Briefly: in our opinion, full speculative long positions (150% of the regular position size) in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert. In our view, no positions in gold or silver are currently justified from the risk to reward point of view. We expect to change our position soon (very likely this week). We are adjusting the profit-take levels for all positions.
Practically everything that we wrote yesterday about the big picture remains up-to-date, so today's analysis will be dedicated to the two mining stock ETFs that we are currently focusing on in case of our long trade: GDX and GDXJ. We will show you what determines the current target area, and we will explain why we are moving our profit-take levels higher.
But first, a quick update regarding the outlook for gold. Yesterday's session strongly indicated that the yellow metal can - and is likely to - decline during this crisis. Gold is an excellent hedge against major wars, financial crises, and hyperinflation. During war times, currencies might not be as good as a precious metal that used to be money for thousands of years. During financial crises and hyperinflation, gold helps to preserve one's purchasing power when things go south.
What's happening right now is none of the above cases. This is a major global pandemic, and gold's ultimate-store-of-wealth status won't help much. It's not a war - we don't have the need to use gold as money. It's not a financial crisis - there might be local liquidity shortages, but the Fed and other banks are standing ready to provide the liquidity as the need arises. It's not hyperinflation either.
And you know what gold needs to fulfill its role as money? Human contact. You need to handle it over to someone (or receive it) to facilitate the trade. Right now, it's the last thing that is advised. Instead, electronic payments and credit cards (especially touchless technology) are much preferred.
It's not a situation in which gold shines.
Of course, just like in 2008, gold is likely to regain value quicker than stocks as people want to have some hedge against the worst anyway, but gold likely won't be immune to further major slides.
Still, silver and miners are likely to drop harder as they are also likely to decline based on the slide in the stock market.
And speaking of the stock market, while the specific trades in the S&P 500 are governed by our Stock Trading Alerts, and stock selection market-neutral strategy (which greatly outperforms S&P 500 right now...) is taken care of by our Stock Pick Updates (this might be a good time to consider these services), we will still cover the general stock market here, to the extent that it's useful for explaining the moves in the precious metals.
In this case, we would like to draw your attention to the specific pattern in the daily candlesticks.
The Clues from the Stock Market
The S&P 500 futures are posting lower intraday lows, but the pace at which it declines overall, has slowed down compared to previous days.
Given all the similarities (as discussed yesterday) to 2008, did we see something similar back then, and if so, what happened next?
We did. Just before the sizable corrective upswing. This indicates that the stock market is likely to correct upwards anytime soon.
There are also three big non-market factors that make it even more likely.
First, the Fed's interest rate decision is tomorrow, and it could be the case that the Fed pumps even more liquidity into the system.
Second, which is related to the first point, is that just after the Fed's major surprising move, the market declined anyway... Which makes the Fed look... Well, stupid. The officials don't like to look stupid, and Fed's credibility is of utmost importance, especially now when they have used most of their bullets. This means that the Powers That Be will likely use whatever trick they could to make the stock market rally. Perhaps by asking their investment banker friends to start buying stocks (or maybe they will be rather "persuading" them than "asking"). Or perhaps short-selling will be banned... Which brings us to the third point.
Third, the short-selling is already being banned in Europe. Quoting from Reuters:
France, Italy and Spain are introducing curbs on stock market trading on Tuesday, banning short-selling to shield some of Europe's biggest companies from a sell-off triggered by the coronavirus.
France is banning short-selling on 92 stocks, the financial markets authority said as it tries to calm market turmoil. Belgium also took a similar step.
The Powers That Be desperately want to stop the declines and... We think they will succeed. But only for a while. This "while" will be enough for the market to take a breather and get ready for another powerful leg down.
This creates a very bullish situation for the mining stocks (in the very short term), which were recently led lower by the stock market. Silver might be affected as well. Given how silver corrected in 2008 after a similar slide, it would now be likely to correct to about $14, which more or less means a verification of the breakdown below the 2015 lows by moving back to them. Some may want to bet on silver's or gold's rebound and it would probably be successful, but we will focus on mining stocks, which offer better risk to reward opportunity in our view. Plus, they already showed substantial strength by rallying yesterday, despite not having a good reason to do so (gold, silver, and stocks ended yesterday's session lower), despite being extremely oversold previously.
Ok, so how high are the GDX and GDXJ likely to move?
Actually, based on their yesterday's strength, and the fact that the rebound in the main stock indices has yet to start, it seems that they will move higher than we initially thought.
Both target areas are created based on the same techniques, so we will discuss them at the same time.
The Miners' Targets
The GDX and GDXJ have already rallied by about 20% yesterday. Since you were buying relatively close to the intraday lows (either in the final 25 minutes of Friday's session or early in Monday's trading), it means that your unleveraged long positions in these ETFs are already about 30% profitable. The leveraged ones might be close to doubling their entry price. Talk about a quick profit opportunity...
Anyway, the strength of the miners is a very good indication that the entire precious metals sector is about to move higher in the very short term.
Now, there are several techniques that we can use to estimate the likely upside target, the first of them being the Fibonacci retracements. They range from about $22 and $26 (GDX) and from $30 to about $36 (GDXJ).
Second tool would be the rising resistance line that's at about $24.5 in case of the GDX and $31 in case of the GDXJ. These didn't work during the decline at all, so we don't view them as strong resistance at this time either.
Third tool is the upper border of the price gap - about $25 in GDX and about $34 in GDXJ.
The fourth tool is the resistance provided by the late-2019 lows - at about $26 in the GDX and at about $35.50 in the GDXJ.
The fifth tool is the late-February low. This might be viewed as double-counting of point four, but it deserves its own point as it means that the previous point is much stronger. The low was at about $25.5 in the GDX and $35 in the GDXJ.
Based on the above, the strongest part of our target area is its upper part - at about $25.50 - $26 in the GDX and at about $35 - $36 in the GDXJ. It's confirmed by three of the five above-mentioned tools.
But will the miners be able to generate the momentum needed to rally as far? They already did. They soared back up even without help from gold, silver, or the general stock market. Once the stock market rallies, and PMs correct, miners would likely gain the most. This is in tune with the general way in which the PM market works. Miners tend to rally first, and silver tends to catch up later.
Consequently, we are moving our profit-take levels to just below the lower border of these narrow target areas. At the same time, we would like to ensure you that we are monitoring the market, and if there are meaningful topping signs, we would likely exit this long position and take profits off the table even before these targets are reached. For now, it seems to be justified from the risk to reward point of view, to let them grow.
Summary
Summing up, the 2020 top in the precious metals market is in. Gold declined on record-breaking volume, while silver plunged below its 2015 lows and miners declined the most they had declined during one week - ever. The outlook for the following months is extremely bearish, but a short-term rebound is likely (and it's already taking place in case of the miners). It's particularly likely in case of the mining stocks as they tend to outperforming during the initial parts of the upswings.
The profits on the new long positions in the miners are already very profitable, but it seems they will become even more so before we close them.
After the corrective upswing is over, we plan to go back on the short side of the precious metals market.
By the way, we recently opened a possibility to extend one's subscription for a year with a 10% discount in the yearly subscription fee (the profits that you took have probably covered decades of subscription fees...). It also applies to our All-Inclusive Package (if you didn't know - we just made huge gains shorting crude oil and are also making money on both the decline and temporary rebound in stocks). The boring time in the PMs is over and the time to pay close attention to the market is here - it might be a good idea to secure more access while saving 10% at the same time. You can proceed using the following link and in case you have some questions, please don't hesitate to contact us:
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As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative long positions (150% of the full position) in mining stocks (but not in gold nor silver) are justified from the risk/reward perspective with the following binding exit profit-take price levels:
Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $24.89; 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 NUGT ETF: $13.74; stop-loss for the NUGT 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: $32.89; 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 JNUG ETF: $13.93; stop-loss for the JNUG ETF: none (the volatility is too big to justify a SL order in case of this particular trade)
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
