Briefly: in our opinion, full (150% 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.
The key development of yesterday's session was the decline in gold stocks and decisive invalidation of HUI Index's breakout above its 2016 highs.
We previously commented on the above chart in the following way:
The HUI Index invalidated the breakout above the 300 level, and it also invalidated the breakout above the 2016 high (286.05) in intraday terms by closing at 285.13. This made the bearish picture for gold miners more bearish. The final confirmation of the top being in, will be gold stocks index's close below the highest weekly close of 2016 - 278.61.
The reason we're giving so much attention to the 2016 high right now and so little to anything else - at least in case of the gold stocks - is that what happens with regard to it really is the key to the miners' technical outlook. Confirmed breakout above the 2016 high would be likely to result in a bigger move higher, while its invalidation is likely to result in a bigger move lower.
Given the fact that gold is not moving up despite USD Index's sizable daily decline, it seems that we might see declines in gold and gold miners shortly (as soon as the USDX regains strength), and the decline below HUI's highest weekly close of 2016 will serve as a great bearish confirmation for gold, silver, and miners alike.
The HUI Index just closed at 270.55, which is clearly below the highest weekly close of 2016. This serves as a strong bearish sign, and it will be even more bearish when the HUI manages to close the week below the 2016 weekly high as well. There are only three sessions left (including today) before the end of the week (and month), so it will be very important where the HUI Index closes on Friday.
At this point, you might be asking yourself what's the big deal with the invalidation of the 2016 breakout and why are we placing so much emphasis on it.
One thing is that breakouts above previous highs are an important technical sign and everyone can clearly see them, and so are invalidations. The more profound the previous high is, the more important the implications become. And the 2016 high was indeed profound.
The second thing is that we saw exactly the same thing in the GDX ETF earlier this year. The GDX moved above its 2016 high in late February 2020, and it then invalidated this breakout. Do you know what happened then? The February-March carnage.
The third thing that makes yesterday's decline and invalidation of the breakout so important is that it was accompanied by developments that should have caused gold miners to rally. This shows just how badly miners really want to slide from here.
The general stock market rallied above all important nearby resistance levels (the next strong resistance is provided by the March highs). It even closed the early-March price gap. And miners still declined!
Junior miners are more closely correlated with the general stock market, and while the GDXJ declined a bit less than GDX, the rising stocks didn't prevent juniors' decline. While GDX declined by 4.14%, the GDXJ ended the day 3.36% lower.
If the stock market continues to rally, GDXJ is likely to be stronger than GDX, but:
- I doubt that the rally in stocks is sustainable
- Both: GDX and GDXJ are likely to fall anyway.
One of the reasons for the second point is the weakness in both mining stock ETFs relative to stocks, and the other reason is yesterday's weakness of gold relative to the USD Index.
The USDX declined profoundly yesterday, but it didn't move below the April lows, so the bullish implications of the support provided by them remain intact. The USDX moved very briefly below the late-April low, but then moved back above it.
What is striking is that gold didn't soar in light of yesterday's decline, but it actually declined quite visibly. Gold declined also in today's pre-market trading - at the moment of writing these words, it's trading a few dollars below $1,700.
Gold refused to follow USD's bullish lead, which is clearly bearish.
Moreover, thanks to the recent decline, gold is erasing the previous May gains.
Taking today's pre-market decline into account, gold futures are currently up by just $4 in May.
The most interesting thing about the above is that it corresponds to the way gold topped in 2008 right before the final slide. There was a monthly high that was very close to the previous months' high and then gold plunged. In other words, the analogy seems to be developing as we had outlined:
In 2008, after the initial plunge, and a - failed - intramonth attempt to move below the rising support line, gold came back above it and it closed the month there. The same happened in March 2020.
During the next month in 2008, gold rallied and closed visibly above the rising support line. The same was the case in April, 2020.
In the following month - the one analogous to May 2020 - gold initially moved higher, but then it plunged to new lows and finally closed the month below the rising support line. We might see something very similar this month.
In fact, it seems that we have already seen something very similar this month - gold moved very close to the April highs, but failed to break higher and it's now declining. It's too early to say with 100% certainty that the top is already in, but combining this with what we see on gold's seasonality chart, makes it likely that the top is already in or that it will form before the end of this month.
Summary
Summing up, despite the very recent moves higher, especially in silver, the outlook for the precious metals market is bearish for the next few weeks, and it's very bullish for the following months. Even if gold, silver, and mining stocks are not going to move to new 2020 lows, they are still likely to decline visibly when the USD Index soars. Based on silver's outperformance and the verification of the breakout in the gold to silver ratio by the move back to the 100 level, and invalidation of gold stocks' breakout above their 2016 high in intraday and closing price terms, it seems that the short-term upswing has already ended.
After the sell-off (that takes gold below $1,400), we expect the precious metals to rally significantly. The final decline might take as little as 1-3 weeks, so it's important to stay alert to any changes.
Most importantly - 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 make much more in the following weeks and months), but you have to be healthy to really 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 (150% 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: $10.32; 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: $231.75; 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: $9.57; 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: $284.25; 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: $8.58 (the downside potential for silver is significant, but likely not as big as the one in the mining stocks)
Gold futures downside profit-take exit price: $1,382 (the target for gold is least clear; it might drop to even $1,170 or so; the downside potential for gold is significant, but likely not as big as the one in the mining stocks or silver)
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
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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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
