Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert. In other words, we are increasing the size of the speculative short position.
Today’s alert is going to be a bit different than the usual ones as not much happened in yesterday’s trading but a major event took place in the overnight trading. Silver collapsed to $14.34 (based on Bloomberg’s prices) in minutes and even though the price reversed and recovered relatively quickly, that was not a minor event.
If you’ve been following our analyses for some time, you know that we strive to remain as objective as possible and refrain from using the word “manipulation” to explain random price movements. However, this time, things don’t add up.
Silver is volatile in general – OK. Silver declined in a sharp manner in the past and sudden price moves shouldn’t seem odd – OK. Silver can be traded in the overnight market, when the volume is thin and thus the moves could be big – OK. Someone could make a mistake when entering a shorting order and added a few extra zeros in the amount field – OK. Some big entity could have panicked right before the non-farm payroll numbers – OK.
However, if a mysterious flash crash happens in silver less than 2 weeks after an analogous flash crash in gold and both take place outside of regular U.S. trading hours – that’s very far from OK.
So, while there is no proof of any wrongdoing here, we need to take the “what if” case into account, because things really do look like there was a big entity (or many entities that either worked together or backed-out of a pre-arranged agreement together) that knew about silver’s (and gold’s) decline in advance and took action to either enter massive short positions or to close long ones before the biggest part of the move materialized.
At first sight, the recent developments look rather random, but the more one thinks about it, the more they start to appear like they were made to look random.
If you had a lot of money (whether you had positions in silver in the first place or not is not that important – if you did, you can exit them, and if you don’t, you can enter short positions) and you knew that the precious metals were going to fall hard in the coming months, because that’s how things are going to be triggered – how would you take advantage of it, so that you didn’t attract the regulator’s attention, and even if you did, so that you could defend yourself?
You’d know that your position was / would be so significant that you would move the market, so you couldn’t really hide the move itself. Theoretically, you could spread your position among many days and limit the impact on the price. However, you would risk many people noticing it before you took your position and since your action could trigger a downtrend (maybe even the huge move that you’re trying to profit on), you might enter the final parts of the position at unfavorable prices. Plus, you would not be able to explain to the regulator that you reacted to specific news – it would be hard to hide your intention to enter a huge position right before a big move. All in all, it would look like you were trying to hide something and you wouldn’t get good prices anyway – not an optimal solution.
So, why not make it look like you are not trying to hide anything, make sure you have a good and timely excuse (which judge can tell you that you can’t enter/exit a position based on a very important news announcement, like the non-farm payrolls?) and spread the position, but only to the extent that it doesn’t indicate any trend and in fact appears random?
The above covers all bases – the impact on the price would have to be huge anyway, but it would not generate red flags with the regulators and even if it did, you would have very good excuses.
What actually happened?
On June 26th gold plunged in a very meaningful way (1.8 million ounces were traded in one minute) and the intra-day low was less than $20 below the starting price of the decline. That’s not much compared to silver’s move, but let’s keep in mind that the gold market is much bigger than the silver one, so the impact of even a huge sale would be smaller. The plunge in gold happened before the markets opened in the U.S. on Monday. On Monday, Mario Draghi spoke and on Friday (June 23rd), new U.S. home sales data was released and FOMC members spoke. The above could be used to explain to the authorities the decision to sell gold.
Today’s flash crash in silver took place almost two weeks after the mysterious gold sale, so the two don’t seem connected at first sight. “Surprisingly”, today’s collapse also took place outside of the regular U.S. trading hours. It’s even more interesting that the collapse took place exactly when different exchanges were open (except for Globex, today’s move was seen when the Sydney exchange was open and gold’s decline was seen when the exchanges in Hong Kong and London were open) – just like if someone didn’t want the same regulators to look into both trades and in no case did they want the U.S. regulators to be involved.
The non-farm payroll report is released today, which is an excellent excuse for any transaction – “we were expecting the report to exceed / fail to meet expectations based on this and that and we sold before the announcement”.
Different exchanges, different times of the day/night, different reasons to open or close positions and different metals – what could possibly connect the two transactions? Surely, they were just random… At the moment of writing these words, we noticed a few short mentions of the overnight silver plunge and none of the authors connected it with the previous decline in gold – the strategy seems to have worked.
Still, there has been no meaningful and lasting price decline in the precious metals sector so far (with gold moving hundreds of dollars lower) and consequently, if someone wanted to take on new positions or exit the previous ones before the plunge, they succeeded.
Now, some may say that both moves, in particular today’s move in silver was something different – short-term manipulation aimed at throwing longs out of the market by triggering stop-loss orders and entering big long positions at more favorable prices. This would supposedly be confirmed by a quick turnaround in both cases. Wouldn’t this – as a quite clear reversal - invalidate the bearish implications and be a bullish sign?
It might have looked this way if it weren’t for the fact that not many traders place stop-loss orders far from the current price (it’s generally rare for traders to have it more than $1 away from the price), so it wouldn’t make sense to trigger such a big decline just in order to catch a handful of extra orders.
Who took the opposite positions that would drive metals back up in the short term? Likely traders focusing on catching the gold-silver spread aiming to profit on temporary imbalances. It could have been some algorithmic trading techniques or manual traders that were entering the orders to take advantage of the sudden drop in the price of one metal without a big change in the other one.
Were both orders accidental? One of them might have been – it would have been unlikely, but it could have been the case. Two similar flash crashes in a relatively short period are highly unlikely to be accidental (if they are unrelated then a 20% probability of each being accidental translates into a 4% probability of them both being accidental).
Were both transactions conducted by the same entity or group that is trying to take advantage of other market participants? There is no direct proof, but there are many things that point to such a scenario.
So, if someone or a big entity (or a group of them) knows that the next huge move in the precious metals market is going to be down (which is in perfect tune with our previous expectations) then we can take advantage of this information and position ourselves accordingly. We’ve been out of the long-term precious metals investments for a long time and we already have a trading short position, so there’s one thing that we can do in light of the increased odds of a big decline in the coming weeks and months. We can’t further decrease the investment position as there is none, but we can increase the size of the speculative short position to 150% of the regular trading position – and that’s what we’re doing in today’s alert.
We’ve also been waiting for the situation to clarify a bit regarding the gold-USD link and based on what we see right now, it seems that the bearish implications are even stronger – during yesterday’s session the USD declined and metals replied by moving higher, but only insignificantly so. In today’s session, the USD is up a bit and metals replied by declining (not taking the temporary flash crash into account), but the relative strength of the reaction today is much stronger than what we’ve seen yesterday. Again, the implications became even more bearish.
Finally, we would like to stress that the days when non-farm payrolls are announced are often quite volatile, especially right before and right after the announcement, so if gold and silver move temporarily higher today it will not necessarily invalidate the bearish outlook or make it any less bearish.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): 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 / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
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
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 always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
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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