Briefly: in our opinion, small (50% of the regular size of the position) speculative long positions in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Just when most traders thought that the previous week is going to end in the red for gold, something exceptional happened. The USD Index reversed after rallying, and gold rallied sharply in response. In the end, gold ended the week in the green by forming a clear weekly reversal.
That was actually the second weekly reversal that we saw recently. Why is this important? Because of what happened shortly after we saw the opposite of it not so long ago.
The Anatomy of Gold Reversals
The August and early-September reversals were followed by sizable short-term declines and the combined reversals themselves have most likely created the 2019 top.
The opposite of what created the major top, should create a major bottom now, right? Not so fast. The double reversal is indeed bullish, but there's one more detail to pay attention to before calling a major bottom in gold. Gold's volume.
The volume that accompanied the August and September reversals was big, and the volume that we saw recently - especially last week - was small. Sure, it was the long Thanksgiving weekend, which means that fewer traders were making transactions, which explains why the volume was low. Still, knowing what's below the low volume's surface doesn't change the fact that low volume means that the candlestick formations (like the weekly reversal) should not be taken at face value. They give some hints, but they are not as reliable as if they took place on huge volume.
The recent situation is more similar to what we saw in early March. There was a clear weekly reversal, but it was accompanied by low volume. And what happened shortly thereafter? Gold rallied, but not significantly so. At least not within the next several weeks. This tells us that the recent reversals - while bullish - are not too bullish and not beyond the next week or a few of them. Perhaps not even beyond the next several days.
What would one use to forecast a top in gold prices within this week?
The Case for the Upcoming Gold Top
Because of the looming triangle-vertex based turning point. The recent turning points for gold, silver and mining stocks worked perfectly by pinpointing the early November top, and they also correctly estimated the most recent reversals - the local bottoms after which gold, silver and miners moved higher.
The early November top is clearest in case of silver (middle of the above chart), while the recent local bottoms are most clearly visible in case of gold miners (lower part of the chart).
The next triangle reversal is due this week, which makes it likely that we'll see some kind of turnaround shortly. The important details about this turnaround is that it's confirmed by not one but two markets - silver and miners, which increases the odds that the reversal will indeed take place. The early-November top, for instance, was indicated by all three parts of the PM market at once.
Let's keep in mind that it's not the only factor pointing to this outcome. The True Seasonality for gold confirms the above.
On average, gold price has been spiking around late November and early December. Please note that while on average gold performs best in late November, the accuracy reading actually rises strongly in the next several days. This means that while the biggest price moves usually happened sooner, some of them arrive a bit late. When gold soared sooner, it didn't decline immediately. The take-away here is that even if the above is not 100% correct, and price spike doesn't happen right away, it means that it's still likely to arrive shortly.
Based on the weekly candlestick reversals in gold, the looming triangle reversals, gold's True Seasonality, and other factors, it seems that gold is going to rally and top shortly.
Turning to Mining Stocks
Let's take a closer look at the GDX ETF and start by quoting what we wrote about it previously.
Looking at the GDX ETF, we see that it rallied strongly on volume that was the highest this month. This is a very bullish sign for the following days. It doesn't change anything from the medium-term point of view, though.
The daily big-volume rally was followed by a daily pause on lower volume and then by another daily rally on a volume that was rather average, but higher than what we saw during the daily pause. The GDX ETF moved higher practically in exact tune with how we had indicated it in the above chart with the purple dashed lines. The mid-November rally seems to be repeating itself as miners are moving higher at similar pace. If this continues, GDX is likely to reach our upside target for this short-term rally shortly. That's in perfect tune with what we wrote about gold just above.
And what is gold doing today?
Gold Futures Right Now
It's more important to say what gold is not doing. Gold did neither move below the rising short-term support line, nor did it manage to break below the 61.8% Fibonacci retracement level despite a few quick attempts. This means that the very short-term trend remains up. Today's pre-market decline might seem discouraging, but it's well within what can be viewed as normal.
Again, we did not see a breakdown below the key short-term support levels in gold, so it's likely to move higher once again. Based on what we wrote earlier today, it's likely to do that soon.
Interestingly, the USD Index formed a major immediate-term reversal candlestick, which was followed by a clear invalidation of the breakout above the mid-November high. This is an extremely bearish combination for the very short term (and for the very short term only). The USD Index seems poised to decline in the following hours and - perhaps - the next few days, which means that gold is likely to get a very positive boost shortly.
Again, that's in perfect tune with what we wrote previously, which makes the bullish case (only for the short term) for gold even more so confirmed.
The very short-term gold chart helps to confirm our previous gold price prediction - namely, that gold will attempt to rally to $1,500, but that it could reverse before reaching this level.
Based on the 1.382 multiplicator applied to the recent short-term upswing, gold would be likely to rally a little above $1,490. Based on the upper border of the rising trend channel, gold would likely top after moving either close to $1,490, or a little above it, depending on when this border would be reached.
Why would the 1.382 multiplicator be important? Because it's yet another use of the Phi number on the gold market (1.618). Long story short, this number is ubiquitous in many places in nature, and since people are part thereof and they are active in markets, perhaps it would be present in the market movement. It turns out that it is indeed present, and it quite often works remarkably well as a tool to detect support or resistance levels. At times, it can be used to make forecasts by multiplying one of the previous moves by 1.618 or another Phi-related number (such as 1.382). And, well, it tends to work quite often, despite there being theoretically no specific reason (other than mentioned above) why 1.618 or 1.382 should work, and not 1.792 or 1.123 or any other random number above 1.0.
Since both very short-term techniques: the upper border of the rising trend channel and the Phi-based target point to similar price level, and the same goes for other gold trading techniques that we didn't cover today, it seems that gold will top relatively soon, in the proximity of $1,500, quite likely close to $1,490.
Key Factors to Keep in Mind
Critical factors:
- The USD Index broke above the very long-term resistance line and verified the breakout above it. Its huge upswing is already underway.
- The USD's long-term upswing is an extremely important and bearish factor for gold. There were only two similar cases in the past few decades, when USD Index was starting profound, long-term bull markets, and they were both accompanied by huge declines in gold and the rest of the precious metals market
- Out of these two similar cases, only one is very similar - the case when gold topped in February 1996. The similarity extends beyond gold's about a yearly delay in reaction to the USD's rally. Also the shape of gold price moves prior to the 1996 high and what we saw in the last couple of years is very similar, which confirm the analysis of the gold-USD link and the above-mentioned implications of USD Index's long-term breakout.
- The similarity between now and 1996 extends to silver and mining stocks - in other words, it goes beyond USD, gold-USD link, and gold itself. The white metal and its miners appear to be in a similar position as well, and the implications are particularly bearish for the miners. After their 1996 top, they erased more than 2/3rds of their prices.
- Many investors got excited by the gold-is-soaring theme in the last few months, but looking beyond the short-term moves, reveals that most of the precious metals sector didn't show substantial strength that would be really visible from the long-term perspective. Gold doesn't appear to be starting a new bull market here, but rather to be an exception from the rule.
- Gold stocks appear to be repeating their performance from 20 years ago, which means that a bottom in the entire precious metals sector is quite likely to form at much lower prices, in about a year
Very important, but not as critical factors:
- Long-term technical signs for silver, i.a. the analogy in terms of price to what we saw in 2008, shows that silver could slide even below $10.
- Silver's very long-term cycles point to a major reversal taking place right now and since the most recent move was up, the implications are bearish (this is also silver's technical sign, but it's so important that it deserves its own point)
- Long-term technical signs for gold stocks point to this not being a new gold bull market beginning. Among others, it's their long-term underperformance relative to gold that hint this is rather a corrective upswing within a bear market that is not over yet.
- Record-breaking weekly volume in gold is a strong sign pointing to lower gold prices
Important factors:
- Extreme volume reading in the SIL ETF (proxy for silver stocks) is an effective indication that lower values of silver miners are to be expected
- Silver's short-term outperformance of gold, and gold stocks' short-term underperformance of gold both confirm that the precious metals sector is topping here
- Gold topped almost right at its cyclical turning point, which makes the trend reversal more likely
- Copper broke below its head-and-shoulders pattern and confirmed the breakdown. The last time we saw something similar was in April 2013, when the entire precious metals sector was on the verge of plunging lower.
Moreover, please note that while there may be a recession threat, it doesn't mean that gold has to rally immediately. Both: recession and gold's multi-year rally could be many months away - comparing what happened to bond yields in the 90s confirms that.
Summary
Summing up, the outlook for the precious metals sector remains very bearish for the following months (also because of the record open interest in gold), but it seems that we will first see a short-term upswing before the decline continues. Based on what we saw in the last few days, the bullish outlook remains justified. It seems that the profits on our long positions will become bigger before we close it. We expect to close the long position later this week. Then, we plan to open a short position shortly thereafter.
On a side note, have you seen the powerful 5% decline in crude oil? Yes, we did see it in advance, and our short positions in oil greatly profited from this move.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Small speculative long position (50% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:
- Gold: profit-take exit price: $1,489.80; stop-loss: $1,437; initial target price for the UGLD ETN: $135.88; stop-loss for the UGLD ETN: $122.10
- Silver: profit-take exit price: $17.47; stop-loss: $16.27; initial target price for the USLV ETN: $89.33; stop-loss for the USLV ETN: $72.44
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $27.88; stop-loss: $25.47; initial target price for the NUGT ETF: $30.27; stop-loss for the NUGT ETF $23.08
In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $39.27; stop-loss: $35.38
- JNUG ETF: profit-take exit price: $67.97; stop-loss: $49.83
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 the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder - "initial target price" means exactly that - an "initial" one, it's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (DGLD for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn't, then we will view both positions (in gold and DGLD) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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Last week's economic data releases were mixed but investors went risk-on ahead of the Thanksgiving holiday long weekend. Stocks hovered along new record highs while the price of gold remained close to its recent local lows of around $1,450. In the coming week we will surely see more action in the global financial markets! Let's take a look at the details.
Important Economic News Calendar: December 2 - December 6, 2019
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
