Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
So far gold’s price action in September has been quite typical. It moved higher as it virtually had to in light of the USD’s decline, but shortly after Labor Day, it started to decline, just like was the case in almost all recent cases and as we described previously. Based on Friday’s closing price, gold was up $3 in September, but since it moved more than $5 lower in today’s pre-market trading, September is now a down month for the yellow metal. What can we expect to follow in the remaining part of the month and year?
Let’s jump right into the charts, starting with gold’s monthly picture (chart courtesy of http://stockcharts.com).
In the September 1 Alert, we wrote the following:
The August volume on which gold rallied in August was huge and it’s directly comparable to only one case from the past – the 2011 top. That’s the only case when gold’s monthly upswing was accompanied by volume that was similarly big. Since that was THE top, the implications here are naturally bearish.
However, there are more analogies that are also important. Considering other monthly volume readings, when gold moved higher on volume that was visibly bigger than the previous values, we get the same implication. We marked the similar cases with red rectangles. Two 2004 declines, the final part of the 2008 decline and – approximately – the 2008 top, the two 2010 corrective downswings, and finally the 2011 top were all accompanied by or preceded by huge monthly volume readings. In 3 cases (the 2008 top, both 2010 corrections) the signal was not precise as the decline started in 2 months not in the next month, but still, the efficiency of this signal in a strong bull market where gold rallied in the vast majority of months, is still remarkable.
The signal that we’re seeing right now is not a minor one – the volume was truly huge and thus the implications are not vague, but clearly bearish at this time.
(…)
Finally, there’s an interesting analogy between the 2011/2012 tops and the 2016/2017 tops. We marked the link between them with the blue lines. Actually, that’s only one line – between the 2011 and 2012 tops, which is then copied into the current situation. Surprisingly – it fits, which means that in case of the monthly closing prices, the 2017 rally could be just as significant as the 2012 rally. In other words, it could indicate that this year’s move is just a fake rally that’s here to fool the gold bulls, just like the 2012 rally did. Of course, it could be the case that the current rally is a beginning of a new long-term uptrend, but the signals – including the long-term ones - and the way the precious metals sector responded to USD’s decline in the past few months strongly suggest otherwise.
Both factors that we discussed back then remain up-to-date. Gold reversed its direction despite the early September gains and is now forming a major monthly reversal. Naturally, it’s too early to say at what price level gold will close at the end of the month, but the fact that gold erased its previous gains, almost without the USD’s help is quite profound.
There’s one more thing that we would like to add about the link that connected the previous monthly closes. Back in 2011 and 2012, the month that followed the last link – October 2012 – was the month in which gold made a new intraday high (gold moved above the September 2012 intraday high), but still declined shortly thereafter. Consequently, the fact that gold moved higher initially this month, does not invalidate the above analogy – it fits into it. The implications remain bearish.
From the weekly point of view, we once again see that what “was supposed to” become a bullish reverse head-and-shoulders pattern in gold was already invalidated.
We also see that the RSI reversed after moving close to the 70 level and the Stochastic indicator generated a sell signal. Let’s zoom in to see it more clearly.
In all previous cases both signals were followed by declines that were much bigger than what we’ve seen so far this month. Consequently, gold is likely to fall further.
Meanwhile, gold stocks once again reversed after moving into the 200-220 area. The HUI Index is not yet below 200 at this time, but the reversal action is very similar to all cases when it started declines from this area: early 2015, once in 2016 and 2 times this year – this was the third attempt of mining stocks to break above the 50% Fibonacci retracement level (the same level that gold miners reached in 2012 before declining more than 300 index points) and it seems that it was once again failed. The Stochastic indicator flashed a sell signal also in this case, confirming the bearish indications from the gold market.
In the previous alerts, we wrote the following about the above USD Index chart:
(…) The key levels (weekly closing prices) that should be invalidated are: 91.66, 92.04, 92.22, 92.28, and 93.03. Yesterday’s close of 91.85 means that if the USD closed the week without any changes, it would already invalidate the lowest of the above levels. It’s something, but it doesn’t seem enough to convince most traders about the start of a new major rally in the USD. While the USD Index hasn’t rallied enough yet, it seems that it will rally enough shortly – its ridiculously oversold not only on a short-term, but also on a medium-term basis and it declined in a parabolic fashion – that’s not sustainable. Once we see the USD visibly above 93 (say, a close at 93.5), a much bigger rally is likely to follow.
(…)
Consequently, another upswing in the USD and a close above 93.03 (preferably visibly above it) would have profound bullish implications on the value of the index and bearish implications for the precious metals market.
The USD Index is moving back and forth around the 92 level, which means that it’s currently a tough call to say which long-term support levels will be upheld and which will be broken when this week is over. However, that’s not what we meant, when we wrote about the visible signal with implications for gold, silver and mining stocks.
What we meant is how the precious metals sector reacted to USD’s decline. It didn’t, while it “should have “ rallied. In today’s pre-market trading, the metals are once again declining even though the USD Index is not (yet?) rallying. The gold-USD link is now clearly pointing to lower prices in gold in the short term.
The USD Index closed the previous week below all the mentioned key levels, which is bearish. However, instead of declining this week, it moved back to the 92 level in today’s pre-market trading, moving above two of the mentioned key levels. Is the breakdown confirmed or invalidated? It’s a tough call, so on average it seems that we should wait before drawing direct implications.
What is clear, however, is how gold reacted to what’s happening in the USD. Last week, gold declined $26 (the HUI declined almost 10 index points), while the USD Index was up by only 0.33. In today’s pre-market trading, gold is down about $5, while the USD is up by less than 0.10.
Moving back to the USD Index, please note that the declining resistance line is currently no longer at about 93, but at about 92.5.
Since the USD Index is moving around the 92 level, the 92.5 level is well within the reach of just a daily price swing.
For now, the precious metals’ reaction to the USD’s movement is the most bearish development for the former that we can see on the above charts.
Summing up, at the moment of writing these words, gold is trading at about $1,314 and it seems that the analogy to the Labor-Day worked once again. Still, we would like to emphasize that the downswing that we saw in the past week or so is nothing compared to the size of the decline that’s likely still ahead. The outlook remains bearish. Please note that if the USD Index does indeed start a major rally (and we expect it do to so), then gold’s decline could be sharper than the decline that we saw in 2012 and 2013, as back then the USD Index didn’t rally substantially. Consequently, the 1:1 analogy between them could work for prices, but not necessarily in terms of time.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: initial target price level: $1,063; stop-loss: $1,366; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $38.74
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
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
Important Details for New Subscribers
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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