Briefly: in our opinion, full (250% 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.
The signal coming from the mining stocks is clear - lower values of precious metals and miners are just around the corner.
Once again, we will begin today's chart discussion with the picture featuring mining stocks. Miners plunged on Wednesday, right after we increased the size of our short position, and they moved up yesterday. Is the move higher a reason to be concerned?
Absolutely not. If anything, it's a actually bearish confirmation. Why? Because gold moved higher visibly, and miners moved up only barely. In fact, they declined on an intraday basis, what Stockcharts marks with black. And there's something very specific about this black candlestick right now.
On Wednesday, we wrote the following:
The thing that we would like to add today is the note about similarity between the price patterns that we saw between mid-February and early March and the last few weeks. The areas marked in red are identical. As you can see, the shape of the price moves is very similar, and so is the timing of the price extremes. In fact, the latter is almost identical. "Almost", as it seems the move lower started one day earlier this time.
It's just like if the PMs and miners got fed up waiting for the USD's rally and stock market's decline and are moving lower even without them. This is the perfectly bearish situation, because once we do get the above-mentioned signs, the decline is likely to simply accelerate.
The specific thing about yesterday's black candlestick in the GDX is that the same type of candlestick formed on March 10th - three days after the high in terms of the closing prices, two days after the first daily decline, and one day after the very interim bottom.
Back in March, this session was the very definition of the calm before the storm. What followed in the next three trading days was truly epic. And yet, just then, this session might have appeared not to be a big deal at all. At least to many of our bullish colleagues.
And just as we had suggested a huge, 250% short position in miners (we also had it in gold and silver at that time) in our March 10th Gold & Silver Trading Alert, we are shorting the precious metals sector with a huge position once again.
So far, the moves lower in the GDX were smaller than the ones in March, but please note that back then, miners had bearish support from the action in the main stock indices, which were falling. Right now, the general stock market does appear to be ready to fall, but it hasn't moved lower just yet.
Let's keep in mind the monthly May reversal in the HUI Index. Gold stocks have already declined shortly after May ended, but the size of the decline has been barely noticeable on the monthly chart where the reversal took place. Consequently, it seems that the move has only begun.
Gold rallied yesterday, and it's declining today. It's not a bearish sign on its own, but we want to show you that after the initial decline in March gold also corrected before sliding most profoundly. Back then, the move took form of an intraday move higher, and this time we had a daily upswing, but the similarity is intact in general. This means that yesterday's rebound is not necessarily a bullish development.
Silver has more or less paused which is also very similar to what happened right after the initial top. It then continued its decline shortly.
As you can see, PMs and miners are repeating their March performance to a considerable extent, but they are repeating slightly different parts thereof. Why would that be the case? For instance, because the situation in the related markets: USDX and the general stock market is somewhat different, especially in case of the latter.
The situation is more similar to what we saw in early March in case of the USD Index. The US currency is after a sizable decline also this time. Right now, it's not as big, but it's a bit longer. People now are starting not to fear Covid-19, but the second wave seems to be just around the corner.
In fact, it's clear that it's already here globally - please note the rise to new highs in new daily Covid-19 cases. As far as the US is concerned, right now people are still not focusing on the economic implications of "mass gatherings" of various kinds, including protests and riots. We'll expand that thought on Monday, but for now let's say that given the similarity to early March, it's quite natural to see moves that are a bit less volatile and that take a bit longer.
Moving back to the USD Index chart, please note that the RSI is below 30. Even the close proximity to this level used to trigger rebounds in the past months, and these signals have been very effective. The implications are very bullish for the USDX. Please keep in mind that gold plunged in March when the USDX started its volatile rally, which in turn started right after the decline that's so similar to what we've seen in the past few weeks.
The S&P 500 didn't decline yesterday and in today's pre-market trading, the S&P 500 futures moved above the March highs and the 78.6% Fibonacci retracement level. If confirmed, this will be a very bullish development for the stock market. The key word here is: if.
For now, I strongly doubt that stocks will be able to rally even more without a bigger decline first. In fact, given the economic damage that is being done, it doesn't seem to me that the stock market has ended its decline either.
The decline in the stock market is what would likely add fuel to the bearish fire, particularly in case of silver and mining stocks.
The fact that gold miners (brown line in the lower part of the above chart represents the HUI Index) moved visibly lower despite a decisive move higher in the S&P, is already a strong bearish sign. Once stocks decline and so does gold, gold stocks are likely to truly slide.
Before summarizing, we would like to reply to the questions that we just received.
From the Readers' Mailbag
Q1: I think there must be a trigger that will be the cause of the decline. There is no clear cause for this decline. The first drop was also caused by a virus called Corona. In my opinion, this trigger seems to be a problem due to the crisis of the emerging countries. What do you think is the trigger?
A1: We both: agree and disagree about the necessity of seeing some kind of trigger. In general, we disagree. The prices can fall just like that and - in fact - that's exactly what mining stocks have been doing recently. Did the USD rally, or did the stock market plunged? No, and yet, the market is falling simply because it rallied too much.
When the market does move more profoundly, people might say that it happened because of something that happened on that single day. And there will be multiple events that will seem like they caused the move. There's a saying in statistics that "if you torture the dataset long enough, it will confess to anything". There might be 20 economic reports released in different parts of the world when gold does something major. Will any of the events be the real cause of the decline? If China invaded Russia today, gold would almost certainly soar because of that. But what kind of event has caused gold to both: rally, decline, and then rally more in February and March? The big development was the same for all of them, but people changed the way in which they reacted to it.
The trigger that you want to see might already be here, but people have not yet managed to start reacting to it in a bearish way. Or actually they did, but not in the way that's profound just yet. The trigger that people are not yet fully reacting to might be the economic damage caused by the second wave of the Covid-19 or by significantly longer single wave. Longer lockdowns, more deaths, both: in the US and globally. That's what was the reason behind the March rally in the USD and what could be behind the next one.
The question is when the press starts covering the rising numbers of new cases - which are almost guaranteed to rise. Once that happens, people will recall that they are actually in the middle of the pandemic and the fear might return - as the perceived scale of pandemic would increase beyond what people already got used to.
Stock market's recent strength is my view something very emotional as if people were in the "it's all over, let's get back to the way everything was" mode. But it's neither over, nor the reality is going to be the same as it used to be. People don't seem to realize the vast cost of this pandemic.
Q2: You said it would be similar to the March move, when oil and stocks were already the first move. (This is known as a typical downturn pattern.)
Oil (01/08)> Stock Price(02/20)> Precious Metal(02/25)> Dollar(03/10)
But this time, oil and stock prices are not moving.
Do you think the dollar will plunge again without oil and stock movement?
Or do you think these will go down eventually?
Or do you think these are separate movements and there will be no adjustments?
A2: The pandemic - the direct trigger for the moves that were likely to take place (at least in case of the PMs) anyway - is not something the market has experienced in the past decades.
Consequently, the order in which all markets react to it doesn't have to be aligned with how it used to be.
The current inter-market links have been working differently than in March, for instance in case of the stock market and crude oil. The two are likely connected, by the way. However, we wouldn't say that this is a major deviation from a certain rule. For instance, after the 1980s top in gold, the next major top was in early 1983. Gold then declined from above $500 to below $300. Stock were moving up during this time and crude oil was moving sideways.
All in all, I think that the USD Index is the more important driver of the precious metals sector in general and it's link with gold is quite similar to what happened earlier this year (PMs topped first, but their decline would accelerate once USDX bottoms and starts to soar).
Q3: There may be a move for the benefit of option holders during the volatile period of the remaining nine days (based on market open days) until June 17, the third Wednesday of June, the same day as the closing date for futures options called 4 Witch Day.
In March, there was definitely a move.
Do you think there will be such a dramatic move this June?
Have you analyzed Gold's option positions?
I don't know it.
But I think you need to check it out.
From what I've heard, I've heard that there is no big difference in the position on the stock price yet.
A3: The options' expiration dates are often associated with extra volatility. The more options expire, the greater the possible volatility, for instance during the triple or quadruple witch days (that's the name when more than one set of derivatives expire on the same day). We're taking this factor into account while preparing our True Seasonal patterns as it's something that we can know in advance. We looked into that and we are applying the implications to the above-mentioned patterns so that both: time-dependent are accessible on the same chart. The current implications of these charts are bearish for the precious metals sector.
Also, we think the link between gold and the USD Index in March was much stronger than the link between gold's price and the date of the options' expiration.
Q4: If only the March movement of precious metals is analyzed, in the case of silver, the highest point has already been touched on the 24th of the previous month and the full decline began on the 25th.
Then the first rebound ended on Monday, March 9 (Monday 2) at 17.615.
Therefore, it would not have been difficult to manage the crisis because there was no big rebound above the 18th.
However, gold and silver were different.
Gold eventually broke through the highs on the 24th again on 03/09 Monday.
If you look at the current situation, it means that there may be a retracement above 05/18 1787.5 (but it will not exceed 1800).
I'm worried about this, and I'm going to wait until the 06/08 Monday and decide on the other half of the investment (of course I also check the start of the dollar rebound the next day).
Isn't there a guarantee that silver is not applicable like gold?
If there is a rebound in the period, it seems to be from Thursday to next Monday, but I think there is a possibility that it will go down without rebound.
Because this time the depth to go down is greater than last March, shouldn't we be busy going down?
A4: Silver's and miners' performance is likely connected with the performance of the general stock market. While the key driver for the entire precious metals sector is still the USD Index (that's what was the key to the entire March decline and what directly triggered the final slide in 2008), the relative valuations within the PM sector are connected with what the stocks are doing.
If stocks top here, silver and miners are likely to be affected and they are likely to decline much more than gold - just like what we saw in March. If stocks simply continue to rally, miners and silver could decline, but not as significantly as they did in March.
Naturally, there are absolutely no guarantees in any market, whatsoever, including that silver will or will not move along with gold. However, we presented above what we view as likely based on our expertise.
Also, please keep in mind that we are not getting married to the downside target levels. They are likely at this time, but not more than that. Gold, silver, or miners don't have to reach our targets for the outlook to become bullish. If gold proves its ability to rally back up after being beaten by soaring USD Index - while the USDX is still rallying, it will be a strong sign that the bottom is already in. At that time, we would probably go long and we might even suggest getting back into the market with one's long-term investment capital, regardless of the price levels at which it would happen.
Q5: Is there any reason you're almost sure the drop you're talking about is now?
A5: You will find many of those reasons in this week's Alerts and in particular in the flagship Gold & Silver Trading Alerts (link to the latest one) that we are usually posting on Mondays. Also, we are not sure, but we think the downturn in the PMs here is indeed very likely.
Q6: A lot of people say it will fall in the second half, but why do you think it is now?
A6: Again, we also cover the issues of timing in our Alerts, also in today's analysis. For instance, based on the similarities to how the situation developed in March. "Second half" here might imply that the downturn would take place once June ends - this might also be the case, but based on the confirmations that we already got from silver (strong short-term outperformance of gold) and miners (clear underperformance of gold, and a repeat of the early-March price pattern), it seems that we won't have to wait that long.
Q7: Also, if there is a scenario where the decline doesn't reach your target and rises again with the bottom between 11 and 15 in the middle (...)
A7: As we outlined in the previous paragraph (the one that we put in bold), our targets are guidelines and what we think as most likely as of this day, this hour, and this minute. If we see very strong bullish signs before our targets are reached, we might change the outlook and the positions. We're monitoring the market and we'll report to you - our subscribers - accordingly.
Summary
Summing up, the very bearish situation became extremely bearish as silver's fakeout became crystal-clear and gold miners continue to show weakness to gold, and the latter is showing weakness relative to what's happening in the USD Index (yesterday's session seems to have been more of an exception than a rule - also it was quite similar to the March 9th session).
In our view, the above, plus GLD's triangle-vertex-based reversal, gold's seasonal patterns and other factors that we outlined in this week's flagship Gold & Silver Trading Alert, makes huge short position justified from the risk to reward point of view.
After the sell-off (that takes gold below $1,400), we expect the precious metals to rally significantly. The final decline might take as little as 1-3 weeks, so it's important to stay alert to any changes.
Most importantly - 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 make much more in the following weeks and months), but you have to be healthy to really 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 (250% 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: $10.32; 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: $231.75; 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: $9.57; 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: $284.25; 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: $8.58 (the downside potential for silver is significant, but likely not as big as the one in the mining stocks)
Gold futures downside profit-take exit price: $1,382 (the target for gold is least clear; it might drop to even $1,170 or so; the downside potential for gold is significant, but likely not as big as the one in the mining stocks or silver)
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
