Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The biggest event of the previous week was the huge decline in the USD Index – the reaction of the precious metals market – especially the mining stocks – was very specific. What can we infer from the size and additional details of the metals and miners’ upswing?
Let’s take a look at the charts, starting with the USD Index (chart courtesy of http://stockcharts.com).
The USD Index broke below the late-2016 lows on Friday and there are a few things that we would like to stress. Firstly, the USD Index declined in an accelerated manner (reverse parabola), which is how the most volatile price swings end (remember the 2011 top in gold?). Secondly, the RSI indicator is the most oversold since the 2011 bottom (yes, the situation is so extreme at this point), while the fundamental picture still favors higher USD Index values (rising rates in the U.S. compared to expansive monetary policy in the EU and Japan, despite somewhat hawkish comments from Mario Draghi). Thirdly, while the USD broke through the short-term support levels, it is now approaching a long-term one – the 2015 and 2016 lows in terms of the weekly closing prices. They are just above the 93 level – about 0.6 below last week’s low. That’s only half of last week’s decline that would need to be seen for the USD to reach these key lows. In fact, just a repeat of Friday’s decline would almost be enough.
All of these factors point to a nearby reversal and the way that gold, silver, and – in particular – mining stocks have been reacting to the USD’s decline (to a limited extent) suggests that a reversal in the USD is likely to trigger a sharp decline in the precious metals sector.
Even if the USD was to repeat it’s Friday’s decline, would it be a good idea to bet on higher PM prices or even stay on the sidelines, especially given the recent show of volatility in silver?
All in all, our previous comments on the USD Index remain up-to-date:
Moving back to the current trend, let’s keep in mind that no market can move for long in a straight line up or down and there will be periodical corrections. Even within this short-term decline in the USD, there were corrective upswings. Let’s take a look at the most recent ones (one at the beginning of June and the second one at the end of June and the very beginning of July).
The USD Index moved higher by about an index point in each case – it turned out none of these rallies marked the end of the decline, but, the key question is how did the precious metals market reacted to these events. At the beginning of June, gold and silver declined substantially, then rallied back up a little when the USD resumed its downtrend, then declined again at the end of the June and it’s now moving back up as the USD continues to slide. Overall, however, gold is reacting strongly to the USD’s strength, even if it’s something temporary and relatively small, but it is reacting in a limited way to the USD’s short-term declines, even if they are significant. Overall, gold and silver remain in a downtrend even though the same thing is the case with the USD Index.
This means two things. Firstly, even if the short-term decline in the USD Index continues for some time, it will still be likely to be interrupted by corrective upswings, which will likely (just like was the case before) trigger bigger declines in the precious metals market – bigger than the preceding rallies.
Secondly, as soon as the USD Index forms the final bottom, and a big rally starts, gold and silver are likely to truly plunge – the size and sharpness of the decline in such a situation could be very significant.
Both things have one big implication for the precious metals investors – we could see either small rallies, or sizable declines, or enormous declines. This is a situation in which short positions appear appealing, not long ones.
Is there anything else that could point us to this direction besides the USD Index chart and comparing it to gold and silver prices? Yes.
Friday’s session didn’t change the outlook in the case of gold’s price in terms of the euro and our previous comments remain up-to-date:
Gold priced in the euro has just verified its breakdown below the December 2016 low. The slide is now likely to continue. This means that gold’s underperformance relative to the USD Index is likely to continue and we could even see both decline simultaneously. That’s yet another reason for one not to view the decline in the USD Index as something significantly bearish.
Gold’s performance in terms of the Canadian dollar is also bearish – the yellow metal broke below the long-term rising trend channel and verified this breakdown by moving back to it without breaking back above it. The breakdown was also confirmed in terms of weekly closing prices.
More or less the same is the case with gold priced in the Australian dollar. There was no trend channel in this case, but gold broke below 2 important support lines (one rising and one declining) anyway. Just like in the case of the breakdown in terms of the Canadian dollar, gold moved back to the previously broken lines but didn’t close the week back above them. The implications are bearish.
In the case of the gold stocks, we wrote the following on Friday:
The gold stocks’ reaction to yesterday’s decline in the USD and gold’s upswing was once again very weak. If a market doesn’t want to move in the way it “should” given what’s taking place in the case of its drivers (and there’s no doubt that the price of gold is the key driver behind gold stocks’ profits and thus prices), it is a strong indication that the market wants to move in the opposite direction and it’s waiting for a trigger.
For now, the trigger is absent as the USD Index continues to decline – however, the point is that since the USD Index is likely to reverse eventually which is likely to translate into a big plunge in miners and until it does… Miners don’t seem to be going anywhere. The nothing-or-big-decline situation is naturally a bearish one.
The above remains up-to-date as miners remain below two strong resistance lines – one declining one based on the August 2016, April 2017 and June 2017 highs and the second one based on the December 2016 and May 2017 lows. In a way, the entire July upswing in the miners was just a verification of the breakdown below the rising support black line.
The additional significant confirmation comes from the weekly volume readings.
The volume that we saw last week was extremely low, especially when compared to the sizes of previous volumes. Theoretically, it’s a strong bearish sign as it shows that the buying power is next to non-existent.
We marked similar situations with red arrows – as you see, the weekly upswings that took place on very low volume were usually followed by huge declines. The only exception that we can see on the above chart (1 out of 5) is not quite comparable as it was the session right at the bottom and the current one is the second after the bottom, which changes a lot – the volume should be picking up right now, but it isn’t. Back in December 2013 it was the first candlestick of the rally – so the sellers might have given up and the buyers simply were able to push the market higher. Besides, trading is generally limited in the second half of December each year as it’s the holiday season.
So, it seems that in all comparable cases, huge declines followed the low-volume rallies in mining stocks – will this time be any different? It doesn’t seem likely. The efficiency of this signal alone is something that makes the outlook very bearish for the following weeks.
The precious metals are moving higher in terms of the USD, and their reaction continues to be limited – the moves may seem quite normal on the above charts, but gold and silver “should be” soaring given the reverse parabolic decline in the U.S. dollar.
Can gold and silver move higher temporarily? Yes, but very likely not much higher. Can gold and silver plunge shortly after reaching their tops and decline in a very volatile manner, similarly to what silver did recently? Naturally, that’s the key thing in the current situation – the downside potential is multiple times greater than the temporary upside potential.
Gold could move to $1,265 or so (the previous top and the rising support line), but would that really matter if gold plunged over $150 shortly thereafter? The analogous price level for silver would be $16.90 and everyone saw recently just how fast silver could decline once it’s time for it.
Summing up, last week’s sessions didn’t invalidate multiple bearish points that we had made in our previous alerts and – despite the bullish nature of the week (after all, gold, silver and mining stocks closed higher last week than on the previously) - it was yet another case of the metals and miners’ underperformance given the action in the USD Index. The breakdowns in gold prices, in terms of currencies other than the U.S. dollar, were confirmed and we saw a major sell signal from the mining stocks – they rallied on very small volume last week, and in practically all similar cases from the recent past, this meant that a big decline was about to be seen. Any strength here is likely to be only temporary.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: initial target price level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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 initial target prices:
- GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
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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