Briefly: In our opinion, full (150% 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.
Gold moved visibly higher during the first session of the year and this time mining stocks accompanied it. In fact, it seems that they are back on the track after a short pause. What’s the likely reason behind this year’s rally and what does it imply going forward?
Let’s jump right into the mining stock charts (chart courtesy of http://stockcharts.com).
Gold stocks indeed broke above the rising support lines, but since that was only one close above them, the breakout is unconfirmed. There are several reasons to think that it will not be confirmed without even considering the apex-based reversal or gold's cyclical turning point.
The two things that we would like to discuss with regard to the above chart are: the 200-day moving average, and the RSI above the 70 level.
The former was broken rather insignificantly and this doesn’t invalidate the bearish analogy to the previous similar patterns. For instance, in February, the day when the HUI Index closed above the 200-day MA, was the day of the final top. In fact, higher HUI values have never been seen since that time. The June rally also ended above the MA, but the follow-up action was very bearish.
As far as the second factor is concerned, there was only one case in the previous months, when the RSI indicator moved as high as it did yesterday - in early September. Mining stocks started an almost 50-index point-decline shortly thereafter.
Moreover, the moments when the RSI moved only to 70 level, without breaking above it were almost always times when it was a good idea to be short the precious metals market. July 2016, February 2017, and the August-September 2017 top were all confirmed by the RSI at or above the 70 level. Naturally, the implications are bearish.
Plus, while the rising support line was broken (again, the breakout was not confirmed), the declining, even more long-term line, held. So, did we really saw a major breakout yesterday that changed the outlook? Not necessarily.
The key reason why we shouldn’t trust yesterday’s move is not visible on the above charts.
It’s partially visible on the general stock market chart. In fact, it’s the likely reason that all stocks soared yesterday, not just miners. The reason is selling during the year or at its end due to tax reasons and then buying back at the beginning of the year. In this way, investors are able to book the losses, which often leads to a decrease in one’s taxes on investments. Those who want to keep the exposure to a given stock often buy back in the first day of the following year.
Consequently, yesterday’s “strength” in mining stocks is likely no strength at all – it’s likely just a result of a tax-optimizing technique.
The above chart showing the golds stock ratio to the general stock market shows that there was no major breakout yesterday. Why? Because by looking at the ratio, we’re looking at the chart that “takes out” the factors that impact the entire stock market in the same way. In math, when we do the same multiplication for the numerator and the denominator of a faction, we are left with the same fraction. So, since there was no major move in the ratio, it seems that the same thing caused the rally in both markets and thus, what we saw yesterday was not a sign of strength in the precious metals sector.
Gold moved to the 61.8% Fibonacci retracement level, the RSI indicator moved above 70 and the Stochastic flashed a (small, but still) sell signal. Despite gold’s relentless rally in the final part of 2017 and during yesterday’s session, the above combination implies that the top is in or that will be in this week.
In particular, the RSI at 70 pointed to turnarounds in the majority of cases, including the April and June 2017 tops. Interestingly, last year’s early rally (it started in late 2016, to be precise) ended (there was no major breakout for months) only after the RSI moved above the 70 level. Is the rally over given the current position of the RSI? It seems likely.
Moreover, our previous comments regarding the upcoming turnaround remain up-to-date:
Gold moved above the combination of resistance levels, but it doesn’t seem to be a big deal. The reasons are the proximity of another combination of resistance levels just several dollars higher and the fact that we have multiple other bearish indications in place.
In terms of time, we have the apex of the triangle based on the intraday extremes (declining black dashed line and the lower of the rising red lines) pointing to a turning point at the end of the year. We also have gold’s turning point around January 8th. Given silver’s outperformance and miners’ small decline that we saw yesterday, it seems that the former time target is more likely to mark the final top for this corrective upswing. This is particularly the case since we saw a turning point in the first days of 2017 but the bottom actually formed in December.
So, it seems that the end of the year might also mark the end of gold’s rally.
The apex technique, just like the turning points, may not work with extreme precision, but instead be a few days off the target due to various individual factors. For instance, due to tax-related buy-backs. Consequently, a turning point during the first session of 2018 or in its first days remains in perfect tune with the above.
Gold price in the Japanese yen is after the sharpest upswing of the past decade. In the recent alerts, we commented on the above chart in the following way:
What we discuss below is what’s generally below the investment surface. It’s the things that people usually don’t write about because they are not aware of these relationships or that they don’t care enough to analyze them thoroughly. We do.
(…)
The next thing that’s rarely monitored is gold’s price in terms of the Japanese yen. Even if it is monitored, then the dynamics of the RSI indicator plotted on it are never or almost never discussed.
Gold very often moves in tune with the Japanese yen. We even received a few messages in the past years saying that analyzing gold is pointless as all it does is track the yen. On a side note, the above chart shows that between 2009 and the 2011 top, gold was much more than that.
Whenever gold doesn’t move in tune with the USD/JPY rate, the price of gold in terms of the Japanese yen changes. It recently changed significantly and the question is: “What can we infer from this kind of movement?”
Indicators are useful in many cases, including for making comparisons between price moves. Without them it would be more difficult to discuss similarities. In the current case, the RSI is after a sudden increase from below 30 to almost 70. There were only several such cases in the past decade. Two cases were seen after a multi-year rally while gold was rising within a relatively steep uptrend. We marked those cases with grey rectangles – they are not very similar to what happened recently. Gold has been trading sideways for a few years an it’s after a breakdown below the medium-term support line.
Consequently, the areas marked with red rectangles are much more similar as they were accompanied by similar developments. In these cases, gold was just finishing its corrective upswings. Sounds familiar? Exactly, that’s exactly what all the other charts are indicating.
The thing that we would like to emphasize today is that the maximum level that the RSI indicator achieved during its sudden rallies was just a bit above the 70 level and based on yesterday’s price action, the RSI moved to 74.25. Naturally, the current case can be the odd one and the RSI could rally further. All is possible in the market, but is it likely? No. What’s likely is that the RSI will stop shortly and the same thing is likely for gold priced in the Japanese yen, which makes the same likely for gold priced in the USD.
Based on the size of the upswing in the RSI, the current upswing in gold appears very emotional and unsustainable.
The above serves as a perfect confirmation of the scenario in which gold tops in the first days of 2018.
What we said about gold indicators can also be said about silver indicators. In this case, the Stochastic indicator hasn’t flashed a sell signal yet, but it’s extremely close to doing so. The RSI is very close to the 70 level, which has bearish implications. Plus, just like it is the case with gold, silver moved to the 61.8% Fibonacci retracement level.
Also, let’s not forget that silver’s turning point is just around the corner and it’s crystal clear that the move preceding it is up. Consequently, the implications are clearly bearish.
The double top in the Euro Index is also something that could trigger a reversal in the price of the yellow metal. After all, a yearly high is a very important resistance, especially if reaching it is combined with RSI’s move to the 70 level. Please note that the latter indicator was useful not only in case of the precious metals, but also in case of the Euro Index.
Summing up, the medium-term outlook for the precious metals market remains bearish as confirmed by multiple factors, and based on the most recent short-term factors, it seems that the corrective upswing in gold, silver and mining stocks is either over or close to being over. Yesterday’s strength in mining stocks is most likely not real strength, but rather a tax-optimization technique. Consequently, it should not be trusted, also because the breakout in the HUI Index is not confirmed and several other resistance levels are in play. It seems that the downswing will start shortly.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full 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:
- Gold: initial target price: $1,218; stop-loss: $1,322; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $40.98
- Silver: initial target price: $14.63; stop-loss: $17.62; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.78
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78
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: $27.82; stop-loss: $38.22
- JDST ETF: initial target price: $94.88 stop-loss: $37.78
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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