New Day, New Signal for Gold

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Briefly: in our opinion, full (200% 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.

Last week ended and provided us with multiple signals that made the case for the next big move even stronger. In yesterday’s alert, we wrote that this was no time to be hesitating what to do, but to be prepared, and to profit. It seemed that the situation couldn’t get any clearer. And this was wrong. We got an additional strong signal that confirms that the current risk to reward ratio is not just great – it’s amazing.

The signal is the precious metals’ weakness in light of the move lower in the USD Index and a (small, but still) move higher in the Japanese yen. Metals and miners were likely to rally at least a little based on the above. They didn’t manage to do even that, showing that the direction of the next move is definitely down. Practically nothing else happened yesterday, so today’s alert will focus on the mentioned currency-PMs link. Let’s start with the USD Index (charts courtesy of http://stockcharts.com).

USD’s Inconsequential Decline

The USD Index declined once again yesterday, this time by 0.23. Even though it doesn’t look like a big deal, it was actually the biggest daily decline in several days. Gold, silver, and mining stocks should have reacted positively to this move – especially if they were to rally from here.

Nothing like that happened. A tiny rally would have already been a bearish sign in light of the mentioned expected performance. A session that PMs would close unchanged would be even more bearish. But we didn’t get as much strength. We saw a decline and a move below the previous short-term lows. That’s as bearish as it gets. Well, theoretically, we could have seen a big slide on huge volume, but expecting this along with a decline in the USD is rather unrealistic, unless that’s the final part of a decline. So, overall, we got a perfect bearish confirmation.

Having said that, let’s move to the part of the USD Index that’s particularly closely connected to gold’s performance – the Japanese yen.

Yen’s Verification

In the previous Alerts, we wrote the following about the Japanese currency:

And we saw it. The Japanese yen just broke below the key long-term support line. Also, when viewing the currency while using the linear scale instead of a logarithmic one, this breakdown took place even sooner.

This is the most profound development on the long-term yen chart since the late-2016 breakdown. The results are clearly visible – a huge decline in the currency. And in gold.

There are multiple factors pointing to lower gold prices right now and this breakdown is one of the most important ones. Naturally, the breakdowns need to be confirmed, before their implications are completely bearish. But, let’s keep in mind that the yen is already after short- and medium-term breakdowns.

The Japanese yen closed the week below the rising long-term support line and the breakdown below the medium-term support line was confirmed by the third consecutive close below it. Both mean that the outlook for the Japanese currency has deteriorated substantially for the following weeks.

Due to the strong link between gold and yen, the above means that the odds of seeing a huge decline in the following weeks (not necessarily days, though, but we’ll move to that in the next paragraph) in both: the yen and the precious metals sector increased substantially.

Let’s keep in mind that there’s a triangle-apex-based reversal today (vertical dashed line), which may mean that we can see some kind of reversal today and a very short-term rally. This would likely serve as a quick verification of the breakdown below the long-term support line. The verification of a breakdown is not a bullish phenomenon, but a bearish one and it doesn’t seem that one should adjust their positions based on just the above. The same goes for the very short-term outlook in the case of gold and the rest of the precious metals sector.

In other words, a short-term corrective upswing may take place and if it does, there’s no need to be stressed about it – it will be the normal course of action. Action that we think is best to be left ignored – i.e. we don’t think that adjusting the positions is a good idea. Why? Because of what happened after similar situations in the past.

Please take one more look at the long-term Japanese yen chart. There were three similar cases to the very recent one and we marked them with red rectangles. All corrective upswings after these similar patterns were so tiny that they are practically invisible on the above chart. In all these cases it was much better to just hold on to a position than to try to time every correction. That’s what we plan to do in the near term with regard to our positions in the metals – unless something major happens we’ll likely stick to the short positions.

All in all, the implications for the precious metals market are very bearish.

So, the Japanese yen was quite likely to rally a bit, but that was not likely to be the end of the decline, but simply a verification of the breakdown below the long-term support line. And that’s exactly what we saw yesterday.

Gold, silver and mining stocks were likely to come back up a bit due to the yen’s temporary strength and it didn’t happen. The precious metals sector was too weak to react positively to a positive piece of news. This is a very bearish sign for the short term. Since the medium term is already profoundly bearish, we have a situation which is clearly bearish and short positions seem more than justified. It seems that gold and the rest of the PMs will shortly slide at least as spectacularly as crude oil did yesterday (and we’ll profit on the decline in PMs just as we did on yesterday’s decline in oil).

And you know what? PMs didn’t just decline – they actually moved below the previous lows. They had all the reasons to hold at these levels or to rally from them – but they didn’t.

Metals and Miners Below Previous Lows

The moves in gold, silver and mining stocks were very small and one might wonder how bearish a $1.50 decline in gold can be. But it can. And it is. The context is always critical when assessing the implications of a given move. Even a $1.50 decline, when we should have seen a rally, is a very bearish phenomenon. Especially when gold closed at new yearly lows and especially when we see daily declines in silver and mining stocks, which serve as confirmations of gold’s weakness.

Also, let’s keep in mind that mining stocks being above their previous 2018 lows is not really a bullish sign:

Unlike gold and silver, mining stocks are not at their 2018 lows, which seems quite bullish at first sight, but it’s not. We have already discussed the moves in the gold stocks to gold ratio and how it verified its major breakdown and then invalidated a few more short-term breakouts. What we see on the above chart is the consequence of the earlier outperformance that has not yet been reversed. But, based on the verification of the breakdown and the invalidation, the miners’ strength is likely over and it’s only a matter of time before their underperformance becomes more prominent.

Summary

Summing up, the outlook for the precious metals is extremely bearish for the following weeks and months, and – based on yesterday’s bearish short-term confirmation - days. Naturally, we could still see a small move higher or a pause, but the odds for it are limited and it doesn’t seem that adjusting positions based on this possibility is a good idea. One reason is that gold already showed resilience to bullish signs yesterday, and the other reason is the situation in the Japanese yen, and in particular the action that usually takes place in it shortly after major breakdowns.

The extra-large short positions in gold, silver, and mining stocks are definitely justified from the risk to reward point of view. The profits on the short position that we opened just a few days ago increased further on Friday and yesterday, and it’s likely that they will increase much more before this trade is over.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% 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:

Gold: initial target price: $1,142; stop-loss: $1,272; initial target price for the DGLD ETN: $63.96; stop-loss for the DGLD ETN $46.38
Silver: initial target price: $14.42; stop-loss: $16.46; initial target price for the DSLV ETN: $32.97; stop-loss for the DSLV ETN $24.07
Mining stocks (price levels for the GDX ETF): initial target price: $19.12; stop-loss: $23.64; initial target price for the DUST ETF: $37.97; stop-loss for the DUST ETF $20.87

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 – but 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: $28.10; stop-loss: $34.82
JDST ETF: initial target price: $74.83 stop-loss: $42.78

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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