Little-known Mining Stock Ratio and Gold-Yen Link

tools spotlight

Briefly: in our opinion, full (250% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

When gold soars or plunges in terms of the U.S. dollar, everyone is aware of it. When silver does the same, most investors are also paying attention. But, when we move into the realm of other currencies and something important happens in one of the PM-related ratios, almost nobody knows that it happened. Well, important things are happening behind the curtains and we’ll make sure that you’re aware of them and positioned accordingly. Let’s start with the currency part.

The Gold-Yen Link

Several weeks ago, we discussed the gold-yen link and while gold has declined since that time, the value of the Japanese currency didn’t decline relative to the U.S. dollar and we were asked over what period should one expect this link to work. That’s a very good question and to reply to it, we’ll refer to the long-term yen chart (charts courtesy of http://stockcharts.com).

Japanese Yen Philadelphia Index

In short, one can expect the link to kick in within several weeks. Sometimes the yen leads the way (like in 2012 and 2013) and sometimes gold leads the way, like it’s been the case in the last couple of weeks.

This doesn’t make the link any less useful. If gold leads the way, the link serves as a very useful confirmation. In this case, the breakdown in the Japanese yen will very likely confirm that the big move in gold is underway.

And, speaking of breakdowns, we are seeing one right now and we saw a prolonged confirmation of another breakdown. The Japanese yen moved below the rising red support line several weeks ago and it’s been verifying this breakdown since that time. This week, the yen finally moved lower and declined also below the rising support line based on the 2015 and 2016 lows. The implications are bearish for the yen and gold, and bullish for the USD Index.

Having said that, let’s take a look at the little-known mining-stock-related ratio. Many people are aware of the gold stocks to gold ratio, but not many investors take a look at the ratio between gold stocks and the general stock market.

Gold Stocks vs. Other Stocks

The two major factors that impact gold stock prices are the price of gold and the value of the general stock market (after all, they are stocks as well). By looking at the ratio between gold stocks and other stocks, we are taking out the other-stock factor, while leaving the gold factor. Consequently, we’re getting a specific proxy for gold that is likely to – and usually will – have its own price patterns that can be used for confirmation or invalidation of signals coming from the gold price analysis.

Gold Bugs Index/ S&P 500 Large Cap Index

We have just seen a major breakdown in the value of the ratio. It moved below its 2015 lows after taking a brief pause at this level. The pause actually adds credibility to the breakdown, because it’s not an emotionally-driven and likely accidental move. The emotionally-driven move was stopped by the previous lows. The price paused and it’s starting a new slide that’s yet to gain momentum. The implications are very bearish.

Gold Bugs Index/ S&P 500 Large Cap Index

This is the case also because – just like what we see on the HUI Index chart – there is no strong (or even average) support until much lower levels.

The implications are very, very bearish. Not only for the ratio and mining stocks, but for the entire precious metals sector.

Another Relativity-based Confirmation

On one hand, it’s kind of boring to report the same factor over and over again, but on the other hand, it’s great, because it makes it more and more confirmed that big price declines are still ahead and our profits are likely to increase even further.

The USD Index moved a bit lower yesterday and gold moved a bit higher. But, mining stocks declined anyway, once again showing exceptional weakness. This weakness is a very strong bearish indication for the following days and weeks.

Important Analyses

Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:

Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
Preparing for THE Bottom in Gold: Part 7 – Buy-and-hold on Steroids – description of a strategy dedicated to significantly boosting one’s long-term investment returns while staying invested in the PM sector.
Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
Gold: What Happened vs. What Changed – discussion of the latest extreme readings from gold’s CoT report
Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.

Summary

Summing up, it’s very likely that the pause in the precious metals market is over and the next big move down is already underway. The move is likely to be sharp and the profits on the current short position are likely to change from being huge to being enormous and then finally to being ridiculous.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

Gold: profit-take exit price: $1,062; stop-loss: $1,226; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $53.67
Silver: profit-take exit price: $12.72; stop-loss: $15.16; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $31.37
Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $19.61; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $33.37

Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. 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 target prices:

GDXJ ETF: profit-take exit price: $17.52; stop-loss: $29.43
JDST ETF: initial target price: $154.97 stop-loss: $64.88

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.

=====

Latest Free Trading Alerts:

Stocks were mixed on Wednesday, as investors continued to take profits off the table following the recent rally. The broad stock market remains relatively close to its new record high. Is this a topping pattern or just pause before another leg up?

Mixed Market, Topping Pattern or Just Pause Within a Rally?

=====

Hand-picked precious-metals-related links:

PRECIOUS-Gold gains on short-covering, softer dollar

India's Aug gold imports double, hit 15-month high as prices drop -GFMS

WPIC Platinum Quarterly Q2 2018

CME Group Gold average daily volume climbs 29% y/y in August

=====

In other news:

World shares fall for fifth straight day, hit by trade war jitters

Bear Market Looms for Emerging Stocks as Trade Noise Gets Louder

Bitcoin Bloodbath: News From Goldman Sachs Is Behind Today's Plunging Cryptocurrency Prices