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.

Welcome to this week's flagship Gold & Silver Trading Alert. As we’ve promised you previously, in our flagship Alerts, we will be providing you with much comprehensive and complex analyses (approximately once per week), which will usually take place on Monday.

Predicated on last week’s price moves, our most recently featured outlook remains the same as the price moves align with our expectations. On that account, there are parts of the previous analysis that didn’t change at all in the earlier days, which will be written in italics.

Before discussing the technical point of view, we’d like to say a few words about the recent news, and in particular, about the most recent conference during which Powell was particularly dovish.

Last week was full of important events. First, both the Pfizer/BioNTech and Moderna vaccines received emergency-use authorization from the US Food and Drug Administration. In consequence, the first COVID-19 vaccination in the United States has already taken place, which is (hopefully, since nobody knows the long-term effects of this particular vaccine) great news for America, as it marks the beginning of the end of the pandemic.

It’s high time for that! As the chart below shows, the US has already lost about 314,000 people to the coronavirus.

And what is most disturbing, the current wave of infections doesn’t look like it’s going to end quickly. As one can see in the chart below, the number of new daily official cases is still above 200,000 – actually, it has recently jumped to about 250,000.

So, the beginning of vaccine distribution is the light at the end of the pandemic tunnel that brings hope for a return to normalcy in 2021. It’s important to note here that – contrary to what happened after the groundbreaking November news about the efficacy of the vaccines – the approval of vaccines and first injections didn’t plunge gold prices. This suggests that the bridge to normalcy built by the vaccines has already been priced in. That’s good news for gold bulls.

Second, there was renewed optimism about the fresh fiscal support. Indeed, there are higher odds now that at least about $750 billion in aid will be passed and implemented by the end of 2020. Theoretically, the fiscal stimulus is considered to be helpful to the economy, so it should be negative for gold. However, the price of the yellow metal may actually go up amid concerns about rising fiscal deficits, public debt, and inflation.

Third, the last FOMC meeting took place this year. The Fed tied tapering in its quantitative easing to the progress toward reaching full employment and inflation at two percent, while the economic projections were more optimistic. Nevertheless, the projections didn’t see any interest rate hikes until the end of 2023.

However, it was Powell’s press conference that was really crucial, so let’s take a closer look at it. The Fed Chair sounded dovish, as he emphasized the U.S. central bank’s commitment to maintaining its very accommodative stance. In particular, Powell reiterated that the Fed will not hike interest rates or reduce its asset purchase program anytime soon. Actually, Powell said that the bank will normalize its monetary policy only after reaching the maximum employment and price stability:

our guidance for both interest rates and asset purchases will keep monetary policy accommodative until our maximum employment and price stability goals are achieved. And that's a powerful message. So substantial further progress means what it says. It means we'll be looking for employment to be substantially closer to assessments of its maximum level, and inflation to be substantially closer to our 2 percent longer run goal, before we start making adjustments to our purchases.

In other words, Powell clearly stated that he will keep his foot on the gas until at least 2023, and that he is not going pull the brakes even if inflation increases. This is because Powell believes that although inflation may rebound in 2021, it will be a temporary increase, and the Fed now has a flexible average inflation targeting framework, so it wants inflation to overshoot the target:

What we’re saying is we're going to keep policy highly accommodative until the expansion is well down the tracks. And we’re not going to preemptively raise rates until we see inflation actually reaching 2 percent and being on track to exceed 2 percent. That's a very strong commitment. And we think that's the right place to be

This means that in 2021 the Fed is likely to be behind the curve. Higher inflation with the nominal interest rates unchanged imply lower real interest rates – further declines in these rates should push gold prices up. Moreover, Powell will announce in advance when he wants to take his foot off the gas pedal and start reducing the amount of monetary accommodation. The Fed clearly doesn’t want the replay of the 2013 taper tantrum:

And when we see ourselves on a path to achieve that goal, then we will say so undoubtedly well in advance of any time when we would actually consider gradually tapering the pace of purchases.

What does it all mean for gold prices? Well, although the Fed did not expand its monetary accommodation in December, Powell was really dovish and he pointed out that the U.S. central bank would continue its current easy stance “as long as it takes until the job is well and truly done.” Gold welcomed Powell’s remarks and gained nearly $40 on Thursday, as the chart below shows.

It makes sense – after all, the Fed promised that its monetary policy would remain highly accommodative for a long time. So, although the potential for further accommodation and, thus, a great rally in gold prices is limited (at least until we see a further weakening in the U.S. dollar or an increase in inflation and decrease in the real interest rates), the risk of the Fed suddenly tightening monetary policy that could plunge the gold prices, has diminished.

All in all, there are multiple fundamental reasons why gold is likely to soar in the upcoming years. However, even the most profound bull markets can’t move up in a straight line, and some corrections will likely take place. After the big rallies, we will probably witness significant corrections, and in the case of the precious metals market, one is long overdue.

To clarify, the significant correction in the precious metals market is already underway, but it seems that it’s not over yet, and it’s probably before its biggest and most important part.

Triggers for the decline in the precious metals market are not necessary – the market might collapse on its own or as a result of some lone random trigger that normally wouldn’t cause any major action. However, a trigger would speed things up. The less likely trigger might come from the general stock market – after all, it fell sharply together in the first half of this year.

S&P 500 (SPX) Signals

Despite the SPX closing the week above its long-term trendline (the red line), the U.S. equity benchmark is still primed for a triangle-vertex-based reversal. Last week, the bounce was too small to invalidate any key technical levels, and the SPX remains likely to re-test ~3,600 and possibly ~3,400. Actually, it could plunge much more, but the above would be the first, short-term targets.

For context, a similar pattern emerged earlier this year, with SPX declining shortly after its triangle-vertex-based reversal (a rising red line and the blue line based on the 2020 bottom and the June bottom).

The price action is also analogous to SPX’s behavior during the 2018 top:

Back in 2018, stocks moved above their previous high before sliding. The fact that they moved above their previous highs is therefore not as bullish as it first appears.

Today, the dynamic is eerily similar. U.S. equities remain overbought and the NASDAQ 100 is screaming excess. More than 90% of its constituents are trading above their 200-day moving average – a sell-signal that preceded four previous pullbacks.

Remember though: A decline in stocks is not required for the PMs to decline. However, a break in the former could easily trigger a sell-off in the latter. And as history has shown, silver and the miners will be the hardest hit.

Gold and Seasonality

Last week, I discussed the variables that affected gold pre-and-post Thanksgiving:

This year, gold declined immediately before and right after Thanksgiving, after which it corrected. However, if we compare what gold did relative to the USD Index, we see that there is very little strength to be celebrated here. How does it impact the above seasonality? I think that it doesn’t mean that gold is bottoming right now, but rather that its decline is longer than the previous ones were on average. Based on many years of experience in this market, I think that what’s happening in the USD Index and how gold is reacting to it, is currently the key thing to pay attention to (along with monitoring the relative strength of silver and miners compared to gold). The seasonality is helpful, but it plays a supporting role, not the main one. All in all, perhaps we’ll see the final bottom closer to the end of the year or even later.

The key takeaway?

While seasonality is a helpful indicator, its historical precedent shouldn’t be taken as gospel. Instead, seasonality is an ancillary indicator – a co-pilot that supports other analysis. Specifically, the performance of the USD Index, and gold’s performance relative to the miners and silver provides more insight into the metal’s near-term direction. Thus, we’ll focus our attention on these variables going forward.

The USD Index (USDX)

On Friday, the USD Index breached the Fibonacci extension level based on the size of the preceding corrective upswing. At the first sight, this appears to be a bearish sign for the greenback. However, let’s monitor the price action in 2018: the USD Index traded below the analogous extension level, before reversing course and trading sharply higher. The initial bottom occurred in early 2018, with the final bottom not far behind.

The above-mentioned 2018 USDX weakness also coincided with a top in gold, silver and the gold miners (shown in charts 2 and 3).

Last week, I elaborated on the potential move:

It appears that the USD Index is repeating its 2017 – 2018 decline to some extent. The starting points of the declines (horizontal red line) as well as the final high of the biggest correction are quite similar. The difference is that the recent correction was smaller than it was in 2017.

Since back in 2018, the USDX’s bottom was at about 1.618 Fibonacci extension of the size of the correction, we could expect something similar to happen this time. Applying the above to the current situation would give us the proximity of the 90 level as the downside target.

“So, shouldn’t gold soar in this case?” – would be a valid question to ask.

Well, if the early 2018 pattern was being repeated, then let’s check what happened to precious metals and gold stocks at that time.

In short, they moved just a little higher after the USDX’s breakdown. I marked the moment when the U.S. currency broke below its previous (2017) bottom with a vertical line, so that you can easily see what gold, silver, and GDX (proxy for mining stocks) were doing at that time. They were just before a major top. The bearish action that followed in the short term was particularly visible in the case of the miners.

Consequently, even if the USD Index is to decline further from here, then the implications are not particularly bullish for the precious metals market.

And as we move toward the New Year, I expect a similar pattern to emerge.

On Friday, the USDX rallied by 0.21 – ending a stretch of four consecutive days in the red. And while it’s too early to call a bottom – in my view, it’s simply a matter of when, not if, the greenback moves higher.

Why so?

First, the USD Index is after a long-term, more-than-confirmed breakout. This means that the long-term trend for the U.S. currency is up.

Second, the amount of capital that was shorting the USD Index was excessive even before the most recent decline. This means that the USD Index is not likely to keep declining for much longer.

To expand on the first point, look at the USDX’s long-term breakout in 2015:

The duration of the move, the multiple breakouts, and the five-year consolidation signals a move higher for the USDX. This remains the path of least resistance (perhaps to the ~120 level).

Please note that the consolidation that preceded the previous rally to 120 that took place between 1997 and 2000 happened when the USD index was trading at relatively similar price levels – approximately between 90 and 105.

A second major factor is extreme USDX bearishness within the futures market. A contrarian indicator, net-short USDX futures positions remain excessively high.

The above chart shows the netted version of the positions included in the Commitment of Traders report. Please note how the lows in the blue line correspond to major medium-term bottoms in the USD Index. We once again find ourselves in this situation.

On the fundamental front, please keep in mind that for the currency markets it’s not important how “things are going in the U.S.”, but how they are doing relative to the rest of the world, and most importantly, relative to the Eurozone and Japan (currency exchange rates against the euro and the yen have the biggest weights in the USD Index, which is ultimately a weighted average of currency exchange rates). Are things about to get much worse in the U.S. compared to them? No. In risking oversimplification, let’s say that while things are bad pretty much all around the world, they might actually get calmer in the U.S. as the post-presidential election turmoil subsides.

Please note that the current – broad – lows in the values of the net positions of the non-commercial traders (broad bottom in the blue line) is similar to only one case from the past – the 2017-2018 bottom. This further confirms the validity of the analogy to 2018 that I made earlier, based on the similarity in price patterns.

To summarize, the USDX is poised for a reversal and the prophecy of its demise remains overblown. Moreover, once the phoenix rises from the ashes, gold’s shimmer will very likely begin to fade.

Sentiment Indicators

Before I get to the metals, I want to update you on the Gold Miners Bullish Percent Index ($BPGDM). Despite its vertical decline from the July highs, the index is still above 50 and more than 40 points above the 2016 and 2020 lows.

I wrote last week:

Back in 2016 (after the top), and in March 2020, the buying opportunity didn’t present itself until the $BPGDM was below 10.

Thus, there is plenty of room for sentiment to head lower.

The excessive bullishness was present at the 2016 top as well and it didn’t cause the situation to be any less bearish in reality. All markets periodically get ahead of themselves regardless of how bullish the long-term outlook really is. Then, they correct. If the upswing was significant, the correction is also quite often significant.

Please note that back in 2016, there was an additional quick upswing before the slide and this additional upswing had caused the $BPGDM to move up once again for a few days. It then declined once again. We saw something similar also in the middle of this year. In this case, the move up took the index once again to the 100 level, while in 2016 this wasn’t the case. But still, the similarity remains present.

Back in 2016, when we saw this phenomenon, it was already after the top, and right before the big decline.

Based on the decline from above 350 to below 280, we know that a significant decline is definitely taking place. But has it already run its course?

Let’s consider two similar cases when gold miners declined significantly after the $BPGDM was very high: the 2016 decline and early-2020 decline.

In both cases, the HUI Index continued to decline until it moved slightly below its 61.8% Fibonacci retracement level. This means that if the history is to repeat itself, we shouldn’t expect any major turnaround until the gold miners decline to 220 - 230 or so. Depending on how things are developing in gold, the above might or might not be the final bottom, though.

Please note that the HUI already declined below its 2016 high. This breakdown is yet another bearish sign.

Gold Miners (GDX)

Despite rallying by 8.7% over a three-day stretch, the GDX traded sharply lower on Friday (Dec. 18), and yet again, failed to recapture its 50-day moving average (unlike gold). Moreover, GDX also closed below its early-December intraday high, while the GLD ETF remained above its analogous price level.

The relative weakness (miners underperforming gold) supports the bearish thesis I discussed on Friday:

While gold corrected about 61.8% of its November decline, gold miners declined only half thereof. In other words, they underperformed gold, which is bearish.

The GDX ETF moved to its 50-day moving average – the level that kept its rallies in check since early October. Can miners move above it? Sure, they did that in early November, but is it likely that such a move would be confirmed or followed by more significant strength? Absolutely not. Let’s keep in mind two things:

1. Back in early November, the GDX moved above the 50-day MA, when gold did the same thing, so if the GDX wanted to rally above this MA, it “should have” done so yesterday. It was too weak to do it.
2. The early-November move above the 50-day MA was invalidated in just 2 days.

Moreover, please note that the performance of the GDX ETF from late-November to now looks like an ABC correction. This is not a bearish sign on its own, but it fits other indications described today and this week in general. It increases the chance that the top is already in or very, very close.

Another important development was the spike in volume during Thursday’s (Dec. 17) upswing. It resulted in the largest number of GDX shares traded since the November 6 top (on days when GDX is positive), and we all know what happened to GDX after November 6 (As a point of reference, the four other highest volume days since the November 6 top coincided with declines of 6.13%, 2.74%, 3.40% and 4.29%).

In addition, options traders aren’t buying GDX’s rally. Despite put options (which profit when GDX declines) trading relatively flat, call options (which profit when GDX rallies) traded at a significant discount on Friday. Please take a look at the table below for details (courtesy of Yahoo! Finance)

The lack of demand among options traders is another signal that last week’s rally is unlikely to continue.

As for price targets, my December 1 comments remain up-to-date:

How high could miners go? Perhaps only 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. No matter which level we take, it’s not significantly above the pre-market price of $35.76, thus it seems that adjusting the trading position in order to limit the exposure for the relatively small part of the correction is not a good idea from the risk to reward perspective – one might miss the sharp drop that follows. Please note how sharp the mid-November decline was initially.

That’s almost exactly what happened – the GDX ETF rallied to $36.92 in intraday terms, and to $36.50 in terms of the daily closing prices. The breakdown was verified in terms of the daily closing prices, which is more important than what happened in intraday terms.

Consequently, the outlook is bearish as it seems that miners are ready for another move lower. There’s still a chance that the precious metals sector would move higher based on a possible short-term decline in the USD Index, but this chance is slim, especially given today’s pre-market decline in both the USD Index and gold.

The next downside target for the GDX ETF is the February top in terms of the closing prices – $31.05.

Also, let’s not forget that the GDX ETF has recently invalidated the breakout above the 61.8% Fibonacci retracement based on the 2011 – 2016 decline.

When GDX approached its 38.2% Fibonacci retracement, it declined sharply – it was right after the 2016 top. Are we seeing the 2020 top right now? This is quite possible – PMs are likely to decline after the sharp upswing, and since there is just more than one month left before the year ends, it might be the case that they move north of the recent highs only in 2021.

Either way, miners’ inability to move above the 61.8% Fibonacci retracement level and their invalidation of the tiny breakout is a bearish sign.

The same goes for miners’ inability to stay above the rising support line – the line that’s parallel to the line based on the 2016 and 2020 lows.

Gold

Moving on to the yellow metal itself, Friday’s price action was a snoozer. Barely budging, gold traded just below the flatline. However, the bearish technicals still remain in play. Right now, gold’s RSI (~58 and forming a potential double top) is basically where it was before the yellow metal plunged in November.

Similarly, real yields are also staring at a triple bottom. If they head higher in the coming weeks, it will put significant pressure on gold prices (which move in the opposite direction of real yields).

Still, based on what we explained in the opening part of today’s analysis, the situation with real interest rates is a big “if”.

Furthermore, while gold recaptured its 50-day moving average on Thursday, the yellow metal is still likely to re-test (and breach below) its September lows, thus invalidating the breakout above them. So far, gold invalidated the move above the mid-November highs.

Before moving further, I would like to quote my previous comments that explain why I expect gold to bottom at least at the $1,700 level.

One of the reasons is the 61.8% Fibonacci retracement based on the recent 2020 rally, and the other is the 1.618 extension of the initial decline. However, there are also more long-term-oriented indications that gold is about to move to $1,700 or lower.

(…) gold recently failed to move above its previous long-term (2011) high. Since history tends to repeat itself, it’s only natural to expect gold to behave as it did during its previous attempt to break above its major long-term high.

And the only similar case is from late 1978 when gold rallied above the previous 1974 high. Let’s take a look at the chart below for details (courtesy of chartsrus.com)

As you can see above, in late 1978, gold declined severely right after it moved above the late-1974 high. This time, gold invalidated the breakout, which makes the subsequent decline more likely. And how far did gold decline back in 1978? It declined by about $50, which is about 20% of the starting price. If gold was to drop 20% from its 2020 high, it would slide from $2,089 to about $1,671.

This is in perfect tune with what we described previously as the downside target while describing gold’s long-term charts:

The chart above shows exactly why the $1,700 level is even more likely to trigger a rebound in gold, at the very minimum.

The $1,700 level is additionally confirmed by the 38.2% Fibonacci retracement based on the entire 2015 – 2020 rally.

There’s also a good possibility that gold could decline to the $1,500 - $1,600 area or so (50% - 61.8% Fibonacci retracements and the price level to which gold declined initially in 2011), but based on the size of the recent upswing, we no longer think that this scenario is the most likely one.

The odd thing about the above chart is that I copied the most recent movement in gold and pasted it above gold’s 2011 – 2013 performance. But – admit it – at first glance, it was clear to you that both price moves were very similar. 

And that’s exactly my point. The history tends to rhyme and that’s one of the foundations of the technical analysis in general. Retracements, indicators, cycles, and other techniques are used based on this very foundation – they are just different ways to approach the recurring nature of events.

However, every now and then, the history repeats itself to a much greater degree than is normally the case. In extremely rare cases, we get a direct 1:1 similarity, but in some (still rare, but not as extremely rare) cases we get a similarity where the price is moving proportionately to how it moved previously. That’s called a market’s self-similarity or the fractal nature of the markets. But after taking a brief look at the chart, you probably instinctively knew that since the price moves are so similar this time, then the follow-up action is also likely to be quite similar.

In other words, if something looks like a duck, and quacks like a duck, it’s probably a duck. And it’s likely to do what ducks do. 

What did gold do back in 2013 at the end of the self-similar pattern? Saying that it declined is true, but it doesn’t give the full picture - just like saying that the U.S. public debt is not small. Back then, gold truly plunged. And before it plunged, it moved lower in a rather steady manner, with periodic corrections. That’s exactly what we see right now.

Please note that the above chart shows gold’s very long-term turning points (vertical lines) and we see that gold topped a bit after it (not much off given their long-term nature). Based on how gold performed after previous long-term turning points (marked with purple, dashed lines), it seems that a decline to even $1,600 would not be out of ordinary.

Finally, please note the strong sell signal from the MACD indicator in the bottom part of the chart. The only other time when this indicator flashed a sell signal while being so overbought was at the 2011 top. The second most-similar case is the 2008 top.

The above-mentioned self-similarity covers the analogy to the 2011 top, but what about the 2008 performance?

If we take a look at how big the final 2008 decline was, we notice that if gold repeated it (percentage-wise), it would decline to about $1,450. Interestingly, this would mean that gold would move to the 61.8% Fibonacci retracement level based on the entire 2015 – 2020 rally. This is so interesting, because that’s the Fibonacci retracement level that (approximately) ended the 2013 decline. 

History tends to rhyme, so perhaps gold is going to decline even more than the simple analogy to the previous turning points indicates. For now, this is relatively unclear, and my target area for gold’s final bottom is quite broad.

Silver

Slithering silver continues to distract investors from the big picture. Despite its reputation as a temptress – battering the bulls with its string of false breakouts – investors continue to utter the four most dangerous words in finance – “this time is different.”

Analyzing the price action, silver is following a familiar playbook. The white metal continues to leave gold and the gold miners in the dust – a warning sign of things to come. On Friday, silver also failed to hold its November intraday high, and it’s behaving exactly as you would expect before an interim top.

So, what do you think? Is this time different?

Shot out of a cannon, silver burst above its declining resistance line with relative ease.

What does this breakout imply on its own? Not much, actually – it means that the white metal is continuing to trade sideways after breaking below the rising, medium-term support line in mid-September.

Specifically, since its September bottom, silver has actually been range-bound (despite the violent swings in both directions).

What is most important here is that

silver is holding up much better than gold and – in particular – mining stocks. If this was the early stage of a rally, miners would have been strong, and silver would have been weak or average. What we see confirms the validity of the bearish case for the next few weeks or months.

Let’s compare the various parts of the precious metals market to each other and to the two major markets that often impact them – the USD Index and stocks.

Like a string of dominoes, gold, silver and GDX all broke down in September after the USDX broke above resistance.

What happened since that time? The USD Index moved somewhat higher, but then ultimately moved to and stayed at new yearly lows. Gold, silver, and mining stocks should have rallied given the above. They have not.

Silver is more or less at the level just before it broke, gold is below it, and mining stocks are also below it – the most out of the entire trio.

So, it is not only the case that silver was strong and miners were weak in the last several days – it’s been the case over the past few months as well. The implications are bearish.

Also troubling is that the soaring stock market hasn’t shined its light upon silver. Contrasting the mantra that ‘a rising tide lifts all boats,’ equity market strength hasn’t triggered a sustainable rally in silver or the gold miners. And this “should have” been the case – both are more connected to stocks than gold is. Gold stocks because they are, well, stocks. Silver, due to multiple industrial uses.

Additionally, the implications coming from silver’s long-term chart are also bearish for the next several weeks (perhaps even months) due to the size of the volume that accompanied the recent monthly rally.

If you look at the monthly silver volume levels, it seems likely that the next sizable downswing has already begun. The previous substantial monthly volume in silver accompanied the 2011 top. The analogy doesn’t get more bearish than this. Ok, it would, if there were multiple key tops confirmed by huge monthly volume. But the 2011 top was so significant that other tops are not comparable, except for the most recent one. Thus, the implications are bearish.

Moreover, please keep in mind that while gold moved to new highs, silver – despite its powerful short-term upswing – didn’t manage to correct more than half of its 2011 – 2020 decline.

In fact, silver has already invalidated its move above the lowest of the classic Fibonacci retracement levels (38.2%), which is not something that characterizes extraordinarily strong markets.

Just like in 2011, silver initially spiked on high volume, before rolling over and making a vertical move lower. Then it corrected about 61.8% of the preceding decline and then it truly plunged – much more than it had declined initially. We already saw the initial slide and the corrective upswing very close to the 61.8% retracement. If the history is to rhyme – and this appears likely – then we can expect to see a sizable slide in the white metal in the next several weeks – months.

Based on the above chart, it seems that silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.

We are witnessing something similar in the HUI Index as well. The latter corrected half of its 2011 – 2016 decline and nothing more, while gold moved well above its 2011 high.

All in all, it was mostly gold that was making the major gains earlier this year – not the entire precious metals sector.

Please note that the HUI Index is declining at a pace that’s very much in tune with how it declined in 1999-2000 and 2012-2013, which is a particularly bearish similarity.

So, how do we determine whether we see the buying opportunity or not?

We will view the price target levels as guidelines, and the same goes for the Gold Miners Bullish Percent Index (below 10), but the final confirmation will likely be something else. Something that we already saw in March when gold bottomed.

We will be on a special lookout for gold’s strength against the ongoing USDX rally. At many vital bottoms in gold, that’s exactly what happened, including the March bottom.

The link between gold and the USD Index is strongly negative in the medium-term (past year), but given gold’s extraordinary weakness despite the USD’s decline, the short-term correlation actually turned positive recently (last 30 trading days). This is not the bullish sign we’ve been looking for. This is its opposite.

Since gold, silver, and mining stocks have been strongly negatively correlated with the USD Index in the medium term, it seems likely that they will be negatively affected by the upcoming sizable USDX upswing.

…Until we see the day where gold reverses or soars despite the U.S. currency’s rally.

If that happens with gold at about $1,700, we’ll have a very good chance that this was the final bottom. If it doesn’t happen at that time, or gold continues to slide despite USD’s pause or decline, we’ll know that gold has further to fall.

Naturally we’ll keep you – our subscribers – informed.

To move forward, how does the GDX downside target compare to gold’s downside target? If, at the same time, gold moves to about $1,700 and miners are already after a ridiculously big drop (to $31-$32 in the GDX ETF, or lower), the binding profit-take exit price of your GDX ETF will become $32.02 (those with higher risk tolerance might lower it to $31.15 or so, but moving it lower seems just too risky).

At this time, the final GDX target (the one that would correspond to gold at $1,500 or so) is still unclear. The $17 - $23 area seems probable, especially if the general stock market slides once again. It’s too early to say with any significant level of certainty. Gold is providing us with a clearer final target, so that’s what we’ll focus on. And most importantly – we’ll focus on gold’s performance relative to the USD Index.

Overview of the Upcoming Decline

1. As far as the current overview of the upcoming decline is concerned, I think it has already begun.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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

While Christmas came early for the precious metals last week, the holiday cheer isn’t likely to last very long. Despite doing its best Santa Clause impersonation, silver’s gift-giving isn’t rubbing off on gold or the gold miners. And given its relative outperformance, it’s most likely only a matter of time before silver’s sleigh crashes.

The divergent price action signals that the next move lower in the precious metals market is already underway. It will likely take another 1-5 weeks to play out, with gold falling to or below $1,700 and with a substantial decline in silver (downside target is unclear) and miners ($1,700 in gold is likely to correspond to about $31 in GDX).

Remember, last week’s upswing is a relatively normal bounce within a bigger decline. And this corrective upswing might have already ended.

Today’s pre-market price action is very volatile - the USD Index soared, stocks plunged, while gold and silver moved higher and then declined (outperforming gold first!), likely due to disrupted supply chains in Europe and a new wave of fear regarding the current pandemic. This is in tune with the technical points made above.

Despite a recent decline, it seems that the USD Index is going to move higher in the following months and weeks, in turn 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.

Finally, on an administrative note, due to the Holiday season, there will be no regular Alerts posted on Thursday (Dec 23) and Friday (Dec 24). If anything major happens, we’ll send out a quick message to you anyway.

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

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 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