Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

The precious metals sector soared sharply yesterday, only to fall in the following hours. This has more important implications than many would think.

You already know the key thing about the current market situation, as I explained it on Monday – we saw key weekly (!) reversals across the precious metals market as well as in one of the key gold price’s drivers – the USD Index. If you read my yesterday’s analysis, you are well aware of the context in the case of the USD Index – how important its recent rally truly was – not just for the index itself but also for the precious metals market.

Today, I’d like to bring your attention to something interesting that happened as a part of this week’s small, corrective upswing in gold and gold stocks.

Let’s take a look at the below 1-hour candlestick (each candlestick represents 1 hour of trading) chart for more details:

To be precise, the above chart doesn’t show gold and silver prices, but their ETF counterparts. Sometimes it’s actually more useful to look at the markets through their proxies in order to isolate what happened in the U.S. markets. Thanks to this, we can directly compare the performance of gold, silver, and mining stocks.

Or should I say: the GLD ETF, the SLV ETF, as well as the GDX ETF (proxy for senior mining stocks, and the GDXJ ETF (a proxy for junior mining stocks).

Thanks to this, we can have an apples-to-apples comparison – the opening and closing prices of the instruments are identical, as are the trading hours.

Thanks to isolating how the entire precious metals sector (its most important and popular parts) performed during the U.S. session, we can see if the signals from gold are confirmed by signals from gold stocks (and vice versa), as well as verify if they have the same implications as the signals coming from the silver price analysis.

The sharp rally that we saw during yesterday’s session was quickly invalidated, but the levels that gold and gold stocks reached were particularly important, and the focus on the U.S. session helps to notice why this was the case.

Namely, yesterday’s intraday sharp rally stopped right at the lower border of the most recent price gap. That’s one of the things that can – and often does – work as resistance.

What is a price gap? Well, to make a long story short, a price gap is formed when the price opens below the previous day’s close and then continues to decline during the day without going back above the opening price. That’s what we saw in February in gold, silver, and mining stocks.

It could also happen during a rally – in this case, the price opens above the previous day’s close and then continues to rally without moving back to the previous day’s close.

What’s so special about this? The fact that there were certain price levels where there was no trading at all.

In the case of some markets, like gold price futures, trades might have been placed on other exchanges, but in the case of the U.S. ETFs, the trading is usually limited to U.S. trading hours. And even if there are counterparts of the ETFs that are traded overseas (for example, the GDXJ is trading in London as well), it’s the U.S. trading that has the greatest volume of trades – it’s most important.

No trading means that stop-loss levels couldn’t have been executed, at least not in the case of most brokerages. Most importantly, it will mean the price at which many people will finally be able to sell (in the recent case) once the market opens. They couldn’t sell earlier even if they wanted, simply because the market was not open.

This creates a psychological barrier to preventing people from entering the market at those levels. They associate the prices with the “highest price that they could get,” and perhaps, as they weren’t willing to sell more at even lower prices, getting back to this level (lower border of the price gap in our case) serves as an opportunity to sell at the prices that seemed like the “final levels to sell high before the daily slide.”

That’s how technical resistance is formed.

It works similarly in the case of the upper border of the price gap, and some people even apply Fibonacci retracements to the price gaps and see those levels as resistance. While this might make sense in the case of intraday trading, that’s not significant enough from my point of view, and since most investors don’t engage in day trading, I think the above wouldn’t apply to them either.

What happened yesterday was a return to the lower border of the price gap. I marked those borders with black, dashed lines.

We saw this in the GLD ETF, the GDX ETF, and the GDXJ ETF. The resistance created by the price gap held, so the bearish implications and outlook remain clearly intact.

In the case of the SLV ETF, we didn’t see it, as silver is currently so weak that it didn’t manage to even move close to the lower border of its February price gap. Instead, silver moved to its recent intraday high and then declined again. So, silver confirmed the bearish nature of the correction, but in a different way.

To summarize, in my view, the real interest rates are up and about to soar higher, the USD Index most likely bottomed and is likely to soar, while the precious metals topped in a spectacular manner and are now likely to slide – either shortly or soon enough. The rally in gold, silver, and miners was indeed sizable, but… It’s over.

What’s next? Something exciting (and, in my view, very lucrative) or something scary – depending on how positioned and informed one chooses to be.

Also, please note that (paraphrasing Sun Tzu) “understanding the enemy without understanding your true self is only half a victory.” Before applying any insights into actionable practice (and placing or adding to your trades), please make sure that the position that you’re about to enter and its size are aligned with your approach, your investment goals, and your risk tolerance.

In other words, I suggest starting with yourself, and tailoring the trade to you, not the other way around. Please consider your motivation for this trade and how it aligns with the rest of your approach and life in general.

Hint: don’t go for the easy answer like “money” or “profits,” but consider why the result of the trade is important – is this a part of your well-designed strategy and “you have it,” or is it something you “must absolutely do” – in other words, “it has you”…).

This will save you lots of stress, which is not only end in and of itself (your happiness and health are both closely linked to your stress levels), but it also helps you become a more profitable investor as less stress (or none thereof) means more objectivity and less risk of “running for the hills” right before a given trade becomes profitable (perhaps extremely so).

Overview of the Upcoming Part of the Decline

1. It seems to me that the corrective upswing is over (or about to be over) and that the next big move lower is already underway (or that it’s about to start).
2. If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all – perhaps with gold prices close to $1,500 - $1,550.
3. I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
4. I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
5. I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
6. The above is based on the information available today, and it might change in the following days/weeks.

You will find my general overview of the outlook for gold on the chart below:

Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.

Letters to the Editor

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Summary

To summarize, in my view, the real interest rates are up and about to soar higher, the USD Index most likely bottomed and is likely to soar, while the precious metals topped in a spectacular manner and are now likely to slide – either shortly or soon enough. The rally in gold, silver, and miners was indeed sizable, but… It’s over.

What’s next? Something exciting (and, in my view, very lucrative) or something scary – depending on how positioned and informed one chooses to be.

Also, please note that (paraphrasing Sun Tzu) “understanding the enemy without understanding your true self is only half of a victory.” Before applying any insights into actionable practice (and placing or adding to your trades), please make sure that the position that you’re about to enter and its size are aligned with your approach, your investment goals, and your risk tolerance.

In other words, I suggest starting with yourself, and tailoring the trade to you, not the other way around. Please consider your motivation for this trade and how it aligns with the rest of your approach and life in general.

Hint: don’t go for the easy answer like “money” or “profits,” but consider why the result of the trade is important – is this a part of your well-designed strategy and “you have it,” or is it something you “must absolutely do” – in other words, “it has you”…)

This will save you lots of stress, which is not only end in and of itself (your happiness and health are both closely linked to your stress levels), but it also helps you become a more profitable investor as less stress (or none thereof) means more objectivity and less risk of “running for the hills” right before a given trade becomes profitable (perhaps extremely so).

Given the above, gold’s invalidation of the temporary move above its very long-term resistance (the 2011 high!), and the situation in the USD Index, it seems that the next big move lower in the precious metals sector is already underway.

Now, as more investors realize that interest rates will have to rise sooner than expected, the prices of precious metals and mining stocks (as well as other stocks) are likely to fall. In my opinion, the current trading position is going to become profitable in the following weeks, and quite possibly in the following days. While I can’t promise any kind of performance, I fully expect it to become very profitable before it’s over and to prolong our 2022 winning streak.

After the final sell-off (that takes gold to about $1,350-$1,500), I 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.

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 junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $20.32; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $22.87; stop-loss for the JDST: 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.):

Silver futures downside profit-take exit price: $14.32

SLV profit-take exit price: $13.42

ZSL profit-take exit price: $48.87

Gold futures downside profit-take exit price: $1,504

HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $16.47

HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $36.87

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’ve 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 (as 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 K. Radomski, CFA
Founder, Editor-in-chief