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.
Gold moved higher yesterday... For a while. Then, it reversed and closed over $20 lower, creating a profound shooting star candlestick. These candlesticks should be confirmed by high volume and that's exactly what we saw. Gold reversed on volume that was highest since late March.
All that happened while silver reversed (also on volume that was highest since late March) and miners declined. Interestingly, silver was still up during the day, while gold and miners were down.
Silver once again outperformed, while miners lagged. Gold and silver both reversed profoundly and on relatively big volume.
Is there any topping confirmation that we are actually not seeing right now?
Even the link between gold and the USD Index seems to confirm gold's top. The two charts from the bottom are the USD Index and the GLD ETF. We included the GLD ETF for two reasons.
The first reason is to make it easier to compare gold and USD (these charts are next to each other), and the second reason is to show you that, in a way, gold just moved to new highs and then declined once again anyway. The latter is important in case one wants to view the recent triangle in gold as the fourth of the Elliott Waves. The move to new highs could be the tiny fifth wave. We haven't seen it in gold futures prices, but we did see it in the GLD ETF.
Back in March, GLD topped when it declined at USD's bottom, during its intraday decline, and it happened slightly above the previous yearly high. If the USD Index just bottomed yesterday, it means that the situation is very similar.
The performance of either silver or the miners is different, which is likely linked to the relatively strong performance of the general stock market in the recent days. Relatively - meaning compared to what we saw in March.
The bearish case for the short term just got stronger.
Before replying to the question that we just received, let's take a quick look at stock market's performance.
The huge price gap that we saw yesterday seems very encouraging, but please keep in mind that the S&P 500 once again failed to close the bearish price gap that it had opened in the first half of March. So, should one trust yesterday's bullish price gap? It seems too early in our view. The above-mentioned resistance is strengthened by the late-April high, and the S&P 500 futures moved lower in today's pre-market trading... Also, please note the increase in volume - we saw the same thing at two April highs. Perhaps we're seeing yet another high, instead of a beginning of a new upswing. We shall know soon enough - stocks are trading between the price gaps and they are likely to break out or break down sooner rather than later.
From the Readers' Mailbag
Q: Have been following your letters for some time and i am a subscriber of the Gold Alert in the past 2 months. I have a short position on gold and silver miners but i am wondering if we are too early in this trade. Shortly, I think that liquidity crisis has passed b/c of huge Fed and other CB stimulus and now we are in a transition hope (reflation) period. WE might have a huge and fast correction in precious metal miners like we had in March only when we have another (maybe solvency?) crisis and people will desperately buy USD. But this might happen later this year maybe starting September onwards. I do not see a sudden crisis coming soon, especially that you bound the fast precious miner correction to the big correction in US stocks, which i do not currently see it in the short term. Also, i think that we put too much emphasis on the covid cases, unlike the most of market participants. Today SPX 500 is back to 2950 level. When and how will you change your mind about the short-term correction in the mining stocks.
A: Thank you for the message - it includes several interesting points that we would like to elaborate on.
The first thing is that one would need to define for themselves what "too early" with regard to a given trading position is. The more short-term oriented one is, the more important it is to perfect the entry moment. That is the case with our Day Trading Signals for example. The bigger and sharper the expected move is, the more sense it makes to enter it ahead of time, just to maximize the chance of not missing the move entirely. While it would be much better to enter the short positions at the exact top, it seems that given the potential size of the move lower and its possible sharpness (based on the analogy to March 2020 and to 2008), it was justified to enter it earlier.
We had liquidity crisis in 2008. Now, it was a bit different - and it still is. There are numerous similarities between 2008 and 2020, but the thing that made people seek safe haven in the US dollars was simply fear. In March, people got scared and the situation was developing very quickly. However, the reason people wanted to get out of pretty much everything remains intact, even though people are now much more optimistic. The damage to the global economy is and will be enormous. It will be bigger as the Great Lockdown continues, and the reason we are mentioning developments on the Covid-19 front is to show that the pandemic is not over yet, and the same goes for the Great Lockdown. This means that the economic activity will be limited for much longer than people - cheerfully - expect.
Please note that mining stocks' decline is likely to be exacerbated by declining general stock market, but the thing that will take them lower directly will be lower gold - and gold has just formed a major reversal.
It's not about a new sudden crisis - it's about the realization that the crisis never ended in the first place. Without paying attention to how the pandemic is developing not only in the US, but also globally it would be relatively easy to give up to the false optimism. The countries and economies will recover - eventually - but it's way too early for the stock market to be really rallying. Yesterday's rally could be attributed to a large extent to the possibility of getting a Covid-19 vaccine... Which makes it seems like everything is already over. It's not. And vaccines usually take years to develop and to be tested and verified. And even if it goes incredibly fast this time and the vaccine is developed within a year (yes, it usually takes much longer, so a daily stock market rally because of some remarks regarding a vaccine is rather ridiculous), one should consider the fact that many people won't agree to take it.
But all the above means that the big decline in the stock market is going to happen, not necessarily that it has to start right away. Still, what makes the above likely anyway, are the technical details that we outlined. Silver outperformed in a rather extreme manner, while the gold to silver ratio verifies 100 as support. The futures ratio is slightly below 100, while the spot ratio is slightly above 100.
Should we see continued strength in mining stocks relative to gold, and - most importantly - should we see gold's huge resilience during USD's rally, we are likely to join the bullish camp. We don't expect to see that happen before seeing another big decline in the PMs.
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 yesterday's reversals in gold and silver, silver's 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
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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
