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.
It didn't take long for the mining stocks to turn south once again. No wonder, given that their breakdown was more than verified.
Additionally, they also got bearish support from gold, the stock market, and the USD Index, which also confirmed their decisive move. For more details, let's take a closer look at the chart below.
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 implication for the next several weeks remains quite bearish. Let's get back to the previous question - why do we think that the current pause within the decline is over.
In short, it's because that's what the triangle-vertex-based-reversal technique is currently suggesting, and it was able to pinpoint the last three short-term reversals very well. In short, whenever support and resistance lines cross, there's likely to be some type of reversal. But does it work? Of course, not all the time, but in general - you can bet it does. Please take a look at the chart below for details.
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 yesterday's decline, it seems that the early-October reversal point did mark the end of the rally. To be precise, gold did move slightly higher after that time, but the vast majority of the upswing was over at that time, and it was the "pennies to the upside, dollars to the downside" kind of situation.
Since this technique was so useful recently, and since we already saw a sizable downswing yesterday, it seems that the corrective rally is already over.
Other than that, instead of being strong, mining stocks declined profoundly yesterday.
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 looks like. That's how a post-breakdown decline looks like.
Instead of rallying, miners simply corrected to the previously broken rising red support line, and they verified it as resistance. Since miners have already taken a breather, they appear ready to fall further.
Letter to the Editor
Q: Dear Mr. Przemyslaw-Radomski,
Firstly, I have just joined your website, I must say your commentary and analysis are very interesting.
As for the Dollar, I wonder if the current "breather" is more like failing to rally and as a result gold price may already reached a premature 6-month low last week when it bottom (1,853). Is it possible that gold continue its momentum to them upwards?
In case the democrats and republican agreed on a new stimulate package before Nov election this could affect the near term gold price prediction, doesn't it? I don't see what interest the democrats has to pass the package before the election and give Trump the full credit for that...
Thanks for taking the time to read my question. I look forward to hearing your thoughts on that.
A: Thank you for your kind comments and the questions.
As for the first question, it's always possible that a given move in a market will happen, but the real issue is whether it's possible and if it's likely enough to trade this move or invest based on this likelihood. In my view, it is highly unlikely that gold continues its rally right away. The key two reasons are the USD Index situation, the breakdown in gold (below the medium-term support line), and the self-similarity to what happened in 2013. I elaborated on all of them on Monday's flagship analysis, so I encourage you to read it, focusing on the long-term USD Index chart (please note the clear invalidation of the small breakdown in it) and the self-similar analysis of gold (gold's long-term chart, on which I pasted gold's recent short-term movement).
As for your second question, I think that the information regarding another stimulus package is already "priced-in". By that, I mean that the markets have already taken it for granted that there will be more stimulus money coming in, and based on that, prices have already rallied. The talks about another round of stimulus money have been around for weeks, and markets had plenty of time to discount it (i.e., move based on it).
However, markets can still move if there is surprising news, based on the surprise's extent. If the stimulus is much bigger than expected, USD could decline while stocks and precious metals move higher in the short term. If the stimulus is announced and it's smaller than what was expected, the USD could rally while stocks and precious metals decline.
In my opinion, it's much more effective to focus on the technical indications from the charts than to try to guess what the politicians are going to come up with before or right after the elections.
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, but it doesn't make the short-term decline improbable. Markets can and will get ahead of themselves and then decline - sometimes very profoundly - before continuing 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 a very soft and broad instruction, so 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 successfully execute such a strategy.
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, 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
