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.
GameStop! AMC! Reddit. Other forums. And now, silver manipulation (the same that’s been discussed for over two decades)!
Is the above really the key thing that’s happening in the markets right now? No, it’s only the most interesting thing. I admit, what we’re seeing on the Internet right now is truly absorbing, but one should realize that it’s what used to happen multiple times in history. This time it’s simply more visible as the conversations and associated images are publicly available and widely distributed.
In yesterday’s intraday Alert, I commented on the issue of the likely implications of these cumulative purchases on the precious metals market as a whole and what difference they are likely to make over the course of the following months and weeks – next to none.
Well, there is one effect that I’m expecting to see. It’s the increased volatility during the following price declines – likely proportionate to what was so vigorously bought in the last few days.
Figure 1 – GameStop Corporation (GME) - NYSE
The above GameStop chart shows a near-vertical rally, and it also shows the spike in volume. The purchasing power seems to have dried up and the price – as expected – fell. Those, who bought at $300, were already at a 33% loss as of yesterday’s close.
The various forums (other forums joined in, it’s not just Reddit anymore) are filled with messages and images encouraging to “hold”. But sooner or later people will realize that without fresh buyers the price is going to fall, and one by one, they are likely to panic and sell – especially knowing that they won’t be “punished” by the “forum community” in any way, as it’s not known to the forum participants who is selling and when.
The topic of silver manipulation, paper silver and paper gold really is older than 20 years, and it’s been mostly the same argument over all those years. The price managed to rally from below $5 to about $50 – if there was a massive long-term manipulation, then it wasn’t particularly effective. If it didn’t prevent silver from rallying so far, then why would it prevent silver from rallying from below $20 to $200? Anyway, this topic is too broad to be fully discussed, even in a lengthy Alert – the point that I want to make here is that nothing new happened in the silver market – it just got more spotlight.
So, what’s more important and timelier than the above topics, even though it doesn’t get as much attention – and can herald a decline in the precious metals?
Figure 2 – S&P 500 (ES.F)
First, the almost-confirmed medium-term breakdown in stocks!
On Wednesday, the S&P 500 futures moved visibly below the rising support line and closed below it for the first time. Despite yesterday’s strength, stocks were unable to rally back above it and so far, today, stocks are moving lower. If the S&P 500 futures close today below this line, the breakdown will be confirmed by both: three consecutive daily closes and a weekly close. This will be a bearish sign for the short term.
If stocks slide further shortly, it will be particularly bearish for silver and mining stocks, which means that those who bought yesterday based on forum messages etc. would be likely to find themselves at a loss relatively soon. This, in turn, means that the decline could be quite volatile.
Second, there is also another market that could ignite the powerful decline in the PMs and miners – the rallying USD Index.
Figure 3 – USD Index (DX.F)
Despite the intraday decline, the USDX is once again close to its 2021 highs, which means that my comments from yesterday remain up-to-date:
The USD Index is testing its previous 2020 highs, and it might (!) be forming the right shoulder of a short-term head-and-shoulders pattern. The key word here is “might”. If the USDX rallies above its previous highs (about ~91), this pattern will be invalidated and the short-term outlook for the USDX will be clearly bullish. This would also serve as a breakout above the inverse head-and-shoulders pattern (mid-Dec. low being the left shoulder, the early 2021 low being the head, and the recent low being the right shoulder), which would have even more bullish implications (with the price target above 92).
Would this be enough for gold to decline to $1,700? It might not be enough, but it might be enough for the miners to move to my above-mentioned initial downside targets ($31 and $42.5 for GDX and GDXJ, respectively).
So, the bearish storm seems to be brewing. How are the precious metals responding? Let’s take a look at gold.
Figure 4 – COMEX Gold Futures (GC.F)
Gold shrugged off yesterday’s “exciting news” coming from the internet’s forums. It rallied initially, almost touched its declining resistance line, and then reversed, thus erasing the previous gains. It’s now trading pretty much at the same levels where it was trading two days ago. The outlook remains bearish and yesterday’s reversal actually makes it even stronger.
Figure 5 – COMEX Silver Futures (SI.F)
Silver is visibly stronger than it was a few days ago, but if the precious metals sector is about to head lower (especially given the breakdown in stocks) this would be normal even without the entire “let’s buy silver” forum theme.
And miners?
Figure 6 - VanEck Vectors Gold Miners ETF (GDX)
Miners invalidated the breakdown below the neck level of the head and shoulders pattern. Invalidations of these breakouts tend to be “buy” signals. BUT yesterday’s session has “this time really was different” written all over it.
Part of the purchase encouragements on forums were for mining stocks. While silver has indeed rallied yesterday (and so did AG, which was particularly promoted), the GDX ETF moved higher only somewhat. It still closed more or less at its mid-January low and it didn’t manage to erase Tuesday’s decline.
Overall, I think that the proper context is the relative weakness of miners and not the direct implications of the technical invalidation.
Moreover, please note that if the symmetry in terms of shape between both green boxes on the above chart is to be upheld, then it shouldn’t be surprising to see a quick volatile upswing that’s very short. In fact, since the volatility now is smaller than it was in late April 2020, what we saw yesterday might have already been the analogy to what had happened back then.
All in all, the outlook for the precious metals market remains bearish for the following weeks, regardless of what the next few days will bring.
Also… Do you remember about bitcoin? Some time ago, I wrote that the bitcoin situation made the overall situation in currencies similar to late 2017 / early 2018.
Figure 7 - Bitcoin Vault (BTC.V)
Just as we saw back then, bitcoin soared while the USD Index plunged. Then both markets reversed.
Figure 8
That was also the time when precious metals and miners (and stocks) topped.
So, what’s new?
We just saw another clear confirmation that this is the very final inning of the rally. You probably heard that in the final part of a bull market, everything that’s in it soars. If it’s a gold bull market, then even stocks that have “gold” in their name will likely rally even though they might have nothing to do with the precious metals market. People don’t care to check, and emotions are too high to bother checking what they are actually buying.
Well, there’s a cryptocurrency that started as a joke, but then became a relatively big market.
The reason why I’m mentioning it is that dogecoin just soared…
Figure 9
And it had previously soared in this way in early 2018, a few weeks after bitcoin topped.
This is exactly what one would expect to see at a market top, based on common sense (analogy to buying just about anything close to the top), but the fact that we already saw pretty much the same thing in bitcoin, dogecoin, and the USD Index at the top 3 years ago should be flashing a big red light even for the most bearish of USD bears and most bullish crypto bulls.
Remember, early 2018 was also the moment when the stock market and PMs topped.
The above indications are on top of myriads of other factors pointing to lower precious metals and mining stock prices – this is all much more important than forum posts – even very convincing ones.
Having said that, let’s take a look at the market from a more fundamental angle.
Falling off a European Cliff
With the Eurozone economy heading straight for the edge, I warned on Jan. 27 that its fundamental frailty could set off a chain reaction across financial markets.
I wrote:
Janet Yellen’s pledge to “act big” on the next coronavirus relief package ushered the EUR/GBP back above critical support.
However, on Tuesday (Jan. 26), the key level broke again.
Please see below:
Figure 10
More importantly though, a break in the EUR/GBP could be an early warning sign of a forthcoming break in the EUR/USD.
Figure 11
If you analyze the chart above, ~20 years of history shows that the EUR/GBP and the EUR/USD tend to follow in each other’s footsteps. As a result, if the EUR/GBP retests its April low (the next support level), the EUR/USD is likely to tag along for the ride (which implies a move back to ~1.08).
And adding another link to the chain, because the PMs tend to track the EUR/USD, a collapse of the currency pair could send shockwaves across the precious metals’ market.
Figure 12
Furthermore, the economic divergence between Europe and the U.S. continues to widen. On Jan. 28, the U.S. Bureau of Labor Statistics (BLS) revealed that U.S. GDP (advanced estimate) likely expanded by 4.0% in the fourth quarter.
Please see below:
Figure 13
But in stark contrast, European Central Bank (ECB) President Christine Lagarde warned on Jan. 21 that the Eurozone economy likely shrank by more than 2.0% in the fourth quarter.
Please see below:
Figure 14 - Source: Bloomberg/ Holger Zschaepitz
Also in stark contrast, U.S. GDP rose by 33.4% in Q3, while the Eurozone economy only grew by 12.4% (the red box below). And not looking much brighter, Germany (the Eurozone’s largest economy) cut its 2021 GDP growth forecast from 4.4% to 3.0%.
Figure 15
And highlighting what we already knew, J.P. Morgan’s latest research shows that economic activity in the Eurozone has fallen off a cliff.
Figure 16
To explain the chart above, the blue line is J.P. Morgan’s weekly GDP estimate. Conversely, the orange line is Google’s tracker of Europe’s alternative economic indicators. For context, alternative economic indicators are high-frequency data like credit card spending, indoor dining traffic, travel activity and location information. As you can see, economic activity in the Eurozone has regressed since the New Year, with the orange line reversing and moving lower (the red box above).
Also moving backwards, consumer confidence has plummeted in Europe’s two largest economies – Germany and France. Moreover, in Germany, it was the fourth-straight month of CC declines and the – 15.6 print was much worse than the – 7.9 expected. Even more striking, both countries are on pace to revisit their 2020 lows.
Figure 17
If that wasn’t enough, German business confidence (again Europe’s largest economy) fell to a six-month low in January – the largest monthly decline since April.
Figure 18
Even more telling, the deceleration was driven by a pessimistic outlook from German manufacturers. And why is this important? Because data from the World Bank shows that the German manufacturing sector accounts for more than 19% of Germany’s GDP.
Figure 19 – Percentage of GDP through manufacturing (Source: The World Bank)
If you analyze the red box on the right side of the map, you can see that 19% is considered extremely high. Furthermore, out of 263 countries, only 23 rely more heavily on manufacturing than Germany.
The key takeaway?
With manufacturing expectations declining and the German economy highly leveraged to manufacturing output, you can see why its 2021 GDP growth forecast was reduced. Furthermore, with Europe’s largest economy now on its back foot, who will pick up the slack?
Adding to Europe’s wall of worry, COVID-19 vaccination data shows that Germany and Italy (the Eurozone’s third-largest economy) remain far behind the U.S. And while both regions are tracking well below Israel, the goal here is to analyze Europe’s relative underperformance.
Please see below:
Figure 20
With Italy and Germany behind the curve when it comes to vaccinating their populations, relative to the U.S., their economic plight is likely to last much longer. And because the ECB already knows this, its money printer continues to outwork the U.S. Federal Reserve (FED).
Providing another update on Jan. 22, the ECB’s balance sheet has now ballooned to more than €7.024 trillion.
Please see below:
Figure 21
More importantly though, the FED/ECB ratio continues to decline. On Jan. 12, I highlighted how the ECB’s relative outprinting is a precursor to a lower EUR/USD.
Figure 22
I wrote:
Turning to the second chart (Figure 6 - on the right), notice how the EUR/USD tracks the FED/ECB ratio? To explain, the ratio (the light blue line) is calculated by dividing the U.S. Federal Reserve’s (FED) balance sheet by the European Central Bank’s (ECB) balance sheet. Essentially, its direction tells you which monetary authority is printing more money. If you analyze the EUR/USD (the dark blue line), it trades higher when the FED is out-printing the ECB (the light blue line is rising) and trades lower when the ECB is out-printing the FED (the light blue line is falling). The key takeaway? With the light blue line falling, it means that the ECB is outprinting the FED. And if this dynamic continues, the EUR/USD (the dark blue line) should move lower as well.
And with another update, the EUR/USD is starting to follow the FED/ECB ratio lower.
Please see below:
Figure 23
If you analyze the red line, you can see that the FED/ECB ratio has fallen from its 2020 high (the right side of the chart). And while the EUR/USD initially moved in the opposite direction (the gray line) – defying historical precedent – it’s beginning to roll over and follow the FED/ECB ratio lower. For context, the FED/ECB ratio has declined by nearly 18% since June.
In conclusion, the EUR/USD continues to defy fundamental, technical and historical gravity. However, with the walls closing in, it’s only a matter of time before the currency pair shows its true colors. And given the PMs tendency to follow the EUR/USD lower, the behavior is another variable that influences my bearish short-term outlook. However, after the puzzle pieces finish filling out the complete picture, the PMs will be in a position to rise once again.
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 – 6 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 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 1-5 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 14 weeks, while the initial part of the decline (to $1,700 in gold) is likely to take between 1 and 6 weeks.
The above is based on the information available today and it might change in the following days/weeks.
Summary
To summarize, it might be the case that the next big short-term downswing has just begun as miners broke below the neck level of their almost-yearly head-and-shoulders formation and yesterday’s invalidation has “accidental” written all over it. The outlook for the precious metals sector remains bearish.
Please note that today’s volatility is somewhat expected - it’s Friday (options expire) and it’s also the final session of the month. Quite many people and entities might want to push prices and indices in their favor, so that options expire on their preferred side of their options’ strike prices. So, whatever happens today might easily be erased in early February.
The things are likely to be VERY INTERESTING on the stock market in the following days, weeks, and months, and besides having important implications for the precious metals sector, stock price moves might be very important (and perhaps lucrative) if one gets additional insight into this sector.
Consequently, we’re enabling a special promotion for Matthew Levy’s, CFA Stock Trading Alerts – the first three weeks are for just $9. The subscription then renews normally, unless cancelled, which effectively means that you get to access Matthew’s up-to-date thoughts on the market for next to nothing, and if you don’t like what you’re getting, you can simply cancel the subscription. There are quite many “specialists” out there, most of them self-proclaimed (the “Robinhood investors” etc.), so it’s important to make sure that the information that one is getting come from a high-quality source.
Like your Editor (PR), Matthew is a CFA Charterholder, which means that he passed three rigorous exams (each one per year) demonstrating expertise in i.a. analysis, portfolio management & valuation, risk management and – most importantly – ethics. And it’s not just “theory” – far from it. As you can read in Matthew’s bio, he’s been managing and co-managing over $600MM in cumulative assets. Moreover, since he started publishing his analyses with us – which was on Nov. 30, 2020 – he’s made numerous good calls about the market. The great buy of the EWF ETF (Taiwan ETF) on Dec. 3 was one of them (at about $50, and it recently moved above $58). This promotion will only last a few days (only until Monday), so we encourage you to examine Matthew’s work at these preferred terms today.
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: $28.73; 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: $21.22; 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, CFA
Founder, Editor-in-chief
