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.
Practically everything that we wrote yesterday remains up-to-date also today, so if you haven't had the opportunity read yesterday's analysis so far, we encourage you to do so.
The thing that we want to emphasize today, is that gold's performance continues to be very similar to what happened in early March, even though it might not look this way based on the daily candlestick chart.
The reason is that gold daily candlesticks have specific cut-off hours and while the price has moved similarly now and in late-February - early-March, it didn't do so at exactly the same hours during the day. So, in order to check the similarity of the price moves, we'll take a look at the 4-hour candlestick charts.
Right after the bottom, we saw a sharp - and limited - rebound in both cases: in early March and right now. What happened next in March, was a small decline that was then followed by a sharp rally. If the similarity holds, we are now still in this "small decline" phase. If a sharp rally follows, it would be in tune with what we saw in March and not something that invalidates the bearish outlook for the next few weeks.
In case of the GDX ETF, the similarity to what happened in early March is not that visible, but the likely reason is that the above chart features just the trading during the U.S. session. Since the self-similarity in gold is visible when we consider also the overnight price moves, it should be surprising that it's not that visible in GDX. Consequently, it seems that the repeat of the early-March performance is still likely in case of the GDX, even though its chart doesn't really show it.
Other than that, we have little new to report today, as our yesterday's comments remain up-to-date.
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 $1,900, gold, silver and miners will bounce back - perhaps $30-$50 or so in gold - and perhaps back to their previous 2020 highs, and then we will probably see another - bigger - move lower. The latter would likely be triggered by a visible upswing in the USD Index.
During this final part of the slide, we would expect silver to decline more than miners. That would be in tune 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 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.
We previously wrote that gold might (it was not likely, but we were mentioning this as one of the possibilities) even end its decline at about $1,900, but this is now quite unlikely. The reason is that gold already declined to this level, even though the USD Index rally didn't really start just yet. So, when the USDX does indeed soar, gold would be likely to decline more.
Summary
Summing up, it seems that after reversing $4 above our upside target, gold has finally topped. The opposite appears likely in store for the USD Index, which seems to have formed a double-bottom pattern. While we can't rule out a situation in which the PMs and miners move higher one final time before plunging, it seems that regardless of this move, the outlook for the next few weeks for the mining stocks is very bearish.
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 to about $1,700), 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
