Silver’s not Alone Anymore

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Briefly: in our opinion, full (200% of the regular size of the 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 our previous analyses we wrote about silver’s outperformance as something bearish and we saw the latter once again yesterday. The difference, however, was that this time, the white metal’s upswing was accompanied by higher mining stock prices. The latter sometimes indicates the beginning of a rally, so the above might be viewed as a bullish invalidation of silver’s previous signals. Did the outlook really change yesterday?

The answer is no.

Silver’s outperformance of gold was once again a bearish sign and mining stocks performed well only on a daily basis. Taking the last few days into account reveals that what happened in the miners yesterday, was really nothing special. Let’s take a closer look.

Miners (not so) Big Rally

Silver just moved to a new monthly high in a visible way, gold moved to a new monthly high in a less visible way, and mining stocks didn’t move to a new monthly high at all. Are the latter really showing strength?

No, and the daily GDX ETF chart provides additional details.

VanEck Vectors Gold Miners ETF

Can you see yesterday’s rally without clicking on the above chart to enlarge it and without moving close to the screen? Not really. The only reason why yesterday’s move higher seems to be important is because of the very boring performance of mining stocks that we’ve been seeing for a few months. The volume that accompanied yesterday’s upswing was bigger than Friday’s one, but overall it was still rather low. Miners are consolidating and moving back and forth – not rallying strongly.

Speaking of GDX’s volume, let’s take a look at the weekly levels.

VanEck Vectors Gold Miners ETF

The volume in the GDX was very low in the previous two weeks while the price moved insignificantly higher. There were only two similar cases in the recent past. And both were followed by declines in the following weeks. The November 2017 analogy resulted in about $2 decline, and the August 2014 analogy was followed by about a $10 downswing.

$10 decline from the current price levels would mean GDX at the 2016 low. This may seem unrealistic, but… Well, that’s what we already saw after similarly low volume. To be clear, the analogy is not perfect, because percentagewise the move to the 2016 low would be bigger, but still, any confirmed breakdown below the late-2016 low is likely to result in a steep move down, as there’s not technical support all the way to the 2016 low. Just as people were buying like crazy in the early 2016, they are likely to sell like crazy later this year.

Gold Bugs Index

As a reminder, gold stocks are on a verge of breaking much lower and the analogy to the 2012-2013 decline suggests much lower PM stock prices ahead. The breakdown below the late-2016 low seems to be just a matter of time and once we see the breakdown below the rising, medium-term support line, we’re likely to see a drop to the 2016 quite soon.

This boredom seems to be ending and those who give up on this market right now, are going to regret it.

Let’s move back to the low volume readings. We saw something similar in daily terms in the key ETF for gold.

GLD SPDR Gold Shares

The GLD ETF moved higher yesterday, but it did so on extremely low volume. It was the lowest daily volume in about 3 months. In the previous year there were only 3 similar cases and they were all followed by the same (or almost the same) kind of action. Declines.

In both: late February 2018 and mid-March 2018, gold moved lower immediately after the low-volume upswing and the remaining, October 2017 case was when GLD moved lower with a one-day delay. Overall, the implications are definitely bearish.

Having said that, let’s take a look at silver.

Silver - Continuous Contract

Silver has indeed moved higher yesterday, and it erased some of the gains in today’s pre-market trading ($16.84 at the moment of writing these words), so it’s already back below the previous June high. Did the move make the outlook significantly bullish? Not at all as it was not accompanied by strength in the gold market (extremely low volume during a small upswing in the GLD ETF is the opposite of strength) and the accompanying mining stocks’ rally was not as significant as it may appear at the first sight.

How does the above compare to what we saw previously in silver? In short, yesterday’s performance doesn’t change absolutely anything regarding our silver analysis and since we wrote quite a lot on it on Friday, we don’t want to repeat ourselves today. If you haven’t had the chance to read that issue previously, we strongly suggest that you do so today.Yes, the bearish implications of the big-volume rally definitely remain in place.

On a side note, we can now see that the triangle-apex-based turning point has actually worked, but it turned out to be a short-term bottom instead of being a top.

Silver - Continuous Contract/ Gold - Continuous Contract

The only thing that we would like to update you on is the silver to gold ratio. Precisely, the RSI indicator that’s based on it. It moved very close to the level of 70, and this level is something that should make silver bulls consider changing their outlook to at least neutral.

The thing is that practically each time that the RSI based on the silver to gold ratio moved above 70 and then back below it meant that the top is in. In many cases (for instance earlier this year), the RSI didn’t even have to move to 70 – its proximity was enough to have bearish implications going forward.

In the April 23rd, 2018 Gold & Silver Trading Alert, we wrote that the short positions were definitely (we had 200% exposure, just like we currently do) justified, while the above RSI was a bit above 69. It turned out that it was the day when the decline accelerated. This may or may not be the case this time because of all the fundamental stuff that’s going on this week (Fed, ECB, BoJ meetings), but the decline is likely to follow shortly anyway.

On June the 4th, we wrote about the extreme boredom on the precious metals market. In particular, we commented on the above chart in the following way:

The situation in gold’s sister metal is analogous and serves as a perfect confirmation. There was only one situation which was similar to what we’ve seen in the past months and it’s what had happened before the final part of the previous bear market.

The situation is similar not only in the level of the Bollinger Band’s width, but also in case of the shape of the moves in both: indicator and silver price. As far as the latter is concerned, the 1998 top is very similar to the 2016 top (note the characteristic head-and-shoulders shape and silver’s position relative to both moving averages). In both cases the declines ended at the end of the year (1998 and 2016) and then silver started to move back and forth for about 1.5 years with several sharp rallies that didn’t last long. That’s exactly what happened in both cases and based on this analogy it seems that the back-and-forth movement is coming to an end.

What’s next? Back in 2000 and 2001, silver decline in a rather stable manner, but it may not be the case this time. The decline that we saw almost 20 years ago was preceded by about 10 years of back and forth movement around the $5 level, from which the decline started. Investors were not interested in the silver market and traders were unimpressed as well and the volume reflected it. Consequently, there was much less short-term capital that could have been added on the short side of the market, exacerbating the downswing.
The situation is very different today despite the similarity in the recent price moves.

Silver has not been trading around the $16.50 for a decade, but for about 3 years and what we saw less than 10 years ago was a 2.5-year rally that took silver from below $9 to about $50. That was extremely exciting, and many people keep thinking that silver is about to take off immediately. The volume readings show that the interest in the silver market is many times bigger than it was about 20 years ago.

Besides, even during the last 1.5 years of back and forth trading, the very short-term moves in silver were much more volatile than the ones in 1999 and 2000. In particular, the early July 2017 overnight decline served as a proof that volatility in the white metal is to be expected.

What does it all mean? It means that the signal coming from the analysis of Bollinger Bands’ width is well confirmed and we should be preparing for lower gold and silver prices in the coming weeks.

Why are we bringing the above back today? Because the Bollinger Band’s width decreased once again. The boredom is even more extreme and the similarity to the 2000 pre-slide situation is even stronger. This means that the bearish implications for the following weeks became even more bearish, even though we saw higher prices of silver recently.

Silver is known to erase the previous rallies sharply and without looking back. We may see something like that relatively soon.

Forex Update

As far as the situation in the currency markets is concerned, there were very little changes overall. The USD Index moved higher so insignificantly (by 0.02) that practically everything that we wrote previously on USDX, EUR/USD, and JPY/USD remains up-to-date.

There’s one thing that we would like to add, though.

US Dollar Index - Cash Settle

The analogy to 2014 (described in detail in the previous alerts) implies two things. One is that the final bottom for the USDX is likely to be already in. Second is that we shouldn’t be surprised to see a few days of sideways trading before the rally resumes. That’s exactly what happened in October 2014 and it fits this week’s fundamentally driven uncertainty.

So, while the outlook for the USD Index remains bullish for the following weeks, the news 2-3 days may be characterized by back-and-forth trading.

Interestingly, in 2014, gold didn’t slide until the USDX consolidation was over. Gold traders didn’t believe in the USDX bottom back then and they don’t seem to trust it at this time. But, when USD holds well and then starts to rally, it should get their attention, just like it did in 2014.

All in all, it doesn’t seem to be justified to have open trading positions in the forex market because of the uncertainty and possibility of seeing sharp price moves based on the news that will come from the monetary authorities this week. But, once the tension subsides, it may become justified to enter into positions that benefit from the rising value of the US dollar. At that time the risk will likely be lower and the risk to reward ratio, more favorable.

Summary

Summing up, nothing really changed on Friday or yesterday except for silver’s upswing. The latter is not a bullish, but bearish sign and while the daily upswing in the mining stocks may seem encouraging, it really isn’t when viewed from a broader perspective. Due to this week’s monetary authorities’ meetings, the outlook may be cloudy for the next few days, but it remains very bearish for the following weeks and months.

New signals – the move close to 70 in the RSI based on the silver to gold ratio and a fresh low in the Bollinger Bands’ width for silver –strongly suggest that lower PM prices are just around the corner.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% 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:

Gold: initial target price: $1,251; stop-loss: $1,382; initial target price for the DGLD ETN: $48.88; stop-loss for the DGLD ETN $37.48
Silver: initial target price: $15.73; stop-loss: $18.06; initial target price for the DSLV ETN: $27.58; stop-loss for the DSLV ETN $19.17
Mining stocks (price levels for the GDX ETF): initial target price: $21.03; stop-loss: $23.54; initial target price for the DUST ETF: $28.88; stop-loss for the DUST ETF $21.16

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 – but 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: $30.62; stop-loss: $36.14
JDST ETF: initial target price: $59.68 stop-loss: $40.86

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

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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