Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Very little happened in the precious metals market yesterday, but something major happened in stocks. And it has important implications for PMs.
In my gold forecast yesterday, I wrote the following about the S&P 500 Index:
The debt-ceiling deal rally took stocks to new highs, and they are about to encounter a very strong resistance in the form of the mid-2022 high. This level is likely to hold due to the part of the cycle in which the market is most likely in (“return to normalcy”), and also due to the analogy to the previous situation when stocks first declined on huge volume and then rallied to new highs.
That happened in late-2021 and it was followed by the all-time high in the S&P 500.
Back then the precious metals sector rallied, but that was due to the escalation of the situation in Ukraine, so that stocks-PMs link is not applicable right now.
On a side note, please note that the S&P 500 is more or less, where it was trading in April 2022 and so is gold. And yet, miners are well below their April 2022 levels. Did I already emphasize miners’ weakness enough times already?
Given the similarity between now and what happened right before the all-time high, and the likelihood that the link between stocks and the precious metals sector (in particular junior mining stocks) is currently intact (they move mostly together), the implications of all the above is very bearish for the following weeks and months.
The above is up-to-date. Stocks moved higher on an intraday basis during yesterday’s session but ultimately ended lower, thus forming a daily reversal.
The move was not accompanied by huge volume, which would confirm the bearish nature of the “shooting star candlestick” reversal, but we saw a quite similar reversal after the previous sizable rally that took the RSI indicator close to the 70 level. In fact, the recent high in this indicator is the highest reading since the February top.
Interestingly that was not only right before a decline in stocks themselves, but if you look at the lower part of the first chart, you’ll see that it was also right before the decline in gold, silver, and mining stocks. Crude oil formed a top at that time as well.
Also, there’s more to the 61.8% Fibonacci retracement level that is just above yesterday’s intraday high than “just” the fact that it’s the classic resistance level. And I’m putting “just” in quotation marks because that’s actually a strong resistance on its own – not a weak one.
The thing is that we already saw this kind of resistance really stopping the corrections within bigger downtrends.
During the 2018 decline, stocks first corrected to the 61.8% Fibonacci retracement, and it was only then when they were ready to slide – more than previously.
In 2020, things were very chaotic and volatile, and stock prices corrected slightly more than 50% of their initial decline before sliding – much more than during the initial part of the decline.
Now, the above-mentioned 50% is obviously not 61.8%, but it does confirm the point that Fibonacci retracements are important resistance levels for stocks in general. And since stocks are already above their 50% retracement and they just moved very close to their 61.8% retracement, the odds are that the top is in or at hand.
The bearish indications are further strengthened by the presence of the previous 2022 high just above the 4,300 level.
Consequently, it’s highly likely that the top in stocks is in or at hand.
- But PR, why is this so interesting, again?
Because stocks appear to have been the driving force behind junior miners’ recent rally.
Please take a look at the above short-term chart featuring the GDXJ, GLD, and SPY (I’m using ETFs to have an apples-to-apples comparison).
GLD moved higher recently, but not THAT high. Stocks (SPY) on the other hand, rallied sharply recently. Just like junior miners did. Juniors’ rally was just a verification of the breakdown below the early-May low, but still, it was quite sharp – just like what we saw in stocks.
My point here? Stocks’ rally was likely the only thing that helped to push miners’ prices so high recently (and compared to the previous decline, the rally wasn’t meaningful, it was notable only on a short-term basis), which means that when stocks stop their rally, miners’ are likely to return to their previous (down)trend.
And here’s the catch: stocks are not only likely to stop rallying; they are likely to decline and decline much more than they did in 2022!
This means that the same thing that made junior miners moved higher last week, is likely to push them lower in the following weeks and months, and the magnitude of the bearish impact is likely to be many, many times bigger than what we saw on the upside recently.
Consequently, since the recent price action in stocks and miners confirmed the strong short-term link between them, and we are likely witnessing a top in stocks, we can see just how big the opportunity is, as far as profiting from the upcoming slide is concerned.
Many will be surprised, but you are prepared.
Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, the medium-term outlook for the precious metals sector (and for the FCX) remains to be extremely bearish and the profit potential for short positions in junior miners and FCX remains enormous.
While I can’t promise any kind of return (nobody can), in my opinion, the recent profitable position in the FCX will soon be joined by even more profits, and the winning streak of trades that started in early 2022, will continue.
If I didn’t have a short position in junior mining stocks, I would be entering it now.
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 junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; stop-loss for the JDST: none.
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.):
Silver futures downside profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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
Whether you’ve 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 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 (as 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.
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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a to of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
