Briefly: in our opinion, full speculative short positions (100% of the regular position size) in gold, silver, and senior (but not junior) mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert. The short positions in junior mining stocks were automatically closed yesterday at $26.53 (GDXJ), which means that the JDST positions were also closed, likely close to $24 or so. As a reminder, we had opened the latter on Feb 21st, below $8, and we increased them to 250% size of the regular position size on Feb 25th, below $9. Please note that we are decreasing the size of the short position in gold, silver, and senior miners, which means that most of the position (the move is from 250% to 100% of the position size) should be closed and profits taken off the table. The easy and moderate parts of this particular short-term slide are over, and we are entering a more difficult time.
In yesterday's intraday Gold & Silver Trading Alert, we moved the binding profit-take levels for the GDXJ lower and they were hit later during the day. This means that both: GDXJ and/or JDST positions were closed, at a huge profit.
The positions in gold, silver, and senior miners remain in place. Do we close them at this time? Yes, but only mostly. The S&P 500 didn't reach its downside target level and the USDX seems to have more room to rally before taking a bigger breather. This means that the moves lower in gold, silver, and miners are likely to continue.
However, it is not as extremely likely as it was before that the next short-term move will be to the downside. The support level (the 2018 low) in the S&P 500 is relatively close (just about 80 index points below today's pre-market low), so some people might start buying now, without waiting for another move lower.
Yesterday's Carnage
And it seems that it's already happening today as stock market futures are up by about 5%. The GDX and GDXJ are also moving back up in today's pre-market trading.
To be clear - we continue to think that this is just the beginning of an even bigger move. However, no market can move in a straight line up or down, so a corrective move is likely to take place sooner or later. Since the decline was very volatile in the miners, the corrective upswing is also quite likely to be volatile. This means that it would be ideal to exit the market (or even enter a long position) if the chances for a rebound are becoming big. Right now, they became bigger, but the outlook still looks bearish overall.
Senior miners just moved to their 50% retracement based on the entire 2016 - 2020 rally and that's practically the only reasonably strong support level that was reached. The support lines and mid-2019 lows were not reached yet.
The RSI indicator moved below 30, but given the shape and volatility of the recent slide, the situation is similar to what happened in mid-2015 and mid-2018. And the RSI had to move below 20 to trigger the true buy signal.
Before moving further, please consider the retracement that was reached and what it means. Half of the 4-year rally was erased in less than a month. People were criticizing us and calling us perma-bears when we wrote that it might be difficult to get out of the precious metals market and enter short positions once the move lower really starts. Probably some were laughing at us. Well, they are probably not laughing now.
In case of silver, it's even clearer that the strong support levels remain to be reached. And indeed, silver moved lower in today's pre-market trading (about 2%) despite a move higher in stock market futures.
Gold is relatively flat today (moving between -0.5% down to 0.3% up) in today's pre-market trading as the USD Index moves up (about 0.75% so far). That's the pair that we would like to examine particularly closely now.
The Greenback Rules the Day
The reason is that the negative correlation between gold and the USD Index is returning and it's been particularly visible in gold's current very short-term decline. This means that it could be useful also in determining its final moment.
The USD Index soared back up as it became obvious that status of things in Europe is moving from bad to worse and that this is the way things are likely to remain for some time. After this "some time" we could see more selling pressure on the USD Index, which is unlikely to change the medium- or long-term uptrends in the US currency, but that are likely to cause short-term turbulences.
"Some time" here is directly related to how the situation regarding Covid-19 develops around the world. Now, it seems that the Europe and Asia are on fire, but things are relatively calm in the US.
If you have some time now, we encourage you to read this article on coronavirus - I find it to be the most informative piece on that topic that I've read so far (not in financial terms, but in general). If you don't have time right now, I strongly encourage you to get back to this article later today. Long story short, things are very far from ok in the US and unless some really dramatic measures are taken (some ideas are quite extreme), the virus will spread throughout the country. And we don't think that these measures will be taken in the US shortly, which is only likely to make things worse several days or weeks later.
Regardless of the way the situation is handled, it'll quite probably trigger further weakness in the US stock market. Still, the implications for the currency market are relatively unclear. Depending on how quickly the situation develops in various parts of the world, the currency exchange rates can behave differently.
It seems that the US is still in the very early stage of epidemic, while the Europe is in a comparatively latter one. This means that for some time (several days or more, but not as long as several weeks) people are likely to flock to the US dollar as a safe haven. However, once the US "catches up" with the rest of the world, or the situation gets worse as it is not dealt with soon enough, the situation could reverse as investors want to get out of the US dollar. This might be when they turn to gold. They key word here is "might".
If that is about to happen, we should see some technical confirmations beforehand (not everyone will switch their preferences at the same time, so some things should be visible in the technicals).
It's very unclear how the coronavirus epidemic will be addressed in the US once it becomes much more severe. However, your Editor's best guesstimate is that the US will adopt the UK stance - to slow the disease's spread, but don't try to stop it, as it will be relatively unstoppable (using publicly acceptable means). Of course, we might be wrong, and it might be the case the charts tell us that before the implications hit the market in a big way.
For now, it seems that the USD Index is headed up. And this means that the prices of gold and silver are likely to move down.
In many previous cases, USD's initial rallies were then multiplied using the Fibonacci extensions. The way to check where the final short-term top is going to be, was to use the Fibonacci retracement tool and align the 61.8% retracement with the initial top. On the above chart, we applied that to previous rallies and this technique worked quite well. It's currently pointing to 100.73 as the next upside target.
Of course, that's above the recent 2020 highs and the 100 level which is a natural resistance as it's a round number. Round numbers tend to be important from the psychological point of view.
Any of these levels could stop USD's rally at least temporarily. Still, the 100.73 level appears to be the most likely target.
Now, how low can gold and silver go, if the USD Index rallies to 100.73? A useful way to estimate that would be to use the same Fibonacci extension technique that we used for the USD Index.
Applied to gold, it provides us with about $1,470 as the next target.
Applied to silver, it provides us with about $14.50 as the next target.
Summary
Summing up, the 2020 top in the precious metals market is most likely in. Gold declined on record-breaking volume, while silver and miners plunged to new yearly lows - and it happened even before the USD's rally resumed. During the rebound, silver and mining stocks continued to show weakness. The outlook for the following months is extremely bearish, especially that even gold failed to really react to what happened recently. All of the following factors: dramatic increase in the fear of coronavirus, crude oil turmoil, and an extreme shift in market's expectations regarding interest rates, should have caused gold to soar, and the only thing that it was able to do, was to test its recent highs.
On one hand, the situation is similar to what happened in 2008 - the Fed is trying desperately to cut rates and prevent the market from sliding, and it's not really working. On the other hand, there are very visible similarities to how gold performed at and immediately after its 2011 top. Implications of both analogies are very bearish for the following weeks and months.
We are taking profits off the table in case of most of our trading position (moving from 250% to 100% of the regular size of the position) and we are keeping the position in junior miners closed. You just made a lot of money - congratulations.
We're likely to make some more on this short-term trade and then we'll aim to make much more as the decline continues. Still, given how things are developing in the world, we might be engaging in short positions in silver and miners, but not in case of gold, as the price of the latter might be too unpredictable. It's too early to say with 100% certainty, but we are giving you the early heads-up.
Also, if GDX or silver move to their profit-take levels, we might close the short position in gold as well, regardless of where gold is trading at that time - we would send an intraday Alert in such case.
By the way, we just opened a possibility to extend one's subscription for a year with a 10% discount in the yearly subscription fee. It also applies to our All-Inclusive Package (if you didn't know - we just made huge gains shorting crude oil and are also making money on both the decline and temporary rebound in stocks). The boring time in the PMs is over and the time to pay close attention to the market is here - it might be a good idea to secure more access while saving 10% at the same time. You can proceed using the following link and in case you have some questions, please don't hesitate to contact us:
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As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (100% of the full position) in gold, silver, and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:
- Gold futures: profit-take exit price: $1,472; stop-loss: $1,712; binding profit-take level for the DGLD ETN: $27.30; stop-loss for the DGLD ETN: $19.88
- Silver futures: profit-take exit price: $14.63; stop-loss: none (if gold moved to $1,712 we would view silver positions as no longer valid); binding profit-take level for the DSLV ETN: $26.10; stop-loss for the DSLV ETN: none (if gold moved to $1,712 we would view silver positions as no longer valid)
- Mining stocks (price levels for the GDX ETF): binding profit-take exit price: $21.12; stop-loss: $29.51; binding profit-take level for the DUST ETF: $11.19; stop-loss for the DUST ETF $4.25
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 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 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
