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.
Gold moved higher yesterday (Dec 8), while silver and mining stocks went in the opposite direction. It seems that the latter moved in tune with the trend, while the move in the former was rather accidental.
Why? Because gold already invalidated yesterday’s daily rally at the moment of writing these words (in the overnight trading). Yes, the closing prices matter the most, but if gold was really after an important breakout, it wouldn’t have wiped out the previous day’s entire rally just several hours after the closing bell.
I previously wrote that it had been quite possible for gold to rally up to its September lows, and the low in gold futures in terms of the closing prices was $1,866.30. Monday’s closing price for gold futures had been exactly $1,866, and yesterday, gold closed at $1874.90. At the moment of writing these words, it’s trading at $1,864.60.
So, did anything particularly bullish happen on the gold market yesterday? Not really.
But can gold move even higher from here? As discouraging (or encouraging, depending on one’s perspective) as this answer may be, it’s a “yes”. The US Dollar Index is currently trading at about 90.8, and its downside target is at about 90, so there is room for another short-term slide. Such a slide would be likely to trigger a rally in the yellow metal. How high could the rally go during this final part of the counter-trend corrective upswing?
Perhaps to the mid-November high of about $1,900. Even though gold might theoretically rally all the way up to the early-November high, I don’t see this as being likely.
Meanwhile, silver formed a tiny reversal yesterday and it’s moving lower today.
Silver reversed after touching the declining resistance line, which is also the upper border of the triangle pattern. Did we just see a top in silver? That’s quite likely, but not certain. I wouldn’t be surprised if silver took one final attempt to break higher and rally and topped close to the early November high. After all, silver is known for its fake breakouts.
Moreover, please note that silver has a triangle-vertex-based reversal point in the final part of the month, which could imply that this is where silver forms a final, or temporary bottom. This could have implications also for the rest of the precious metals sector, as its parts tend to move together in the short and medium term.
Given the bearish post-Thanksgiving seasonality in the case of PMs and the tendency for them to form local bottoms in the middle or second half of December, it seems likely that the above is likely to be some kind of bottom.
Mining stocks moved 0.41% lower yesterday, despite a higher close in gold futures and the GLD ETF. The general stock market moved slightly higher yesterday, so it wasn’t the reason behind miners’ weakness. This lack of strength confirms the points that I made yesterday and further validates the bearish picture:
What we see in the PMs is just a correction, not the start of a new, powerful upleg. If it was, miners would have been leading the way higher. We currently see the opposite.
Over a week ago, I wrote that miners could move to the previous lows and by moving to them, they could verify them as resistance. The previous – October – low is at $36.01 in intraday terms and at $36.52 in terms of the daily closing prices. Yesterday, miners closed at $36.50.
So, while gold closed at its September low (in terms of the daily closing prices), gold miners closed at their October low.
If the USD Index declines one more time before bottoming, and gold rallies, miners could also move temporarily higher. How high could they move? I think that the mid-November high of about $38 (intraday high: $38.35, daily close: $38.01) would provide the kind of strong resistance that miners might not be able to breach.
Still, this upside is based on two big IFs.
The first “if” is if the USD Index declines to 90 or slightly lower – it’s extremely oversold, and the CoT reports confirm it.
The second “if” is if the precious metals sector really reacts to USD’s decline with a visible rally. In the past few weeks, gold shrugged off quite a few USDX declines. And miners shrugged off even more positive news.
Consequently, it seems that trying to take a profit from the possible, but not very likely, immediate-term upswing is not the best idea from the risk to reward point of view.
Letters to the Editor
Q: If a market is going UP and the early stages of a Mining recovery can be spectacular, why buy a mining portfolio/GDXJ when you can buy JNUG? That provides 2 times the GDXJ return.
If a market is going UP, then why buy GDXJ when you can get double the return?
Do YOU use the JNUG personally?
A: Regarding JNUG and miners: please note that if one wants leverage (some people want it and can accept it, but some people should avoid it), they could also buy on margin, which would also increase the return on the investment/trade. The difference is that by choosing the stocks that are already providing bigger bang for the buck (inherent leverage that a given company has over the price of gold, or relative to the average from the sector) you are not paying the price of the time decay that the leveraged ETNs mean. If you look at the 5-year chart of JNUG, JDST, DUST, or NUGT, you'll see how costly it can be over the long run - in many cases, it can be much more than the interest for the margin.
With senior miners, I'm relying on my mining stock selection algorithms: Golden StockPicker and Silver StockPicker - they aim to detect senior mining stocks that provide greatest leverage and exposure. With junior miners, these algorithms don't apply as the underlying stocks are not liquid enough for the price data to be meaningful enough.
On the other hand, in case of short-term trades, the transaction costs associated with getting a diversified portfolio of juniors (say, at least 10 companies) and time & effort required to optimize the entry and exit moments for each company are quite discouraging.
So, in case of juniors, going with JNUG or JDST might be a good way to go in case of more short-term trades (or even short- to medium-term trades, if one is aware of the possible costs), but the more long-term oriented moves one wants to participate in, the more appeal the individual miners will have.
I'm using JNUG (not right now), if I want to bet on rapidly increasing junior prices in the short run, but not as a proxy for long-term investments.
In case of the upcoming major bottom in the PMs, I might use JNUG and/or NUGT for a few days and then switch to individual mining companies based on the StockPicker tools.
Q: GDXJ, at its present rate of decent, will not reach 42.72 when GDX reaches 32.02. Do you see the juniors continuing their slide with silver even though the majors have stopped? Will we buy our long investments at this level?
A: I’d say that GDXJ moving to $42.72 or so along with GDX’s move to $32.02 is still a good possibility. This is especially the case, if the general stock market moves lower. GDXJ tends to be more correlated with the stock market than GDX.
I think that juniors (GDXJ) will move more in tune with seniors (GDXJ) than with silver.
I’m not sure about the purchase of the long-term precious metals investments with GDX at about $32 or so. I’d say that most likely I won’t want to make the long-term purchases at that time, just as it seems that gold is quite likely to decline below $1,700 instead of bottoming there. It was already below $1,800 even though the USD Index kept on declining. If the latter rallies (and I expect this to take place in the following weeks / months), gold and the rest of the precious metals market is likely to be affected negatively.
The key thing while determining the moment to make the long-term purchase will be to see gold acting particularly strong despite the USD’s rally. We’re not even seeing the USD’s rally yet.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think it has already begun.
During the final part of the slide (which could end within the next 1-5 weeks or so), I expect silver to decline more than miners. That would align with how the markets initially reacted to the Covid-19 threat.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run, which does not make the short-term decline improbable. Markets can and will get ahead of themselves and decline afterward – sometimes very profoundly – before continuing with their upward climb.
The plan is to exit the current short positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 3 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is a soft, but simultaneously broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,700 - $1,750. If – at the same time – gold moves to about $1,700 - $1,750 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. However, it could also be the case that we’ll wait for a rebound before re-entering short position in silver – it’s too early to say at this time. It’s also possible that we’ll enter very quick long positions between those short positions.
The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.
Summary
Summing up, the next big move lower in the precious metals market is definitely underway and it seems that it will take another 1-5 weeks (likely in the second half of December) before the decline ends. It seems that the part of the slide in gold that takes place below $1,700 is going to see a silver catching up with the decline in gold and miners. Last week’s upswing seems to be a relatively normal bounce within a bigger decline. This corrective upswing might have already ended, but it’s possible that we see one additional move higher before the very short-term top is in.
Please note that even Warren Buffett is limiting his exposure to gold.
Despite the recent decline in it, it seems that the USD Index is going to move higher in the following months and weeks, causing gold to decline. At some point gold is likely to stop responding to dollar’s bearish indications, and based on the above analysis, it seems that we might expect this to take place in December.
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 increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway.
After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.
Most importantly, please 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 earn much more in the following weeks and months), but you have to be healthy to 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 we describe the situation for the day that the alert is posted in the trading section. In other words, if 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 to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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 daily 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. Furthermore, 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.
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
