzle.
Case in point: if you analyze the matrix below, you can see that gold, silver and the miners have negative correlations (relative to the U.S. dollar) of – 0.78, – 0.92 and – 0.63 over a 250-day period (roughly one year). Thus, a USDX uprising won’t be met with applause by the PMs.
Figure 6
As always, I’ll continue to monitor the indicators over the coming weeks. However, it’s important to remember: the PMs don’t operate in a vacuum and cross-asset analysis can provide early indications of their next move.
Over the long-term, there are plenty of fundamental reasons why gold is likely to soar in the coming years. However, even the most profound bull markets don’t move up in a straight line, and corrections are inevitable.
As it relates to the precious metals, a significant correction (medium-term downtrend) is already underway. However, the pain is not over, and a severe climax likely awaits.
For context, potential triggers are not always noticeable, and the PMs may collapse on their own or as a result of some random trigger that normally wouldn’t cause any major action. However, a trigger will speed things up and that’s where the S&P 500 comes in:
S&P 500 (SPX) Signals
Despite the S&P 500’s recent strength, the U.S. equity benchmark still hasn’t recouped its dashed rising support line. After breaking below toward the end of January, the technical damage remains intact. In addition, the S&P 500’s RSI (Relative Strength Index) continues to overheat. Since 2018, each time the benchmark’s RSI approached (or exceeded) 70, significant pullbacks followed.
Please see below:
Figure 7 - S&P 500 Index
Furthermore, the SPDR Dow Jones Industrial Average (DJIA) ETF is mirroring the behavior that we witnessed during its 2020 and 2018 tops. If you analyze the blue line below (the 50-day moving average), you can see an initial break was followed by a short-term rip higher.
Figure 8
However, on both occasions, the superficial strength was short-lived. Despite recapturing its 50-day MA, the SPDR DJIA ETF eventually rolled over and declined substantially. More importantly though, the behavior is identical to what we’re witnessing today. Recently, the SPDR DJIA ETF dipped below its 50-day MA only to rally back above the key level. But if history is any indication, a top could be imminent.
Like the S&P 500, the SPDR DJIA ETF’s RSI is also approaching overbought conditions. In 2020, once the ETF’s RSI exceeded 70, the music came to a screeching halt. And given the momentum that we’re witnessing today, a similar development could occur in the coming days/weeks.
Also ominous, the S&P 500’s current price action mirrors the reversal patterns that occurred in 1982 and 2009.
On Feb. 12, I wrote:
Nearing the precipice of historical precedent, the S&P 500 is approaching a cliff that marked material reversals in 1982 and 2009.
Please see below:
Figure 9 - Source: thedailyshot.com
If you follow the vertical red line near the middle of the chart, you can see that ~216 trading days after forming a bottom, it marked significant turning points for the S&P 500 in 1982 and 2009. En route to the milestones, today’s S&P 500 rally has been nearly identical. If you focus on the first blue line (top-left of the vertical red line), you can see that 2020’s story has yet to be written. However, if history is any indication, the plot could get interesting in the not-so-distant future.
As history has shown, when U.S. equity investors endorse reckless driving, it usually ends with a crash. And given their moderate-to-strong correlations, the PMs will feel the impact. However, a decline in stocks is not required for the PMs to decline. But a break in the former could easily trigger a sell-off in the latter, and if history decides to rhyme again, silver and the miners will be the hardest hit.
Goodbye 2020, Welcome 2021
After last week’s up-and-down trade, gold’s MACD indicator is no longer flashing a sell signal. However, with the technical about face relatively minor, the 2011 analogue still remains the base case. And since the MACD’s black line is still VERY close to its red line, we’re likely to see the sell signal before the end of the month, anyway. Also, please note that we saw this signal not only in 2011, but also in 2008. I will discuss the analogy to the latter more thoroughly in the following part of the analysis (below Figure 46 – the long-term HUI Index chart).
I wrote previously:
Only a shade below the 2011 high, today’s MACD reading is still the second-highest reading in the last 40 years. More importantly though, if you analyze the chart below (the red arrows at the bottom), the last four times the black line cut through the red line from above, a significant drawdown occurred.
Figure 10 - Gold Continuous Contract Overview, GOLD and Moving Average Convergence Divergence Chart (MACD) Comparison
Also ominous is that the magnitude of the drawdowns in price tend to coincide with the magnitude of the preceding upswings in MACD. And with today’s reading only surpassed by 2011, a climactic move to the $1,250/$1,450 range isn’t out of the question for gold. The above is based on how low gold had previously declined after similarly important sell signal from the MACD
Now, the month is not over yet, so one might say that it’s too early to consider the sell signal that’s based on monthly closing prices, but it seems that given the level that the MACD had previously reached and the shape of the top in the black line, it makes the situation so similar to 2011/2012 that the sell signal itself is just a cherry on the bearish analytical cake.
Considering the reliability of the MACD indicator as a sell signal for major declines, the reading also implies that gold’s downtrend could last longer and be more severe than originally thought. As a result, $1,500 remains the most likely outcome, with $1,350 still in the cards.
For more context on the potential move, on Dec. 31, I wrote:
As 2020 quickly draws to a close and the champagne corks pop, precious metals investors have January 2021 on their mind and how gold will fare just after the New Year. Let’s take a quick look at what the previous years tell us.
In a nutshell, gold didn’t just “soar” in previous Januaries, but rather reversed at the end of the year and then moved in the opposite direction in January – canceling the December moves. “New year – new me” sounds cliché, but that’s what gold has actually been adhering to instead of simply soaring.
The above chart covers the past 40 years. The green vertical lines represent cases when (approximately) the turn of the year was a great buying opportunity. The red lines represent cases when (approximately) the turn of the year was a great selling opportunity.
There were 25 cases when gold visibly reversed close to the end of the year or the beginning of the new year – so that’s what happens in most cases.
In 13 of the cases, those were buying opportunities.
In 12 of the cases, those were selling opportunities.
Since the number of turning points is not divisible, the 13-12 breakdown is the closest that it can get to 50/50.
So, while it’s true that in most past cases, the turn of the year was positive for gold, it’s also true that the gold price forecast for January 2021 is not necessarily going to be bullish. The context is important, since:
- Gold has been rallying in December 2020
- Gold tends to reverse at the turn of the year
The implications of the 0 becoming a 1 at the end of the date are actually bearish for the yellow metal.
Moreover, please take a look at the lower part of the above chart. It features the MACD indicator based on the monthly gold prices. There were very few cases when this indicator moved up significantly and then clearly declined. This happened only four times in the previous four decades. Once in the late 1980s, once in early 2008, once in 2011, and once recently. In all previous cases, it heralded months of declines.
This does not bode well for the price of the yellow metal at all, especially considering that it recently invalidated its breakout above the 2011 high.
The USD Index (USDX)
Despite taking a breather last week, the USD Index’s recent weakness isn’t all that surprising.
On Feb. 8, I wrote:
Because assets don’t move in a straight line, it’s plausible that the USD Index retests its declining resistance line, while gold retests its rising support line. If this occurs, the USDX is likely to decline to the 90.6 range, while gold will receive a short-term boost.
After the dust settled, the USD Index ended the week at 90.47 – well within range of my short-term target. More importantly though, the divergence doesn’t change the medium-term trends. If you analyze the chart below, it’s clear that the USDX is heading north, while gold is heading south.
Why so?
Because the USD Index has broken above its declining resistance line, while gold has broken below its rising support line. What’s more, both assets recorded three consecutive daily closes (and weekly close) above and below these key trendlines.
Please see below:
Figure 11
And despite falling below the 50-level, the USDX’s RSI is still mirroring the behavior that we witnessed in 2017-2018.
I wrote previously:
Increasing the likelihood of a sustained bounce, the USDX’s RSI (Relative Strength Index) mirrors the double-bottom pattern seen in 2017-2018 (the green arrows on the below chart). As the initial pattern emerged (with the RSI below 30 in 2017), it preceded a significant rally, with the USDX’s RSI surging to nearly 70. And just like the chorus from your favorite song, the pattern repeated in 2018 with nearly identical results.
And today? Well, the choir is still in the midst of its third act.
If you analyze the top-right section of the chart below (the green arrows), you can see that the USDX’s current RSI has bounced off identical oversold levels.
Figure 12
Even more telling, the size and shape of the 2017-2018 analogue continues to mirror the current price action. However, today, it’s taken 118 less days for the USD Index to move from peak to trough.
Also, it took 82 days for the USDX to bottom in 2017-2018 (the number of days between the initial bottom and the final bottom) and the number amounts to 21.19% of the overall duration. If we apply a similar timeframe to today’s move, it implies that a final bottom may have formed on Feb. 12. As a result, the USDX’s long-term upswing could begin as soon as this week.
Also noteworthy, as the USDX approached its final bottom in 2017-2018, gold traded sideways. Today, however, gold is already in a downtrend. From a medium-term perspective, the yellow metal’s behavior is actually more bearish than it was in 2017-2018.
Also supporting the historical analogue, the USD Index’s current breakout above its 50-day moving average is exactly what added gasoline to the USDX’s 2018 fire. Case in point? After the 2018 breakout, the USDX surged back to its previous high. Today, that level is roughly 94.5.
For context, I wrote on Feb. 4:
Based on the remarkable similarity to early 2018 (also in bitcoin and dogecoin, and most likely also in stocks to some extent), the breakout above the declining resistance line (and the 50-day moving average) is likely to mark the start of a big, sharp upswing.
Back in 2018, the rally continued until the USD Index moved to its previous medium-term high. Afterwards, it started to move in a more moderate manner.
If the history rhymes once again (the similarity has been uncanny in the previous months), then the next temporary stop for the USD Index is a bit below 95, as that’s when the USDX topped in September 2020. Precisely, that was 94.80, so to be conservative, we can say that the next particularly significant resistance for the USD Index is at about 94.5.
As for further catalysts, the USD Index still has plenty of other bullets in its chamber:
First, the USD Index is after a long-term, more-than-confirmed breakout. This means that the long-term trend for the U.S. dollar is up.
Figure 13
Second, the amount of capital shorting the greenback remains at an all-time high. As a result, the slightest shift in sentiment could lead to a violent short-covering rally.
Figure 14
Third, as the speculative frenzy engulfs U.S. equities, technology investors are fanning the flames. Rising by 3.3% over the last month, the NASDAQ 100/S&P 500 ratio hit another all-time high on Feb. 12 and has surged beyond the levels that preceded the dot-com bust.
Please see below:
Figure 15
And given the USDX’s strong negative correlation with the NASDAQ 100, a sudden Minsky Moment could propel the greenback back to its March highs. Moreover, following a short-term consolidation, the USDX could even exceed those prior highs.
Figure 16
Circling back to the FED/ECB ratio, relative outprinting by the ECB remains of critical importance.
Figure 17
I wrote previously:
The top in the FED/ECB total assets ratio preceded the slide in the EUR/USD less than a decade ago and it seems to be preceding the next slide as well. If the USD Index was to repeat its 2014-2015 rally from the recent lows, it would rally to 114. This level is much more realistic than most market participants would agree on.
The bottom line?
As the ECB injects more and more liquidity to support the floundering Eurozone economy, the FED/ECB ratio should continue its trek lower. And despite the EUR/USD’s June 2020 divergence, history implies that the currency pair still has plenty of catching up to do. And because the EUR/USD accounts for nearly 58% of the movement of the USD Index, its pain remains the USDX’s gain.
Regarding futures positioning, we’re already seeing some capitulation from the speculative dollar bears. And if the initial flurries turn into a snowstorm, the cold front will likely chill the drastically overheating equity markets.
To explain, notice the extreme divergence between the users of U.S. dollars (the dark blue line below) and the dollar speculators (the light blue line below)?
Figure 18 - Commitment of Traders Report
As you can see, commercial traders (the dark blue line) and non-commercial traders (the light blue line) have vastly different opinions on the future direction of the U.S. dollar. Again, commercial traders are businesses that use U.S. dollars on a day-to-day basis, while non-commercial traders are speculators (hedge funds, prop traders).
On a more granular level, we’re also witnessing the same activity within the EUR/USD.
I wrote on Jan. 12:
Figure 19
The light blue bars (Figure 27) represent the net-positioning of non-commercial futures traders (speculators), while the dark blue line is the movement of EUR/USD. Please focus on the red circle at the top-right of the chart: right now, bullish futures bets on EUR/USD are at their highest level since before the financial crisis.
More importantly, notice how one-sided positioning (in both directions) often leads to a sharp reversal?
If you analyze the 2009 to 2011 period, you can see that the EUR/USD plunged almost immediately after speculative futures positioning approached (or hit) the 30-level (using the vertical scale on the right side of the chart). And with today’s positioning already exceeding 30 (the red circle), there is plenty of room for the EUR/USD to move lower.
The key takeaway?
Understanding the difference between commercial traders and speculators is extremely important. For context, when speculators bet against commercial traders – with respect to gold and silver futures – the former were forced to cover their shorts at substantial losses.
On Jan. 6, I wrote:
Since Jun. 15, the two parties have drawn opposite lines in the sand. While speculators increased their long positions, producers took the other side of the trade. And despite the yellow metal leaping above $2,000 soon after (mainly momentum driven), gold topped less than two months later and fell by 15.4% before reaching a bottom on Nov. 30 (intraday peak to trough).
Regarding silver, the results are identical. However, producers’ timing was much more prescient.
Since Aug. 17, producers and speculators have traded in opposite directions. In September, with speculators still buying, the white metal rallied to an intraday high of $29.24 (on Sept. 1). However, in just over three weeks, silver plunged by 25.4% before bottoming on Sep. 24.
The bottom line?
Commercial traders (producers) study the market more intently than speculators. And because they have more to lose than just the trigger of a stop-loss, producers are usually on the right side of the trade.
Sentiment Indicators
Stuck in a two-week coma, the Gold Miners Bullish Percent Index ($BPGDM) remained dormant again last week. More importantly though, the index is still more than 30 points above its 2016 and 2020 lows.
On Dec. 14, I wrote:
Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.
Thus, with sentiment still elevated, it will take a lot more negativity for gold to find a bottom.
Figure 20 - Gold Miners Bullish Percent Index ($BPGDM) and NYSE Arca Gold BUGS Index (HUI) Comparison
For more context, I wrote previously:
The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.
Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of this year. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.
Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline.
Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place. But has it already run its course?
Let’s consider two similar cases when gold miners declined significantly after the $BPGDM was very high: the 2016 decline and early-2020 decline.
In both cases, the HUI Index continued to decline until it moved slightly below its 61.8% Fibonacci retracement level. This means that if the history is to repeat itself, we shouldn’t expect any major turnaround until the gold miners decline to 220 - 230 or so. Depending on how things are developing in gold, the above might or might not be the final bottom, though.
Please note that the HUI already declined below its 2016 high. This breakdown is yet another bearish sign.
The Gold Miners
After moving lower on Feb. 11 and Feb. 12, the GDX ETF seems to be setting the stage for an epic final performance. With its head and shoulders pattern continuing to form and $31 likely the next stop, the initial bottom implies a roughly 11% downside from Friday’s (Feb. 12) close.
Please see below:
Figure 21 - VanEck Vectors Gold Miners ETF (GDX), GDX and Slow Stochastic Oscillator Chart Comparison – 2020
To explain, I wrote previously:
Mining stocks are not doing anything right now – they are moving back and forth in a calm manner – just like what they did at the beginning of the year. Back then this was a top that was being formed, and given what I wrote earlier today and – more importantly – what I’ve been writing about in the previous days and weeks (Monday’s flagship Gold & Silver Trading Alert features myriads of details), this could be the start of another bigger move lower. The next downside target is at about $31 in case of the GDX ETF, after which I expect to see a rebound to the $33 - $34 area.
Ever since the mid-September breakdown below the 50-day moving average, the GDX ETF was unable to trigger a substantial and lasting move above this MA. The times when the GDX was able to move above it were also the times when the biggest short-term declines started.
(…)
The most recent move higher only made the similarity of this shoulder portion of the bearish head-and-shoulders patternto the left shoulder (figure 2 - both marked with green) bigger. This means that when the GDX breaks below the neck level of the pattern in a decisive way, the implications are likely to be extremely bearish for the next several weeks or months.
Due to the uncanny similarity between the two green rectangles, I decided to check what happens if this mirror-similarity continues. I used purple, dashed lines for that. There were two important short-term price swings in April 2020 – one shows the size of the correction and one is a near-vertical move higher.
Copying these price moves (purple lines) to the current situation, we get a scenario in which GDX (mining stocks) moves to about $31 and then comes back up to about $34. This would be in perfect tune with what I wrote previously. After breaking below the head-and-shoulders pattern, gold miners would then be likely to verify this breakdown by moving back up to the neck level of the pattern. Then, we would likely see another powerful slide – perhaps to at least $24.
This is especially the case, since silver and mining stocks tend to decline particularly strongly if the stock market is declining as well. And while the exact timing of the market’s slide is not 100% clear, stocks’ day of reckoning is coming. And it might be very, very close.
As I explained (in the Letters to the Editor section) it could be the case that the precious metals sector declines for about 3 months after the general stock market tops. And it seems that we won’t have to wait long for the latter.
As for the junior gold miners, the GDXJ ETF is also heading toward the same cliff.
I wrote previously:
Poised to re-test the ~$42.50 range, the GDXJ ETF (just like it’s big brother, the GDX) put in three adjacent tops in 2019/2020 and put in a similar bottom in June of 2020 right at the 50% Fibonacci retracement level. However, with $42.50 a key support level, a corrective upswing is likely to occur following the steep decline.
Like its big brother, the GDXJ ETF is also forming a similar head and shoulders pattern. If you analyze the dotted line below (the upward sloping line that currently intersects with the $50-level), the GDXJ ETF’s pattern is playing out on an angle.
However, with the right shoulder nearly complete, we could be approaching a make-or-break point. And given the size of the head relative to the neckline, a breach of $47.50 could trigger a slide to ~$33.00.
Figure 22
Keep in mind though, $42.50 is the first shoe to drop. And because a re-test could deliver a short-term bounce, the longer-term downtrend trend will take time to play out. However, once the curtain call is upon us, gold, silver and the miners will likely take their finals bows at significantly lower levels.
In addition, and while the performance is unfolding, the GDXJ ETF is likely to underperform the GDX ETF over the next few weeks (i.e., decline more than GDX on a relative basis).
Please see below:
Figure 23
To expand on the potential move, I wrote on Jan. 18:
The above chart depicts the ratio of the GDX ETF’s price relative to the GDXJ ETF’s price (the dark blue line above). When the line is rising, it means that the GDXJ ETF is outperforming the GDX ETF. Conversely, when the line is falling, it means that the GDX ETF is outperforming the GDXJ ETF. If you analyze the right-half, you can see that the GDXJ ETF has massively outperformed since late May.
However, once the calendar turned (to 2021), the ratio has made a vertical move lower. Thus, if both ETFs reach their 50% Fibonacci retracement levels ($42.50 and $31 respectively), the ratio above should drop from 1.43 to 1.37. As a result, the GDXJ ETF will incur a swifter drawdown. Given the pace at which the ratio has been declining so far this year, the above is easily achievable – the pace of decline would simply have to continue.
Also supporting the underperformance, the GDXJ ETF’s high-beta nature (and stronger correlation with the S&P 500) means that as the SPX falls, more damage is being done to the GDXJ ETF. Please note how closely linked the declines were in case of the GDXJ/GDX ratio and the general stock market (black line in the lower part of the chart). This also explains why the juniors to seniors ratio moved higher since the March bottom.
Thus, if the S&P 500 hits a wall (like I mentioned above), the GDXJ/GDX ratio should continue its free fall.
As further evidence, it’s important to remember that the GDX ETF invalidated its previous breakout above the 61.8% Fibonacci retracement level (based on the 2011 to 2016 decline).
Please see below:
Figure 24 - GDX VanEck Vectors Gold Miners ETF (2009 – 2020)
To explain, I wrote previously:
When GDX approached its 38.2% Fibonacci retracement, it declined sharply – it was right after the 2016 top. And miners’ inability to move above the 61.8% Fibonacci retracement level and their invalidation of the tiny breakout is a bearish sign. The same goes for miners’ inability to stay above the rising support line – the line that’s parallel to the line based on the 2016 and 2020 lows.
Highlighting the importance of the NASDAQ 100/S&P 500 ratio, the unwinding of NASDAQ speculation could deliver a fierce blow to the gold miners. Back in 2000, when the dot-com bubble burst, the NASDAQ lost nearly 80% of its value, while gold miners lost more than 50% of their value.
Please see below:
Figure 25
To explain, I wrote previously:
Right now, the two long-term channels above (the solid blue and red dashed lines) show that the NASDAQ is trading well above both historical trends.
Back in 1998, the NASDAQ’s last hurrah occurred after the index declined to its 200-day moving average (which was also slightly above the upper border of the rising trend channel marked with red dashed lines).
And what happened in the first half of 2020? Well, we saw an identical formation.
The similarity between these two periods is also evident if one looks at the MACD indicator. There has been no other, even remotely similar, situation where this indicator would soar so high.
Furthermore, and because the devil is in the details, the gold miners’ 1999 top actually preceded the 2000 NASDAQ bubble bursting. It’s clear that miners (the XAU Index serves as a proxy) are on the left side of the dashed vertical line, while the tech stock top is on its right side. However, it’s important to note that it was stocks’ slide that exacerbated miners’ decline. Right now, the mining stocks are already declining, and the tech stocks continue to rally. Two decades ago, tech stocks topped about 6 months after miners. This might spoil the party of the tech stock bulls, but miners topped about 6 months ago…
Also supporting the 2000 analogue, today’s volume trends are eerily similar. If you analyze the red arrows on the chart above, you can see that the abnormal spike in the MACD indicator coincided with an abnormal spike in volume. Thus, mounting pressure implies a cataclysmic reversal could be forthcoming.
Interestingly, two decades ago, miners bottomed more or less when the NASDAQ declined to its previous lows, created by the very first slide. We have yet to see the “first slide” this time. But, if the history continues to repeat itself and tech stocks decline sharply and then correct some of the decline, when they finally move lower once again, we might see THE bottom in the mining stocks. Of course, betting on the above scenario based on the XAU-NASDAQ link alone would not be reasonable, but if other factors also confirm this indication, this could really take place.
Either way, the above does a great job at illustrating the kind of link between the general stock market and the precious metals market that I expect to see also this time. PMs and miners declined during the first part of the stocks’ (here: tech stocks) decline, but then they bottomed and rallied despite the continuation of stocks’ freefall.
Gold
Catching unsuspecting traders in yet another bull trap, gold’s early-week strength quickly faded. And with investors unwilling to vouch for the yellow metal for more than a few days, the rush-to-exit mentality highlights a short-term vexation that’s unlikely to subside.
Please see below:
Figure 26
Destined for devaluation after hitting its triangle-vertex-based reversal point (which I warned about previously), the yellow metal is struggling to climb the ever-growing wall of worry.
Mirroring what we saw at the beginning of the New Year, gold’s triangle-vertex-based reversal point remains a reliable indicator of trend exhaustion. And when you add the bearish cocktail of rising U.S. interest rates and a potential USD Index surge, $1,700 remains the initial downside target, with $1,500 to even ~$1,350 still possibilities under the right curcumstances.
Please see below:
Figure 27 - Gold Continuous Contract Overview and Slow Stochastic Oscillator Chart Comparison
To explain the rationale, I wrote previously:
Back in November, gold’s second decline (second half of the month) was a bit bigger than the initial (first half of the month) slide that was much sharper. The January performance is very similar so far, with the difference being that this month, the initial decline that we saw in the early part of the month was bigger.
This means that if the shape of the price moves continues to be similar, the next short-term move lower could be bigger than what we saw so far in January and bigger than the decline that we saw in the second half of November. This is yet another factor that points to the proximity of $1,700 as the next downside target.
In addition, as a steepening U.S. yield curve enters the equation, I wrote on Jan. 27 that the bottom, and subsequent move higher, in U.S. Treasury yields coincided with a USDX rally 80% of the time since 2003.
Figure 28 - Source: Daniel Lacalle
And while the USDX continues to fight historical precedent, on Feb. 12, the U.S. 30-Year Treasury yield closed at its highest level in nearly a year. As such, the move should add wind to the USDX’s sails in the coming weeks.
Please see below:
Figure 29
In conclusion, gold is under fire from all angles and dodging bullets has become a near impossible task. With the USD Index likely to bounce off its declining resistance line (now support), a bottom in the greenback could be imminent. Also ominous, a steepening U.S. yield curve signals that the yellow metals’ best days are likely in the rearview. However, as the situation evolves and gold eventually demonstrates continued strength versus the USD Index, its long-term uptrend will resume once again.
Before moving on, I want to reiterate my previous comments and explain why $1,700 remains my initial target:
One of the reasons is the 61.8% Fibonacci retracement based on the recent 2020 rally, and the other is the 1.618 extension of the initial decline. However, there are also more long-term-oriented indications that gold is about to move to $1,700 or lower.
(…) gold recently failed to move above its previous long-term (2011) high. Since history tends to repeat itself, it’s only natural to expect gold to behave as it did during its previous attempt to break above its major long-term high.
And the only similar case is from late 1978 when gold rallied above the previous 1974 high. Let’s take a look at the chart below for details (courtesy of chartsrus.com)
Figure 30 - Gold rallying in 1978, past its 1974 high
As you can see above, in late 1978, gold declined severely right after it moved above the late-1974 high. This time, gold invalidated the breakout, which makes the subsequent decline more likely. And how far did gold decline back in 1978? It declined by about $50, which is about 20% of the starting price. If gold was to drop 20% from its 2020 high, it would slide from $2,089 to about $1,671.
Figure 31 - Relative Strength Index (RSI), GOLD, and Moving Average Convergence Divergence (MACD) Comparison
If you analyze the red arrow in the lower part of the above chart (the weekly MACD sell signal), today’s pattern is similar not only to what we saw in 2011, but also to what we witnessed in 2008. Thus, if similar events unfold – with the S&P 500 falling and the USD Index rising (both seem likely for the following months, even if these moves don’t start right away) – the yellow metal could plunge to below $1,350 or so. The green dashed line shows what would happen gold price, if it was not decline as much as it did in 2008.
However, as of right now, my initial target is $1,700, with $1,500 likely over the medium-term. But as mentioned, if the S&P 500 and the USD Index add ripples to the bearish current, $1,400 (or even ~$1,350) could occur amid the perfect storm. ~$1,500 still remains the most likely downside target for the final bottom, though.
As it relates to the chart below, I wrote previously:
Before looking at the chart below (which is very similar to the chart above, but indicates different RSI, volume, etc.), please note the – rather obvious – fact: gold failed to break above its 2011 highs. Invalidations of breakouts are sell signals, and it’s tough to imagine a more profound breakout that could have failed. Thus, the implications are extremely bearish for the next several weeks and/or months.
Figure 32 - RSI, GOLD, and MACD Comparison
The odd thing about the above chart is that I copied the most recent movement in gold and pasted it above gold’s 2011 – 2013 performance. But – admit it – at first glance, it was clear to you that both price moves were very similar.
And that’s exactly my point. The history tends to rhyme and that’s one of the foundations of the technical analysis in general. Retracements, indicators, cycles, and other techniques are used based on this very foundation – they are just different ways to approach the recurring nature of events.
However, every now and then, the history repeats itself to a much greater degree than is normally the case. In extremely rare cases, we get a direct 1:1 similarity, but in some (still rare, but not as extremely rare) cases we get a similarity where the price is moving proportionately to how it moved previously. That’s called a market’s self-similarity or the fractal nature of the markets. But after taking a brief look at the chart, you probably instinctively knew that since the price moves are so similar this time, then the follow-up action is also likely to be quite similar.
In other words, if something looks like a duck, and quacks like a duck, it’s probably a duck. And it’s likely to do what ducks do.
What did gold do back in 2013 at the end of the self-similar pattern? Saying that it declined is true, but it doesn’t give the full picture - just like saying that the U.S. public debt is not small. Back then, gold truly plunged. And before it plunged, it moved lower in a rather steady manner, with periodic corrections. That’s exactly what we see right now.
Please note that the above chart shows gold’s very long-term turning points (vertical lines) and we see that gold topped a bit after it (not much off given their long-term nature). Based on how gold performed after previous long-term turning points (marked with purple, dashed lines), it seems that a decline to even $1,600 would not be out of ordinary.
Finally, please note the strong sell signal from the MACD indicator in the bottom part of the chart. The only other time when this indicator flashed a sell signal while being so overbought was at the 2011 top. The second most-similar case is the 2008 top.
The above-mentioned self-similarity covers the analogy to the 2011 top, but what about the 2008 performance?
If we take a look at how big the final 2008 decline was, we notice that if gold repeated it (percentage-wise), it would decline to about $1,450. Interestingly, this would mean that gold would move to the 61.8% Fibonacci retracement level based on the entire 2015 – 2020 rally. This is so interesting, because that’s the Fibonacci retracement level that (approximately) ended the 2013 decline.
History tends to rhyme, so perhaps gold is going to decline even more than the simple analogy to the previous turning points indicates. For now, this is relatively unclear, and my target area for gold’s final bottom is quite broad.
Silver
With silver’s relative strength an ominous sign for the PMs, the white metal’s outperformance of gold just hit its highest level since July 2016.
Please see below:
Figure 33
To explain, the green line above depicts the silver/gold ratio. When the green line is rising, it means that silver is outperforming gold. Conversely, when the green line is falling, it means that gold is outperforming silver. As you can see, silver’s recent run-up has propelled the ratio to an almost five-year high.
Furthermore, mirroring what we witnessed in 2011, silver’s recent surge is far from normal. Last week, Bank of America revealed that weekly silver inflows hit their highest level ever two weeks ago.
Figure 34 - Source: Bank of America
In addition, I mentioned last week that the iShares Silver Trust ETF (SLV) took in nearly $1 billion in daily inflows on Jan. 29. For context, that was nearly double the previous record.
Please see below:
Figure 35 - Source: Bloomberg/Eric Balchunas
As a result, silver is most likely after a major price top. And if it’s not, it could be up for an epic blow-off top shortly. Right now, the white metal is approaching two triangle-vertex-based reversal points, which could lead to fireworks by the end of February or early March.
Figure 36 - COMEX Silver Futures
Why would silver be most likely already after a top? Because when we previously saw such sudden spikes in the silver inflows (proxy for the investment demand) it was precisely when silver topped. You can see the same phenomenon in case of volume.
Mirroring the frantic buying that we witnessed in 2011, the SLV ETF’s 2020/2021 volume spikes are nearly identical to the surges that we witnessed ~10 years ago.
Please note the huge spike in inflows right at the end of 2012. Was that a beginning of a massive upswing? No, that was the final small rally before the big decline.
Please see below:
Figure 37 - COMEX Silver Futures
To explain, I wrote previously:
If you analyze the volume spikes at the bottom of the chart, 2021 and 2011 are a splitting image. To explain, in 2011, an initial abnormal spike in volume was followed by a second parabolic surge. However, not long after, silver’s bear market began.
SLV-volume-wise, there's only one similar situation from the past - the 2011 top. This is a very bearish analogy as higher prices of the white metal were not seen since that time, but the analogy gets even more bearish. The reason is the "initial warning" volume spike in this ETF. It took place a few months before SLV formed its final top, and we saw the same thing also a few months ago, when silver formed its initial 2020 top.
The history may not repeat itself to the letter, but it tends to be quite similar. And the more two situations are alike, the more likely it is for the follow-up action to be similar as well. And in this case, the implications for the silver price forecast are clearly bearish.
Based on the above chart, it seems that silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.
For more insight, let’s look at the relative performance of gold, silver and the gold miners, and compare how they’re impacted by the USDX and the SPX. If you analyze the chart below, you can see that the precious metals all broke down in September, after the USDX broke above resistance.
Figure 38
To explain, I wrote on Jan. 18:
Like traffic lights flashing red, notice how the HUI Index (proxy for gold stocks) is trading well below its early 2020 highs? In stark contrast, gold remains moderately above its early 2020 highs, while silver is significantly above its early 2020 highs. The misaligned performance – with silver outperforming and gold miners underperforming – puts a bow on this bearish package.
The bottom line?
It is not only the case that silver was strong and miners were weak in the last several days – it’s been the case over the past several months as well. The implications are bearish.
Also troubling is that the stock market that’s soaring in the medium term, hasn’t shined its light upon the PM market. Contrasting the mantra that ‘a rising tide lifts all boats,’ equity market strength hasn’t triggered a sustainable rally in silver or the gold miners. And this “should have” been the case – both are more connected to stocks than gold is. Gold stocks because they are, well, stocks. Silver, due to multiple industrial uses
All in all, based on what we saw in silver recently, it doesn’t seem that we’re likely to see much higher precious metals prices without seeing a major decline first.
As another potential warning sign, silver is also showing an interesting pattern when analyzing its inverse price action. Nearly identical to the inverted formation that emerged from 2006 to 2009, today’s chart looks eerily similar to its predecessor.
Figure 39 - COMEX Silver Futures
I wrote previously:
While it’s more of a wild card, the above pattern shows that silver’s 2020 top plots nearly identical to the inverse of the 2006-2009 performance. I copied the 2006 – 2009 performance right below the regular price movement and I inverted it, and I also copied this inverted pattern to the last few years.
The similarity is quite significant. And whenever a given pattern has been repeated, the odds are that it could also repeat in the not-too-distant future. Of course, there is no guarantee for that, but once the same market has reacted in a certain way to a specific greed/fear combination, it can just as well do it again. And these similarity-based techniques work quite often. So, while it’s not strong enough to be viewed as a price-path-discovery technique on its own, it should make one consider some scenarios more closely. In particular, this means that the declines in the prices of silver, gold, and mining stocks could be bigger and take longer than it seems based on other charts and techniques.
The above is also in tune with the implications of the sell signal from the MACD indicator on the monthly gold chart.
The only thing that comes to my mind, which could – realistically – trigger such a prolonged decline would be a major drop in the general stock market. Given what I wrote above, the latter is quite possible, so I’ll be on the lookout for confirmations and invalidations of this scenario.
If history rhymes, silver could be in for a profound decline over the next few months (beyond my initial target). Moreover, the development would increase the duration of a precious metals’ bear market (also beyond my initial forecast).
After all, gold did invalidate its long-term breakout above the 2011 highs and the way gold reacted to a small upswing in the USD Index was truly profound…
Moving on to the HUI Index (proxy for gold stocks), it’s also flashing red in a very bright way.
I wrote on Feb. 5:
The three of the biggest declines in the mining stocks (I’m using the HUI Index as a proxy here), all started with broad, multi-month head-and-shoulders patterns. And now we’re seeing this pattern all over again.
Figure 40 - NYSE Arca Gold BUGS Index (HUI) and Slow Stochastic Oscillator Chart Comparison
The above picture should make it clear why I was putting “at least” in bold, when describing the targets based on the head-and-shoulders patterns.
In all three cases, the size of the decline exceeded the size of the head of the pattern. This means that the $24 target on the GDX ETF chart is likely conservative.
Can we see gold stocks as low as we saw them last year? Yes.
Can we see gold stocks even lower than at their 2020 lows? Again, yes.
Of course, it’s far from being a sure bet, but the above chart shows that it’s not irrational to expect these kind of price levels before the final bottom is reached.
The dashed lines starting at the 2020 top are copies of sizes of the declines that started from the right shoulder of the previous patterns. If things develop as they did in 2000 and 2012-2013, gold stocks are likely to bottom close to their 2020 high. However, if they develop like in 2008 (which might be the case, given the extremely high participation of the investment public in the stock market and other markets), gold stocks could re-test (or break slightly below) their 2016 low.
I know, I know, this seems too unreal to be true… But wasn’t the same said about silver moving below its 2015 bottom in 2020? And yet, it happened.
While describing gold’s very long-term chart (Figure 17), I wrote that based on gold’s MACD indicator, the situation is also similar to what happened in 2008. The above chart shows some additional similarities. Let’s consider the sizes of moves between the 2004 bottom (one could argue that this is when the several-year-long rally started) and the 2008 top, between the initial 2006 top and the 2008 top, and between the very beginning of the final rally – at the end of the fake sharp downswing and the 2008 top.
I marked all of them with dashed lines and I copied them to the current situation. By “current” I mean what happened recently and in the previous years – to the situations that seemed analogous to the ones described above. For instance, the near-vertical 2020 downswing that was followed by a big rally that ended with a big head-and-shoulders top seems similar to what happened in mid-2007.
As one might expect, these dashed lines don’t point to the same price top. No wonder – the history doesn’t repeat itself to the letter, as the circumstances are not identical.
But…
What is remarkable is that on average, these dashed lines did a great job at approximately (!) pinpointing the end of the entire rally and the start of the next massive move lower. One of these three dashed lines is several months too early, one is several months too late, and one is almost exactly pointing to the 2020 top.
This makes the current situation even more similar to what happened in 2008, which has profoundly bearish implications for the entire precious metals sector. I will provide more details of this analogy in the following Gold & Silver Trading Alerts – stay tuned.
Keep in mind though: a move of this magnitude most likely requires equities to participate. In 2008 and 2020, the sharp drawdowns in the HUI Index coincided with significant drawdowns of the S&P 500. However, with the words ‘all-time high’ becoming commonplace across U.S. equities, the likelihood of a three-peat remains relatively high.
As the story unfolds, how will we know when a bottom has formed?
We view the price target levels as guidelines and the same goes for the Gold Miners Bullish Percent Index (below 10), but the final confirmation will likely be something else. Something that we already saw in March when gold bottomed.
We will be on a special lookout for gold’s strength against the ongoing USDX rally. At many vital bottoms in gold, that’s exactly what happened, including the March bottom.
Moving on to cross-asset correlations, gold and the USDX have been strongly negative over the medium-term (past year). And despite trading in similar directions for much of November, gold and the HUI Index (relative to the USD) are now back to their usual divergences (30-trading-day correlations of – 0.81 and – 0.75). Conversely, silver’s squeeze scrambled its 30-day correlation, increasing the reading to 0.04. However, the long-term (250-day) coefficient remains intact at – 0.92. The key takeaway? As it relates to medium-term moves, a USD Index rally should continue to pressure the PMs.
Also a function of the white metal’s drama, gold, silver and the HUI Index’s 30-day correlations with the S&P 500 have drastically shifted (now reading – 0.61, 0.05 and – 0.44). However, for a more reliable assessment, it’s prudent to follow the 250-day correlations. And because the PMs demonstrate a moderate-to-strong correlation with the S&P 500 over the medium-term (roughly one year), a massive plunge in equities should dent the metals, even if it doesn’t impact their prices in the very short-term.
Figure 41
Since gold, silver, and mining stocks have been strongly negatively correlated with the USD Index in the medium term, it seems likely that they will be negatively affected by the upcoming sizable USDX upswing.
…Until we see the day where gold reverses or soars despite the U.S. currency’s rally.
If that happens with gold at about $1,700, we’ll have a very good chance that this was the final bottom. If it doesn’t happen at that time, or gold continues to slide despite USD’s pause or decline, we’ll know that gold has further to fall.
Naturally we’ll keep you – our subscribers – informed.
To move forward, how does the GDX downside target compare to gold’s downside target? If, at the same time, gold moves to about $1,700 and miners are already after a ridiculously big drop (to $31-$32 in the GDX ETF, or lower), the binding profit-take exit price of your GDX ETF will become $32.02 (those with higher risk tolerance might lower it to $31.15 or so, but moving it lower seems just too risky).
At this time, the final GDX target (the one that would correspond to gold at $1,500 or so) is still unclear. The $17 - $23 area seems probable, especially if the general stock market slides once again. It’s too early to say with any significant level of certainty. Gold is providing us with a clearer final target, so that’s what we’ll focus on. And most importantly – we’ll focus on gold’s performance relative to the USD Index.
Letters to the Editor
Q: Dear PR
It’s almost unavoidable not to read other people’s opinions on the future of PMs and miners. I am, however, astonished at the virtual absence of people who even obliquely mention the DXY in that context. On my tradingview software I have the below indices in view all the time.
DXY
GLD
SLV
GDX
GDXY (Editor’s note: this was likely a typo and the author likely meant GDXJ)
SILJ
Every micro-movement in the DXY has a corresponding movement in the other indexes. The negative correlation is clear 95% of the time.
Just so I am clear. 1) It is unsafe to go back into the water until such time as the DXY has risen to such a level that it ceases to adversely affect PMs or the miners. 2) Miners are leading the PMs DOWN right now. Conversely, a sure sign that miners have finally acquired a new pair of running shoes, will be shown when they begin to outrun the GLD on the way UP.
I am thrilled to learn that the GDX might plumb the depths of $16-$24. After exiting longs at circa $33, we get to short them all the way down to these levels, which, when using a 2X bear ETF should be a nice turn. If the baton is then handed to silver....it could be quite a ride!
Then...we get to back up the truck when we re-purchase mining stocks at March 2020 prices (ish)
The lockdown in London has never been so exciting!
I thoroughly enjoy your detailed content.
If GOLD hits anything close to $5,000, the miners will get a moon-shot. Then WallStreetBets (WSB) will jump on board, the public will get FOMO and it could go sky-high. If that happens then we should arrange a Sunshine Nation celebration in London, Vegas or Dubai. If it gets really hot.....ALL THREE!
A: That would be an awesome celebration indeed! We might have to wait a couple of extra years until gold is at $5,000 or so. Also, if (when) gold soars as high, I think that the thing that people will be talking about at that time will be silver, as opposed to mining stocks. The white metal is ridiculously well positioned to truly soar in the final part of the upcoming massive upswing. The #silversqueeze movement is already popular, and people will remember it once again when silver is after the bottom and rallying back up. When silver breaks above its 2011 levels, that’s when things will get really interesting. Until that time, miners could lead the way, especially initially after the bottom.
I see that you’re amazed by people who don’t even mention the USDX in their analyses and… that makes two of us. Naturally, one doesn’t need context for some techniques (say, triangle-vertex-based reversals, breakouts, breakdowns, indicator readings), but why would one just ignore this very useful information? We live in a globalized, interconnected economy, and seeing HOW the news and markets interact with each other provides very important clues. Also, please keep in mind that I have nothing against you reading other analysts in order to get an even broader overview of the situation. I want you to succeed in your investments and if you find that it’s useful to combine insights from many sources, it’s perfectly fine with me.
As for your two points:
- In general, yes, it will be relatively “safe” to get back on the long side of the precious metals market, when gold proves to be able to withstand the USD’s rally. Ideally, this should happen close to one of the target areas that I outlined above – ideally, close to $1,500.
- This part is a bit tricky, because miners’ local strength could indicate a bottom, but just a short-term one, not the final one. Technically, the same also applies to the previous point, but it’s much more common in case of the miners-gold link. However, in general, yes – when we see that miners are strong relative to gold, it will be a good indication that the rally is just around the corner. There is one very important exception to this rule. After a certain period of being strong, miners could then be weak relative to gold for a very short time (a day or a few days), which would not yet imply the return of the bearish trend. If this is accompanied by gold’s strength vs. the USD Index, it could actually serve as a specific confirmation that the bottom is indeed in. Please note that that’s exactly how miners bottomed in early 2016.
Figure 42
Overview of the Upcoming Part of the Decline
- I expect the initial bottom to form with gold falling to roughly $1,700, and I expect the GDX ETF to decline to about $31 - $32 at that time. I then plan to exit the short positions in the miners and I will consider long positions in the miners at that time – in order to benefit from the likely rebound.
- I expect the above-mentioned decline to take another 1 – 7 weeks to materialize and I expect the rebound to take place during 1-3 weeks.
- After the rebound (perhaps to $33 - $34 in the GDX), I plan to get back in with the short position in the mining stocks.
- Then, after miners slide once again in a meaningful and volatile way, but silver doesn’t (and it just declines moderately), I plan to switch from short positions in miners to short positions in silver (this could take another 1-4 weeks to materialize). I plan to exit those short positions when gold shows substantial strength relative to the USD Index, while the latter is still rallying. This might take place with gold close to $1,500 and the entire decline (from above $1,700 to about $1,500) would be likely to take place within 1-10 weeks and I would expect silver to fall hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold – after gold has already declined substantially) is likely to be the best entry point for long-term investments in my view. This might happen with gold close to $1,500, but it’s too early to say with certainty at this time.
- Consequently, the entire decline could take between 3 and 20 weeks, while the initial part of the decline (to $1,700 in gold) is likely to take between 1 and 7 weeks.
- If gold declines even below $1,500 (say, to ~$1350 or so), then it could take another 10 weeks or so for it to bottom, but this is not what I view as a very likely outcome.
- As a confirmation for the above, I will use the (upcoming? perhaps we have already seen it) top in the general stock market as the starting point for the 3-month countdown. The reason is that after the 1929 top gold miners declined for about 3 months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector would be likely to bottom about 3 months after the general stock market tops .
- The above is based on the information available today and it might change in the following days/weeks.
Summary
To summarize, the PMs’ short-term downswing has likely just begun, as miners broke below the neck level of their almost-yearly head-and-shoulders formation. We saw a small invalidation, but we don’t trust its bullish implications – we just saw something similar that failed to ignite a lasting rally and the USD’s decline seems to be a normal, post-breakout pullback.
In addition, because we’re likely entering the “winter” part of the Kondratiev cycle (just like in the 1929 and then the 1930s), the outlook for the precious metals’ sector remains particularly bearishduring the very first part of the cycle, when cash is king.
Silver’s strength seems bullish at first sight, but taking a closer look at this move, and comparing it with previous cases (when silver got so much attention) and with miners’ weakness, provides us with bearish implications for the medium term.
The confirmed breakout in the USD Index is yet another confirmation of the bearish outlook for the precious metals market.
Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway.
After the sell-off (that takes gold to about $1,500), we 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.
Most importantly, please stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely earn much more in the following weeks and months), but you have to be healthy to enjoy the results.
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 mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:
Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $32.02; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $23.89; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)
Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $42.72; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $14.19; stop-loss for the JDST ETF: 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. In our view, silver has greater potential than gold does):
Silver futures downside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.
Gold futures downside profit-take exit price: $1,703
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 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 (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: 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 Radomski, CFAFounder, Editor-in-chief
