Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Why isn’t gold declining yet? Shouldn’t miners be sliding already? These are the questions that I’ll focus on today.
First of all, I assure you that if it depended on me, they would both be much lower, and the portfolios of everyone here would already be so big that the brokers and bankers would be scratching their heads in awe.
Of course, the scope of the things that do depend on me is smaller than the above. What I can do is remain as objective as possible, and analyze the situation thoroughly and applying extra care and diligence while doing so.
Fortunately, the human psyche doesn’t change (in general), and people undergo similar emotional states given similar triggers and input information overall. One of the ways in which we see this play out is that similar price/volume/sentiment situations are followed by similar price moves – even if the underlying fundamental situations are completely different. The above phenomenon even has a name – price formations. However, if the underlying fundamental situations are similar, the odds of seeing the history rhyme increase significantly.
As I emphasized multiple times in the previous days and weeks, the current situation appears to be very similar to what we saw in 2008. There are some other analogies in place as well, and I commented on many of them in Friday’s big analysis, and I even added special comments on the link between junior mining stocks and Bitcoin yesterday.
Today, I will once again focus on the key one – linking the current situation with what happened in 2008, and I’ll put the biggest emphasis on the aspect of time.
It is said that time is more important than price and that when the time is up, the price will reverse.
Well, since the situations are so alike, let’s check when the time for gold was “up” and when it moved sharply lower in 2008.
The first top in gold formed in mid-September 2008, and the final top formed in mid-October 2008. That was precisely 16 trading days later. In other words, gold has been moving back and forth close to the initial high for 16 trading days, and then it plunged.
Consequently, if gold was trading sideways for about 16 trading days after the initial top, it would be perfectly normal and a sign that a slide was about to follow.
Well, let’s check the current status.
Gold formed its initial top on March 20, 2023.
Today is the 11th trading day after that.
This means that the current back-and-forth movement does not deviate from the 2008 pattern AT ALL!
In fact, what we saw recently in gold is perfectly normal, given its link to 2008.
It also means that even if gold doesn’t plunge for a week (or even two), it won’t break the analogy by itself.
Does it mean that gold is likely to rally from here?
No, it doesn’t imply that. Gold has been unable to stay above $2,000 despite multiple attempts, and nothing suggests that this is about to change in the near term. Even the very recent move lower in the USDX didn’t allow gold to do that.
The RSI is close to 70, which means that gold is very close to being oversold, and the volume declined – it’s been relatively low during the most recent immediate-term run-up.
Speaking of the USD Index, let’s take a look at its chart.
I already wrote about it, but it’s worth emphasizing it one more time.
The sharp short-term decline after a sharp-short-term rally was typical before two of gold’s key tops. The final 2008 top and the 2011 top.
This is particularly important given all the other links to 2008.
Back then, the final bottom in the USDX was a bit (but not much) above the initial bottom. Well, guess what’s happening right now.
On a medium-term basis, the USD Index is close to its 2023 low but still somewhat above it.
On a short-term basis, the USD Index moved to (exactly) its March low yesterday.
From both points of view and given the link to 2008, it seems that the final bottom for the USD Index is either in or at hand.
What about mining stocks?
As I emphasized numerous times, miners – and in particular junior miners – tend to move more in tune with the general stock market than gold does. And that was also the case back in 2008.
Back then, stocks slowly declined – and so did miners.
This time, the outlook for stocks is extremely bearish from a medium-term point of view, but the very short-term picture is rather unclear.
I’m not sure if it makes sense to even comment on the above chart, because the analogy to 2008 is extremely clear. Starting from the same price levels – world stocks were unable to move to new highs despite so much money being created worldwide in the meantime. And now, after the analogous retracement and analogous action in RSI, world stocks stand on the edge of a cliff.
Now, thanks to the central banks’ policies, they are about to take a big step forward. :D
On a short-term basis, it looks like the small head-and-shoulders formation is finally going to end up being a broader head-and-shoulders formation.
The red, dashed line marks the neck level of the pattern. The right shoulder is likely forming at slightly higher levels, but besides that, the pattern is quite symmetrical.
While the RSI is not at 70, it is at the levels that stopped the March 2022 and the late 2022 rallies.
This, plus declining volume, suggests that the turnaround is either here or very, very near.
Consequently, we might not need to wait another week or two before seeing a top and the subsequent decline in junior mining stocks.
Speaking of the RSI indicator, please note that in the case of the GDXJ ETF, it’s very close to 70, and at the levels that corresponded to many previous tops. In particular, the current situation seems similar to what happened in April last year.
Also, let’s not forget that the GDXJ moved up in the rising wedge pattern. Breakdowns from those patterns can be very volatile.
Since the GDXJ is now just a little below the 2023 highs, let’s put the most recent events into perspective. The facts are that we are in an analogous position as we were back in January. However, in the meantime, we profitably closed the previous short position, made money on a short-term rally in the GDXJ, and also on an extra trade in the FCX. And while this trade might not seem encouraging right now, in my view, the potential for gains here is truly enormous.
Patience here is likely to be extremely well rewarded.
Just as the night is darkest before the dawn, it “seems most bullish” right before the biggest slides.
Stay strong.
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Overview of the Upcoming Part of the Decline
- It seems that we’re seeing another – and probably final – corrective upswing in gold, which is likely to be less visible in the case of silver and mining stocks.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all – perhaps with gold prices close to $1,500 - $1,550.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, we recently took profits from the additional FCX trade (right before the trend reversed!) and the current short position in junior mining stocks is – in my view – poised to become very profitable in the following weeks and perhaps days.
Things might appear chaotic in the precious metals market right now, but based on the analogy to the previous crises (2020 and 2008), it’s clear that gold, miners, and other markets are pretty much doing the same thing all over again.
The implications of this “all over” are extremely bearish for junior mining stocks. Back in 2008, at a similar juncture, GDXJ’s price was about to be cut in half in about a week! In my opinion, while the decline might not be as sharp this time, it’s likely to be enormous anyway and very, very, very profitable.
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To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; stop-loss for the JDST: none.
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.):
Silver futures downside profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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’ve 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 we describe the situation for the day that the alert is posted in the trading section. 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).
Additionally, 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 (as 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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 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. Furthermore, 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.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
