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 most recent short-term move in the precious metals sector was to the downside, but it's not yet big enough for us to say that the top for this monthly rally is 100% in. It quite likely is, though.
Miners moved lower yesterday, while gold and silver moved up. However, in today's pre-market trading gold is down by over $10 and silver is down by more than $0.40. This is taking place as the USD Index is slowly turning back up - it's up by 0.25 at the moment of writing these words, which is next to nothing, but still a notable change in the very short-term trend.
The gold to silver ratio based on spot prices moved back up, after verifying the breakout above the 100 level. The spot-price-based ratio is currently trading above 101.
The pre-market silver move is particularly interesting, as silver's tops are often most clear due to their shape - it's quite often a big, clear spike.
The above 4-hour chart shows that silver just reversed once again. The previous reversal was quickly followed by even higher silver prices, so it's too early to open the champagne and claim that the top is definitely in, but given silver's recent clear outperformance of gold and the verification of the breakout above the 100 in the gold to silver ratio, the above seems quite likely.
Once silver futures break below the $17.17 level (the most recent low), it will be almost crystal-clear that the top is in. The next very short-term target area for silver is between $16.30 and $15.80. Then, after a brief pause, we would expect the decline to continue.
The HUI Index invalidated the breakout above the 300 level, but it didn't invalidate the breakout above the 2016 high (286.05) just yet. Once it does that, the bearish picture will become even more bearish.
Ideally, we would like to see the HUI Index close below the highest weekly close of 2016 - 278.61.
If the stock market slides here, the above-mentioned invalidation of the breakout above the 2016 highs will be almost inevitable.
But will they slide?
While we get into details in our Stock Trading Alerts (and Stock Pick Updates when it comes to individual stock selection), we can quickly say that stocks are currently in a make-or-break situation.
They closed the price gap yesterday and they declined in today's pre-market trading. Depending on the next short-term move in the stock market, we will see either a decisive breakout above the above-mentioned price gap and the 61.8% Fibonacci retracement level, or invalidation of the move above it and likely another sizable downswing.
In my opinion, as long as the breakout above the upper border of the price gap is not confirmed, another move lower in stocks is quite likely.
Before summarizing, we've been asked about the increase in volume of the DUST ETF in the last several days, and whether it means anything. In short, it most likely doesn't. Volume details are provided in terms of numbers of shares, not in terms of their value. As the price of DUST declined, the same amount of dollars means that more shares are going to be traded. For instance, the value of the NUGT or GDX didn't change that much recently on a relative basis, so it doesn't really confirm anything special as far as the price-volume analysis is concerned.
We were also asked when is the precious metals market likely to decline. It's likely to decline shortly as silver has already outperformed gold in a clear and significant manner - this happens in the final part of a given upswing. We are likely to see decline based on the above even if the stock market and the USD Index don't move as I anticipate (up for the USDX and down for stocks). If we see a big move higher in the USDX, the decline in the PMs and miners is likely to be particularly huge.
Both: USD Index, and the EUR/USD exchange rate have been moving sideways for about 2 months, with decreasing volatility. The most recent moves in them were up (USDX) and down (EUR/USD). It seems more likely that the end of this consolidation will take form of a breakout in the USD Index and breakdown in the EUR/USD currency pair.
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 Monday's reversals in gold and silver, as well as today's pre-market declines, silver's previous outperformance and the verification of the breakout in the gold to silver ratio by the move back to the 100 level, it seems that the end of the current short-term upswing is at hand.
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
