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.
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.
Based on last week’s price moves, our most recently featured outlook stays the same as the price moves were aligned 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 on the recent fundamental news and developments. Last week, we focused on the upcoming US elections, the Covid-19 situation, and the stimulus package related to the latter. Today, we will start with the most recent comments from the International Monetary Fund.
In short, the IMF’s economic outlook for 2020 is less grim. However, the distant future is more worrisome. Therefore, it is expected that the precious metals market will rise.
October’s edition of the IMF’s World Economic Outlook Report is out! It conveys that now the IMF predicts a less severe global contraction than in 2020 and a slower recovery in 2021. The global economy is projected to plunge 4.4 percent this year and rise 5.2 percent in the subsequent year, contrary to the -5.2 and 5.4 percent changes forecasted in June.
Unfortunately, the prospects for emerging countries, excluding China, have worsened. The economic decline for 2020 is projected to be far greater than previously estimated. As a result, the pandemic will reverse the progress made since the 1990s in reducing global poverty.
When it comes to the US economy, it is forecasted to contract by 4.3 percent this year before growing at 3.1 percent in 2021, compared to -8 percent and 4.5 percent seen previously a few months ago. However, the reasons for the celebration are limited, as these projections could be revised down soon.
You see, the problem is that the second wave of the coronavirus cases (see the chart below) is hurting the employment rate again.
As the chart below points out, the number of Americans who applied for unemployment benefit has recently risen to the highest level over the last few weeks.
Even though the IMF’s near-term projection has improved, another issue is that the baseline forecast envisages growth to slow down into the medium term, as the deep downturn this year will harm the supply potential. It means that the US will only modestly progress toward the 2020–25 path of economic activity projected before the epidemic.
Most importantly, the subdued outlook for medium-term growth comes with a significant projected increase in public debt stock. What is worrying is that the reduced potential output also implies a smaller mid-term tax base than previously anticipated, making repaying debts even more difficult.
Indeed, debt is an increasingly pressing problem all over the world, including the US. As a matter of fact, according to the IMF’s Fiscal Monitor, the debt-to-GDP ratio will stabilize next year everywhere but China and the US:
In 2020, government deficits are set to surge by an average of 9 percent of GDP, and global public debt is projected to approach 100 percent of GDP, a record high. Under the baseline assumptions of a healthy rebound in economic activity and low, stable interest rates, the global public debt ratio is expected to stabilize in 2021, on average, except in China and the United States.
However, public debt is not the only big problem in the US. Corporate indebtedness is also a worrying issue. In response to the coronavirus crisis, firms have also taken on more debt to cope with the reduced income and cash shortages, adding to the already high debt levels. Therefore, according to the IMF’s Global Financial Stability Report, if the recovery is delayed, “liquidity pressures may morph into insolvencies”.
So far, the policy support limited the scale of bankruptcies. But still, the economists from the Bank of International Settlements predict that bankruptcies in advanced economies could rise from the baseline in 2019 by around 20 percent in 2021.
What does all the above mean for the gold market? Well, the improved near-term outlook for the US economy is not good news for the yellow metal. However, the slower than expected growth in 2021 and beyond is becoming increasingly positive. Most notably, “the global economy’s long ascent back to pre-pandemic levels of activity remains prone to setbacks”. In other words, the uncertainties persist, which should support the safe-haven demand for gold as a result.
Perhaps this is why the IMF expects that the precious metals index will rise by 28.4 percent in 2020 and by a further 10.4 percent in 2021 in the middle of elevated risks and the dovish monetary policy.
The growing coronavirus cases, subsequent worries about the already fragile recovery, U.S. and presidential election uncertainty have recently pushed gold prices above $1,900, as shown in the chart below.
What counts the most is that the price of gold managed to rise above $1,900 again, despite the declining odds of a new fiscal stimulus happening before the elections occur and the resulting S&P 500 Index decrease. Gold’s decoupling from the stock market would increase its role as a safe-haven asset.
But, who knows, it might be the case that gold is just hovering around $1,900 right now, and it needs a fresh catalyst to continue its rally. Perhaps the U.S. presidential elections, which are likely to be contested, will provide such a trigger?
Or maybe gold would decline based on the election’s outcome? After all, that’s what happened right after Trump won in 2016, and the current technical picture supports the bearish outlook.
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.
Much like in March, it seems that the evident economic decline might trigger a sell-off.
At this point, we would like to quote what we wrote about the aspects of the virus scare and how the market reacts to them. In short, gold (and other markets) reacted when people started to strongly consider the pandemic's economic implications, a topic that was ubiquitous in the media.
Undoubtedly, the most important factor for gold will be the economic implications of the second Covid-19 wave. How do we know that? Because we compared what people were searching for (online) with how the gold prices were shaped. There's a lot more data available on https://searchingcovid19.com/, but we'll focus on the chart that shows us exactly when people were getting interested in each aspect of the pandemic, and we'll compare that to gold.
We aligned both charts with regard to time. The chart on the bottom is from Stockcharts.com and it features gold's continuous futures contract. The gold price (and the USD Index value) really started to move once people got particularly interested in the economic impact of the pandemic and in the government's response.
In the recent days (and weeks) the news is dominated by other issues. Once people start considering the economic implications of the second wave of this coronavirus, the prices would be likely to move.
The news coming from the Fed is positive for gold in the long run, but in the short term, they continue to indicate risk for the economy. This risk is likely to translate into lower stock values and initially gold is likely to slide given the above - just like it did in March.
All in all, gold is likely to rally far in the long run, but in the short run it’s vulnerable to a sizable decline, when the economic implications of the pandemic’s continuation become obvious to investors.
Stocks and the Dollar Weigh In
The big news of the previous weeks was that the general stock market managed to move higher, despite the invalidation of the early-2020 high. This is something unusual for any market, as commonly invalidations of breakouts or breakouts are strong indications that the market is going to move in the opposite way. The invalidation of the breakout was therefore a strongly bearish sign.
So, what happened? Well, it could have been the case that the nothing-bad-will-happen-before-the-elections rule applied, and the rally was more orchestrated than natural. By that we mean that some powerful investors bought enough to trigger the rebound. And let’s keep in mind that the Fed pledged to play an active role right now – even more so than it did in 2008.
What does it mean going forward? It means that the slide could be delayed, but I don’t expect it to be averted entirely. After all, no market can be “triggered artificially”, “supported”, “set”, or “manipulated” for longer periods (of course, except the interest rates), and despite the massive money printing, the economy is not doing great. And that’s an obvious understatement.
From the technical point of view, we would like to point out three things:
- Stocks have corrected more than 61.8% of the recent decline, so they could move higher in the short term. That’s not something certain, though.
- In 2018 we saw a tiny invalidation of the breakout, then another move higher (slightly above the previous highs), and stocks plunged shortly thereafter.
- In early 2020, the very initial decline was relatively small, and it was followed by another move higher (slightly above the previous high). Stocks plunged shortly thereafter.
Consequently, in analogy to two most similar situations to the current one from the recent past, it wouldn’t be surprising to see stocks move to or even slightly above the previous highs, before they turn south in a spectacular way.
This could mean a delay in precious metals’ and miners’ decline as well. Again, a decline, not its absence. Especially that the situation continues to be excessive on the forex market.
Remember when in early 2018 we wrote that the USD Index was bottoming due to a very powerful combination of support levels? Practically nobody wanted to read that as everyone “knew” that the USD Index is going to fall below 80. We were notified that people were hating on us in some blog comments for disclosing our opinion - that the USD Index was bottoming, and gold was topping. People were very unhappy with us writing that day after day, even though the USD Index refused to soar, and gold was not declining.
Well, it’s exactly the same right now.
The USD Index was at a powerful combination of support levels. One of them is the rising, long-term, black support line based on the 2011 and 2014 bottoms. The other major support level and a long-term factor is the proximity to the 92 level – that’s when gold topped in 2004, 2005, and where it – approximately – bottomed in 2015, and 2016.
The USDX just moved to these profound support levels, broke slightly below them, and now it has clearly invalidated this breakdown. For many weeks, we’ve been warning about the likely USD Index rally, and we finally saw it.
Quoting my previous comments:
USD Index moved briefly below the long-term, black support line and then it invalidated this breakdown before the end of the week. This is a very bullish indication for the next few weeks.
Based on the most recent price moves, the USDX is once again below the above-mentioned strong rising support line, but we doubt that this breakdown would hold. We expect to see an invalidation thereof that is followed by a rally.
Before moving to the short-term chart, please note that the major bottoms in the USD Index that formed in the middle of the previous years often took form of broad bottoms.
Consequently, the current back and forth trading is not that surprising. This includes the 2008, 2011, and 2018 bottoms.
A crucial aspect is that the rally that we’ve witnessed so far is just the tip of the bullish iceberg. The breakdown below the key support levels was invalidated, which is a strong bullish indicator. Since it happened on a long-term chart and the temporarily broken lines were critical, the implications are incredibly important as well– and they should be visible from the long-term perspective.
So, how high could the USD Index rally now? At least to the 100 level (approximately). This way, the upcoming rally would almost match the rally that started after the previous major invalidation – the 2018 one.
Still, we wouldn’t rule out a scenario in which the USD Index rallies above its 2020 highs before another major top. After all, the USD Index is after a very long-term breakout that was already verified several times.
Taking into account USDX’s lengthy breakout, its several breakout verifications, and the 5-year consolidation, it seems that the USD Index is ready to rally much higher – perhaps to approximately 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.
The short or medium-term target for the USDX is relatively unclear right now, and it’s very oversold on a short-term basis. It all happened in the middle of the year, which is when on many occasions, the USDX formed major bottoms. This makes a short-term rally here very likely.
The short-term USD Index chart is not as important as the long-term one, but let’s take a look at it anyway.
In short, what we just saw on a bigger scale is now visible on a smaller scale as well.
After the USD Index broke above its declining resistance line, it then verified its breakout by declining temporarily.
The late-September - October consolidation seems to have ended a few days ago when the U.S. currency broke above the declining, short-term resistance line.
From a medium-term point of view, since the market had to correct before moving higher again, it’s no wonder that it needed to do the same from a short-term point of view as well. Today’s move lower represents a correction of the most recent short-term breakout. As such, it doesn’t change anything. The USD index must decline a whole lot more than it did in the past few days for the move to have any bearish implication.
As the outlook remains bullish for the USD Index, consequently, it remains bearish for the precious metals sector. It is particularly the case if we consider that recently, the Gold Miners Bullish Percent Index showed the highest possible overbought reading.
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 has caused the Gold Miners Bullish Percent Index to move up once again for a few days. It then declined once again. We saw something similar also this time. In this case, this 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. Given the situation in the USD Index, it seems that we’re seeing the same thing also this time.
Please note that back in 2016, after the top, the buying opportunity didn’t present itself until the Gold Miners Bullish Percent Index was below 10. Currently, it’s above 60, so it seems that miners have a long way to go before they bottom (perhaps a few months – in analogy to how gold declined in 2016).
Eight weeks ago, we’ve commented on the chart above in the following manner:
Now, since the general stock market moved above the previous highs and continues to rally, we might or might not see a sizable decline early this week. Back in March, the slide in miners corresponded to the decline in the general stock market, and this could be repeated, or we could see some sideways trading after the slide resumes, once stocks finally decline.
That’s exactly what happened. The general stock market continued to move higher, and mining stocks have been trading sideways instead of declining – or rallying. Before miners’ pause (and S&P’s breakout) miners were repeating their late-February and early-March performance. The implications of the self-similar pattern were bearish, and they continue to be bearish, only the timing changed.
The GDX ended last week visibly below previous Friday’s close. This is in a perfect tune to what happened after the previous situations that we’ve marked with blue ellipses.
Exactly one week ago, we’ve emphasized the following:
“The GDX moved higher on Friday, invalidating the breakdown below the red resistance line. Naturally, this is a bullish sign, but before saying that the situation become bullish, let’s consider what followed similar – seemingly very bullish – price moves that we saw recently (July 27, August 17, September 9). That was either the end of the rally or it meant that the vast majority of the rally was already over. Consequently, it was not the time to be going long, but rather to be going short. In fact, Friday’s closing price was below all above-mentioned sessions’ closing prices. Interestingly, each case had a lower daily close than the preceding case.
Moreover, please note that while stocks corrected more than 61.8% of their recent decline, the GDX ETF corrected only a bit more than 38.2% of the move. So, even if the general stock market moves to or slightly above its previous 2020 highs, it doesn’t mean that the same would be likely for gold miners. The decline of the latter would likely be delayed in this case, though.”
Indeed, it seems that as of previous Friday’s close, most of the rally was already over. What we witnessed during last week was a relatively insignificant move higher that was then followed by a decline. The situation seems much like what happened in early August and mid-September – the GDX ETF moved slightly higher, only to stop there.
At the same time, miners moved slightly above their 50-day moving average, and then declined back below it. Back in March, miners moved slightly above their 50-day moving average only to plunge shortly after that.
And if the situation wasn’t bearish enough due to the above, the Stochastic indicator based on the GDX ETF just flashed a sell signal.
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 are only several months 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.
Let’s proceed to metals themselves.
I previously wrote that gold moved above the declining resistance line but stopped at its 38.2% Fibonacci retracement. Consequently, I have emphasized that the move above the declining resistance line had not been significant so that it would require confirmation.
But we never saw this confirmation happen. Instead, gold declined, invalidating the breakdown, which was a sell signal by itself.
However, as the USD Index is still verifying its short-term breakout, once again, gold is trying to rally above the declining resistance line. Will it be successful this time? I highly doubt that. Weekly prices are incredibly important, and in the previous week, gold closed below the resistance line. The move above is just taking place in today’s pre-market trading, far from being conclusive.
To me, it seems more likely that we will see yet another invalidation of the small breakout and – hopefully shortly, but even if not, then eventually – a decline. It is highly probable, especially if we consider the USD Index situation.
According to the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.
As far as the white metal is concerned, on September 24th, we have warned you about the possible temporary rebound:
Silver is also after a major breakdown and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any major rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.
That’s exactly what happened.
Is the counter-trend rally over? That’s quite possible, especially given the USDX breakouts. But, given the possibility that the stock market moves higher, silver could move somewhat higher before it slides once again.
In early March, silver moved higher before truly plunging, so the current move up doesn’t invalidate this similarity, especially that the Covid-19 cases are rising in a quite similar way (this similarity is most visible in Europe).
Technically, silver moved as high as it did on July 28th, on an intraday basis. The corrective rally is not as bit as one might think, while focused on just the Friday’s upswing. But that’s not the key thing here. The key thing is that the breakdown below the rising support line was more than confirmed.
At this point one might ask how do we know if that really just a dead-cat bounce, and not a beginning of a new strong upleg in the precious metals sector. The reply would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very likely because of multiple factors, and the clearest of them are the confirmed breakdowns in gold and silver, and – most importantly – the confirmed breakout in the USD Index.
Let’s go back to gold and zoom out.
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 possibility that gold would decline to the $1,500 - $1,600 area or so (50% Fibonacci retracement 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.
Gold’s is just (from the long-term point of view) after its very long-term turning point, and since the most recent move has definitely been to the upside, its implications are bearish.
We used the purple lines to mark the previous price moves that followed gold's long-term turning points, and we copied them to the current situation. We copied both the rallies and declines, which is why it seems that some moves would suggest that gold moves back in time - the point is to show how important the turning point is in general.
Based on the information that we have available right now, it seems likely that gold will bottom close to the $1,700 level. That’s very much in tune with how much gold moved after the previous long-term turning points.
Speaking of upside targets, eight weeks ago, we wrote:
Based on gold's Fibonacci extensions and the previous major highs and lows (the 2018 high and late-2019 low along with the 2020 low), we get a nearby upside target of $2085. At the moment of writing these words, gold is trading at $2044. Given this week's volatility, it could even be a matter of hours before gold reaches the above-mentioned target and reverses. Taking closing prices into account, gold is up by $35, so if it reverses significantly, we would be likely to see a powerful weekly reversal candlestick and one that causes gold to decline in the following weeks.
That’s more or less what happened. Gold topped at $2,089.20. It then declined quite visibly and closed last week at about $1,950.
Do you get the feeling that you have already seen gold perform this way before? Because you did.
The history rhymes, but this time, the similarity is quite shocking.
We copied the short-term chart and pasted it on the long-term chart above and next to the 2011 top. We pasted it twice, so that you can easily compare gold’s performance in both cases in terms of both: price and time.
They are very similar to say the least. Yes, these patterns happened over different periods, but this doesn’t matter. Markets are self-similar, which is why you can see similar short-term trends and long-term trends (with regard to their shapes). Consequently, comparing patterns of similar shape makes sense even if they form over different timeframes.
After a sharp rally, gold declined quickly. Then we saw a rebound, and a move back to the previous low. Then, after a bit longer time, gold moved close to the most recent high and started its final decline. This decline was less volatile than the initial slide. That’s what happened when gold topped in 2011 (and in the following years), and that’s what happened also this year. Ok, after the initial decline from the 2011 top, we saw two initial reactive rallies and in 2020 there was just one, but it didn’t change the similarity with regard to time.
The patterns of this level of similarity are rare, and when they do finally take place, they tend to be remarkably precise with regard to the follow-up action.
What is likely to follow based on this pattern, is that we’re likely to see the end of the slower decline, which will be followed by a big and sharp decline – similarly to what we saw in 2013.
How low could gold slide based on this similarity? Back in 2013, gold declined approximately to the 61.8% Fibonacci retracement based on the preceding rally (the one that started in 2008), so that’s the natural target also this time.
And we already wrote about this particular retracement – it’s approximately at the $1,700 level. This has been our downside target for weeks, and it was just confirmed by this precise self-similar technique.
Another interesting point is that gold made an interim low close to the 50% retracement and the previous lows. Applying this to the current situation suggests that we could see a smaller rebound when gold moves to about $1,760 - $1,800.
This might be the moment to switch from short positions in the miners to short position in silver. It’s too early to say for sure at this time, though.
Speaking of silver, please note that from the long-term point of view, silver is not that strong.
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.
Silver is likely to move well above its 2011 highs, but it’s unlikely to do it without another sizable downswing first.
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.
We see 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’s mostly gold that is making the major gains – not the entire precious metals sector.
So, how can one determine the end of the gold price decline? At $1,700, it seems that it can go either up or down. Where does gold need to go to complete the pattern?
In reality, gold could rebound from $1,700, but it could just as well slide further, perhaps once again to the previous 2020 lows, especially if the USDX rallies to its 2020 highs.
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 what the March bottom.
So far, the link between gold and the USD Index is strongly negative.
Since gold, silver, and mining stocks have been strongly negatively correlated with the USD Index in the short (30-day column) and medium term (90-day column), it seems likely that will continue to be negatively affected by the 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 the gold’s downside target? If, at the same time, gold moves to about $1,800 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.
However, since gold is only at $1,800, with a GDX of $32, there’s more decline to be expected. Perhaps that exiting GDX is only for changing to shorts in silver? Is that the only instance when that’s the case, or could it also be with a GDX of $32 and a gold price of $1,700. What would be a GDX target for gold a gold price of $1700 be?
It’s also not entirely clear whether you have up to six weeks until the lows arrive, instead of the end of the year.
Yes, we plan to exit the short positions in the mining stocks (GDX) and enter short position in silver. We don’t have an exact price at which we’ll do it (and it’s unclear if we’ll do it at all). We’re just describing what we’re going to do if a certain set of circumstances is met. If miners decline very profoundly, but silver declines only “normally”, then it would create a specific opportunity for one to switch from miners (that would be after most of their decline) to silver (that would be not be after most of its decline). Our estimation is that it might happen with GDX at about $31 - $32, and/or with gold at about $1,800. However, it would be the specific relative performance of miners to silver that would determine if we would make the switch or not.
We expect the above – a local bottom with miners at about $31 - $32 – to form within the next 5 weeks. However, this will likely not be the final bottom, especially if gold doesn’t slide to $1,700 at that time. We expect to see bigger declines to follow then, after a pause or a rebound. This means that miners could rally a bit from $31 - $32, and then decline below this area afterward.
At this time, the final GDX target (the one that would correspond to gold at $1,700 or lower) 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.
Letters to the Editor
Q: We received the following chart along with a request to comment on it:
A: So, is silver just an industrial metal?
Not only an industrial metal, and not just any industrial metal. It served as money for centuries, much longer than the fiat currencies have been used. Its specific properties are also widely used in many industries (best conductor of heat and electricity), and perhaps the only more versatile commodity than silver is crude oil.
The first verse of the Correlation Matrix shows just how closely silver moves along with gold – the flagship monetary metal. The link is not particularly strong in the long run, but it is still strong enough despite that.
And what about the link with copper – which we’ll use as a proxy for the industrial metals?
There are times when silver and copper move in opposite directions. However, merely stating that they move in adverse directions for a few days is not particularly informative. It is just a very brief move that is being examined, and both moves could have been just random noise.
Just like the existence of snowballs doesn’t negate the fact that ice caps are melting at an accelerating rate, observing just a few days when silver and copper move in the opposite directions doesn’t mean that they will move in the opposite directions for longer.
Taking the last few years into account, there were periods when silver moved together with copper (recently) and periods when it moved in the opposite direction (in late 2016).
There were also times when both markets moved relatively independently from each other, and there were times when one market led the other. The latter would be quite informative if it wasn’t for the fact that sometimes silver leads copper, and sometimes it’s the other way around.
The bottom part of the above chart tells us that copper and silver are positively correlated for most of the time, but the link is far from being carved in stone.
So, what can the link between copper and silver tell us? Exactly what we wrote previously. Namely, silver is an industrial metal, but not only that. It’s also a monetary metal. In other words, silver has a dual nature.
What does the above mean from here on out? That its performance could be less than perfect if the general stock market slides, but it will most probably catch up with gold in a major way, once stocks finally bottom and start to climb once again.
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 later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we 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 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 – 5 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 at the same time, a broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 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. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to execute such a strategy successfully.
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, given the recent move higher in the general stock market, it could be the case that the decline is delayed, but there also signs pointing to the corrective upswing being already over, just like the recent invalidation of the gold breakout and the very recent verification of the breakout in the USD Index.
Considering gold's breakout invalidation above the 2011 highs, it's evident that the big rally (that ended $4 above our upside target) is entirely over. Given this invalidation and the confirmed USD Index breakout, gold will probably slide much lower over the next few weeks. There are indications that the corrective upswing in the precious metals market and the pullback in the USDX are close to being over, so the decline could resume any day – or hour – now.
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 1-6 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
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: 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 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.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
