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.
In yesterday's Gold & Silver Trading Alert, we emphasized the importance of miners' very poor relative performance, and whatever we wrote about Wednesday's session, we can say once again - but with double emphasis - about what we saw yesterday.
In yesterday's analysis, we wrote that miners had closed higher by $0.05. Since they declined by $0.30 yesterday, the total net change of the last two days is minus $0.25.
The GDX ETF is mere $0.39 above its July 27th close. Gold moved over $100 higher during this time, which means that miners have basically shrugged off gold's rally in the last several days.
This most likely means only one thing - that miners are about to fall. And when they fall, they are likely to fall hard.
This decline would not end the bull market in its entirety, neither in the precious metals, nor in the miners. It would, however, likely be a massive short-term corrective downswing that the precious metals sector needs before it can climb further.
In the last few analyses, we wrote the following:
Based on gold's Fibonacci extensions and the previous major highs and lows (the 2018 high and late-2019 low along with the 2020 low), we get a nearby upside target of $2085. At the moment of writing these words, gold is trading at $2044. Given this week's volatility, it could even be a matter of hours before gold reaches the above-mentioned target and reverses. Taking closing prices into account, gold is up by $35, so if it reverses significantly, we would be likely to see a powerful weekly reversal candlestick and one that causes gold to decline in the following weeks.
In today's pre-market trading, gold moved to $2,077.50 and then it declined. It was relatively close to our approximate target of $2,085, so it could be the case that the top is already in. It could also be the case that gold moves slightly higher once again and then tops.
Miners are already lower in today's pre-market trading, so it seems quite likely that they have already topped.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think that after bottoming temporarily at about $1,700, gold, silver and miners will bounce back - perhaps $30-$50 or so in gold, and then we will probably see another move lower, with silver declining more than miners. That would be in tune with how the markets initially reacted to the Covid-19 threat.
At this time it seems that after the initial decline to $1,700, gold could correct and then decline to $1,500 - $1,600 and that would be the final bottom - one that would hold for years, perhaps decades.
Still, it's possible that the $1,700 bottom in gold would be the final bottom.
How will we tell, which scenario is more likely - a decline visibly below $1,700 or just to it? Based on the way different parts of the precious metals sector react to the decline and to the initial rebound. If silver catches up with the decline when gold moves to $1,700, but miners lead on the way back up (strongly so), it will be more likely that the bullish scenario prevails. If we see the opposite - miners are weak during the rebound and silver doesn't catch up with the decline once gold approaches $1,700, the bearish case will prevail. Anything in between will require additional confirmations and we will keep you - our subscribers - updated in any case.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is very positive in the long run, but it doesn't make the short-term decline unlikely. In the very near term, markets can and do get ahead of themselves and then need to decline - sometimes very profoundly - before continuing their upward march.
Summary
Summing up, gold soared well above $2,000 but the USD Index hasn't invalidated its short-term breakout and mining stocks continue to underperform. This means that mining stocks are still likely to decline significantly once gold does finally decline, and that the corrective decline is likely to start any day now.
While short trading positions in gold or silver appear too risky, it seems that the risk to reward ratio continues to favor open short positions in the mining stocks. They are not willing to significantly react to the bullish news, but they are very willing to react to the bearish news (as we saw on July 30).
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 to increase its size if it wasn't already sizable, it's now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it's a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.
After the sell-off (that takes gold below $1,600), 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 - 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 (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
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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
