Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Some might consider an additional (short) position in the FCX.
What if bitcoin just topped? What does it change for the price of gold going forward, if anything?
Many years ago, people wanted to buy gold but didn’t really want to store it in their homes, pay for safekeeping and insurance during transport, and so on. The demand gap was filled by all sorts of e-gold, e-bullion, and overall pooled accounts. This idea might seem odd to those, who are new to the precious metals market, and writing about it does make me recall that scene from the Lord of the Rings movie.
- “I was there, Gandalf, 3000 years ago…”
Says Elrond, while describing the weakness of men and how it contributed to Middle Earth’s status quo.
So, yes, I was there when e-gold was gaining popularity. Whether there really was any physical gold backing up those e-gold accounts (and not just hedges through futures contracts) remains unclear. The uncompromising analysts claimed that unless you hold it in your hand, it’s just “paper gold” and not a real thing that would provide protection in case of severe financial turmoil. Some said that as long as you have the serial numbers of the exact bars that you own, it most likely exists and provides real protection.
Then came the ETFs – GLD was launched in 2004, and SLV was launched in 2006 (triggering a local collapse of silver prices, puzzling many who were not aware of the buy-the-rumor-sell-the-fact type of reaction on the market).
The debate about whether they are backed by physical metal continues. And the more evidence (“evidence”?) one side (believers / those, who doubt those metals’ existence) provides, the more backlash it generates on the other side.
On a side note, there are some ETFs that allow for in-kind redemption of physical metals (like, you can go there and pick up the bars), which pretty much implies that they have to be there, which might be the sweet spot for those willing to balance convenience with security.
And just when it seemed that the situation in the case of the fiat currency alternatives and the means through which one could own them is stable…
Cryptocurrencies arrived, and they completely changed the landscape.
At first, it was just bitcoin, but it was soon joined by others.
To be honest, I did hear about it many years before it got popular, but I just shrugged it off as something rather uninteresting. And I ignored my hunch to buy some, just in case. Lesson learned – having a hunch is important, and so is knowing about something way before others (and trusting that insight). Sometimes, the market and investors creating it are so much in denial of something that is about to become huge that those “unclear periods” take much more time than they should (looking at it objectively).
Remember the very early part of the pandemic? Looking back with the benefit of hindsight, it was kind of obvious that most of the things that happened would happen, but it was just too easy to ignore it.
Precious Metals and the Arrival of Cryptos
When cryptos arrived, they were like the new, cool kid in the neighborhood. The future finally arrived! True alternative to the dollar, euro, yen, and other fiat currencies that is not bulky. And it had this “futuristic” vibe to it.
Just like gold and mining stocks, but cooler, with more potential.
Or so it seemed.
The precious metals market and cryptocurrency market became more and more similar over time. Not fundamentally, but through investors’ perception.
Bitcoin was the flagship metal with a big price tag per unit – just like gold (and its price).
Ethereum became the more useful (smart contracts) counterpart that was still cheaper in nominal terms – just like silver (and its multiple industrial uses, smaller stockpiles and so on).
Finally, there were many altcoins (*cough* shitcoins *cough*) that promised quick riches – just like junior mining stocks. Some of those altcoins provided massive gains, just like some junior miners that found a rich deposit. And some altcoins just wasted all invested capital, just like some junior miners that filed for bankruptcy protection.
At first, there were bigger differences in their price moves. They reacted adversely to USD Index’s movement (well, they were alternatives to fiat currencies, so it’s no wonder that this was the case), but in somewhat different ways. However, over time, those differences started to fade away.
Gold, Silver, Miners, and Bitcoin - Technicals
Nowadays, it seems that the cryptocurrency market and the precious metals market are quite synchronized.
Please take a look at the below chart for details.
The upper part is bitcoin, and the lower part is gold (orange), silver (well, silver), and the HUI Index – proxy for gold stocks (brown).
The last time bitcoin and PMs moved differently was in early 2022. Back then, gold, silver, and mining stocks moved higher in a visible manner, while bitcoin moved higher very modestly.
Bitcoin’s performance back then is understandable – it was after a double-top and it didn’t have the strength to rally one more time.
Anyway, since that time, both markets: precious metals and cryptocurrencies moved in a rather synchronized manner.
Namely, after the early-2022 top, they all fell together.
Bitcoin topped above $60k (actually, I wrote about the top being in or at hand when bitcoin was trading close to $50k) and it declined to $15k. That’s when I wrote that it was bottoming – and indeed. It started to rally from those levels.
By the way, do you remember how bearish everyone was at that time? It was very interesting to once again see how excessive bearishness is actually bullish, and vice versa. When bitcoin was above $50k, everyone and there brother were in the “todamoon!” mode.
While bitcoin was declining and then correcting, the same thing happened on the precious metals market. And out of the above-mentioned trio: gold, silver, and mining stocks, the latter’s price movement was most in tune with what happened to the bitcoin price.
This brings me to the reply to the unasked question:
Why am I writing about the bitcoin market in today’s analysis of the precious metals sector?
The point is that something really important happened in the bitcoin market, and I wanted to build the foundation for the technical link between the two markets. It’s not coincidental that they moved together – it has a lot of sense on the fundamental level.
This, in turn, means that indications coming from the bitcoin market are likely to translate into the outlook for the precious metals market as well – in particular into the outlook for mining stocks.
So, what is the bitcoin chart saying right now?
It’s saying “hey, my rebound is probably complete, and I’m about to slide”.
If you look at the chart, you’ll notice that bitcoin moved to the dashed line and then moved back down. This line is based on the previous 2021 low in terms of the weekly closing prices. Bitcoin recently moved above the 2021 lows in intraday terms, but it didn’t move above it in weekly closing price terms. As weekly closes are generally more important than intraday price extremes, the breakdown below those levels was just verified.
This means that the top in bitcoin is most likely in. Especially that in nominal terms, the price doubled from its recent low. Markets (not just precious metals and stocks, this applies to other markets, like forex and crude oil, copper, and other commodities, too) tend to like those round numbers - this applies not only to price levels, but also levels based on performance. And speaking of round numbers, The $30k level that bitcoin reached recently is a very round number, as well.
The above makes sense also from the fundamental point of view. The CBDCs (central bank digital currencies) a.k.a. gov’t cryptos are starting to take a real shape. And if the governments and monetary authorities want to impose using their own cryptos, it will be rather easy for them to outright ban or tax the use of other cryptos like bitcoin. This risk is rising, which means that the appeal for cryptos is likely to wane.
Actually, that’s the key problem I always saw with bitcoin. When it becomes so big that it threatens the monetary status quo, the Powers That Be are unlikely to give away their monetary power just like that. Wars were waged for that… Moving toward CBDCs means that they accepted that something will have to change, but that they still want to retain control within that change (or use this as an opportunity to increase it).
So, as bitcoin declines again, the precious metals are likely to decline as well, and mining stocks are likely to be affected to the greatest extent.
Looking at the bottom of the chart reveals that gold stocks’ performance was truly weak recently compared to the one of gold. And when bitcoin slides, this is likely to be magnified. Those, who are positioned to take advantage of those moves are likely to be rewarded extremely well.
And just like it seemed unlikely that cryptos would rally at all, and then plunge from $60k (and then double from $15k), the “unlikely” slide of the precious metals and – in particular – mining stocks is likely to take many by surprise. You have been warned.
Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, we recently took profits from the additional FCX trade (right before the trend reversed!) and the current short position in it is VERY profitable as well.
The short position in junior mining stocks is – in my view – poised to become very profitable in the following weeks.
Things might appear chaotic in the precious metals market right now, but based on the analogy to the previous crises (2020 and 2008), it’s clear that gold, miners, and other markets are pretty much doing the same thing all over again.
The implications of this “all over” are extremely bearish for junior mining stocks. Back in 2008, at a similar juncture, GDX’s price was about to be cut in half in about a month! In my opinion, while the decline might not be as sharp this time, it’s likely to be enormous anyway and very, very, very profitable.
If I didn’t have a short position in junior mining stocks, I would be entering it now.
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 junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; stop-loss for the JDST: none.
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.):
Silver futures downside profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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’ve 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 (as 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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.
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On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a to of value can be created through this kind of collaboration :).
Thank you.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
