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.
Today’s Alert will be very brief with regard to comments on yesterday’s price action, and it will be almost entirely a quote from yesterday’s analysis. The reason is that practically nothing changed in gold, silver, mining stocks, or the USD Index yesterday.
Gold and silver moved a bit higher, and miners were almost flat. This means that nothing changed in gold’s and silver’s technical picture’s, while the mining stocks were weak once again, thus confirming the bearish outlook for the next several weeks. For those who joined us in the last several hours and for those who haven’t had the chance to read it yet, we’ll quote yesterday’s analysis below:
On Tuesday, mining stocks have turned south once again. It was no surprise, given that their breakdown was more than verified earlier. Furthermore, the bearish encouragement that miners got from gold, the stock market, and the USD Index also confirmed their decisive move. For a better context, let’s review the chart below and our subsequent commentary from yesterday, October 7th, 2020:
We've witnessed the USD's breakout and breakdowns in the precious metals market, followed by smaller corrections. That’s both: normal and natural.
If the USD Index tendency was really descending, and it was upward in case of PMs:
- The USD Index would have declined to new lows, or at least it would’ve moved below its 50-day moving average.
- Gold would have rallied back above the $2,000 level, or at least it would’ve moved visibly above its August lows in terms of the closing prices.
- Silver would have invalidated its breakdown below the rising support line, instead of verifying it as resistance.
- Gold miners (represented by the HUI Index in the middle of the above chart) would have shown strength relative to gold. For instance, they would not have declined yesterday more than gold or GLD ETF did.
Today, it’s evident that nothing from the above happened. And why is that? Because the medium-term trend changed in August and what we see now is just the early part of the decline. It seems that the noticeable pause after this decline is close to being over. But why? We’ll get to that shortly. In the meantime, let’s take a look at the general stock market performance.
The S&P 500 Index chart is second from the bottom and based on yesterday’s profound reversal. Stocks failed to rally back above the early-2020 highs. This is important evidence in determining the precious metals sector’s performance, particularly in the case of mining stocks and silver.
The correlational values in the rows that show the links between various parts of the precious metals market and the S&P 500 Index indicate that these links are indeed positive. However, it is only in the mining stocks that this link remains strongly positive in every examined period (ranging from 10 to 1500 trading days). As far as medium-term moves are concerned, the S&P 500 and silver connection is stronger than the one between S&P 500 and gold.
Stocks failed to rally back above the early-2020 high, and therefore, in my view, they are quite likely to move lower, which would be in tune with the worsening pandemic situation.
Thus, the outlook for the next several weeks remains quite bearish. Consequently, you might wonder why we think that the current pause within the decline is over?
In a nutshell, that’s what the triangle-vertex-based-reversal technique indicated. Additionally, it was too well in pinpointing the last three short-term reversals. To put it differently, whenever the support and resistance lines cross each other, there could be some reversal.
But does it work? Not always, but in general - you can bet that it does.
For more details, let’s have a look at the following chart and our subsequent commentary from yesterday:
The short-term triangle-vertex-based reversals were quite useful in timing the final moments of the given short-term moves in the past few weeks. Please keep in mind that the early and late September lows developed when the support and resistance lines were crossed.
Now, this technique might not work on a precise basis, but rather on a near-to basis, and given the highly political character of the current month (before the U.S. presidential elections), things might move in a somewhat chaotic manner. In previous months and years, this technique worked multiple times, and it has worked recently as well.
Based on Tuesday’s decline, it seems that the early-October reversal point did mark the end of the rally. To be more precise, gold did move slightly higher after that, but most of the upswing was over at that time, turning out to be “pennies to the upside, dollars to the downside” kind of situation.
Since this technique was so useful recently and we have already witnessed a sizable downswing on Tuesday, it seems that the corrective rally is already over. Other than that, instead of being strong, this Tuesday, mining stocks declined profoundly.
The GDX ETF – the flagship ETF for the precious metals mining stocks – closed at the second-lowest levels since July. That’s now how a medium-term rally and a post-breakdown decline look like.
Instead of rallying, miners simply corrected to the previously broken rising red support line, verifying it as resistance. Since they’ve already taken a breather, they appear ready to fall further.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think it has already begun.
During the final part of the slide (which could end later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we expect silver to decline more than miners. That would be aligned with how the markets initially reacted to the Covid-19 threat.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run. However, it doesn’t make the short-term decline improbable. Markets can and will get ahead of themselves and then, at times, decline – pretty profoundly – before continuing with their upward march.
The plan is to exit the current positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 5 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is an incredibly soft and broad instruction, and therefore, additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to execute such a strategy successfully.
The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.
Summary
Summing up, considering gold's breakout invalidation above the 2011 highs, it's clear that the rally (that ended $4 above our upside target) is entirely over. Given this invalidation and the confirmed USD Index breakout, gold will probably slide much lower over the next few weeks. There are indications that the corrective upswing in the precious metals market and the pullback in the USDX are over (or about to be over), so the decline could resume any day – or hour – now.
Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it wasn't already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway.
After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-6 weeks, so it's important to stay alert to any changes.
Most importantly, please 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 earn 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 (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 in the trading section we describe the situation for the day that the alert is posted. 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).
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 "additional instruments" levels without altering the "main instruments" levels, which will 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. 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 smaller alert before posting the main one.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
