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.
Yesterday’s session started in the red for gold, silver, and mining stocks, but only the metals ended the day lower. The mining stocks reversed and both: GDX ETF and HUI Index ended the session higher, thus showing significant strength. The inverse head-and-shoulders pattern is not complete, but given this kind of strength, it could be complete shortly. But is it likely?
No. It’s not likely as the kind of reversal is something that we saw quite a few times in the early days of the previous declines, and it might be the case that the reason for mining stocks reversal was simply an analogous reversal on the general stock market. Let’s take a look at the details(charts courtesy of http://stockcharts.com).
Miners’ Strength
The early July top was followed by a sizable decline and then a reversal that was quite similar to what we just saw. Yesterday’s move was bigger, but the overall shape of the session is alike. And it was not the only time when we saw something like that. The late-February 2017 and the mid-April reversals that took place right after the initial declines were also just pauses that didn’t change the outlook. So, why should yesterday’s “reversal” be any different?
The miners have declined visibly on Friday, when gold and silver did. If we take both previous trading days into account, we get a decline in both: metals and miners.
Moreover, miners had a good reason to reverse – the general stock market reversed.
Every now and then, the miners (and sometimes silver) get influenced by what’s going on in the main stock indices. It seems to have been the case in the last two trading days. Based on just Friday’s session, it didn’t seem that the link was really strong, but seeing two days in a row of the analogous performance is convincing.
What does it mean? It means that for a day or two (it is rarely the case that these links persist for a long time) miners could continue to be influenced by the general stock market. It doesn’t change anything regarding the overall trend for the mining stocks, or the precious metals sector in general. But it does tell us that today and tomorrow, we may want to be skeptical toward signals coming from the mining stocks, especially if they move in tune with the S&P 500.
In other words, if the S&P 500 rallies from here and miners move higher as well, then it will most likely not be a sign of real strength in the precious metals sector.
Meanwhile, silver plunged and erased its recent strength in just one day, just like we’ve been expecting it to.
Silver’s Slide
The “silver signal” worked once again and once again those who believed in silver’s relative strength lost capital. Fortunately, you were not among them.
What’s interesting about silver’s recent performance is that despite several attempts, the white metal was unable to close the day above the 50-day moving average. But it took just one daily decline for silver to close below the 20-day MA. In the late September silver rallied right after failing to break below this level, so yesterday’s breakdown in terms of the closing prices is quite important.
Even though a lot happened in mining stock and silver, in our opinion, the most interesting and most important development took place in gold.
And the reason is the analogy to what happened in 2013. We already wrote about this similarity and we emphasized how striking it is that multiple factors align as they did over 5 years ago. But based on what we saw yesterday, the similarity became even more apparent.
Here’s what happened in 2013 right before the $200+ plunge.
Gold’s Key Analogy
And here’s what happened recently:
After the initial (mid-February 2013; mid-August 2018) bottom, the price of gold moved sharply higher and started a consolidation that took about 1.5 months to complete. There was an initial breakdown below the consolidation and there was a temporary low (early April 2013, late September 2018), which was then followed by a sharp rally that did not take gold to new highs. The top that formed at that time (first half of April 2013, early October 2018) was the final top before the decline and higher prices were not seen since that time.
The decline started with a daily slide that took gold about 1.5% lower (gold had declined by 1.63% on April 10th, 2013 and gold declined 1.41% yesterday). Then we had just one day of pause (April 11, 2013 and – perhaps – today) before all hell broke loose.
Just one day.
If the analogy remains intact, then we may have a fake pause today that makes most investors think that the decline is over. And then it might start – THE decline.
Of course, we don’t have to see a 1:1 repeat of what happened over 5 years ago, but since the similarity has been so extreme, it appears to be justified to expect the big declines in the near future.
On a side note, gold formed the recent top right at the vertex of the short-term triangle pattern, once again confirming the usefulness of this technique. But, to be honest, if it wasn’t for this triangle, then the top would have likely been formed anyway because of the much stronger long-term reversal signals.
We commented on them in yesterday’s Alert in the following way:
The key things that we see on the above gold chart are gold’s very long-term turning point, and the vertex of the triangle based on the previous major extremes (2012 and 2017 tops, and 2015 and 2016 bottoms). They both point to a major reversal that’s likely to take place right now or very close to the current moment. We recently saw a short-term top, so perhaps that was the final top before a very important price decline. That’s what appears likely, based on multiple signals that we have in place, including the remarkable similarity to 2013, so the thing that these two techniques imply is that “it’s time”.
Before summarizing, we would like to briefly comment on gold’s performance in terms of the euro.
We previously wrote that the recent strength was nothing more than a verification of the previous breakdown and yesterday’s slide confirms it. Gold’s price moved significantly lower, verifying the late 2017 bottom as strong resistance. The implications are bearish.
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.
- The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
- Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.
- Changing One's Mind - Why, When, and How – discussing the way of analyzing the market that helps to stay focused on the growing one’s capital while not being influenced by the loss aversion bias.
Summary
Summing up,the outlook for the precious metals sector remains extremely bearish and based on the similarity to the 2013 decline, it seems that gold could truly plunge shortly – perhaps as early as this week. Precisely, it’s most likely that we’ll see a pause today and the big decline will take place tomorrow, but the history may not repeat in 100%, so it’s better to be prepared right away and to also be prepared to wait for additional few days for the decline’s start. All in all, it seems that the huge profits on our short positions will soon become enormous. And Friday’s underperformance of mining stocks seems to indicate that the waiting for decline’s continuation may be over.
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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