Briefly: in our opinion, full (150% 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.
In yesterday's analysis, we emphasized the importance of various links in the precious metals market. We wrote that miners have recently been showing weakness relative to gold, which likely paves the way for a bigger decline. We also discussed the way gold reacts to the developments in the USD Index. What we didn't feature and what's also a very important link, is the one between gold and silver - and we'll catch up on that today. But first, let's take a look at what happened in the gold-USD link.
In short, not much happened. The USD Index didn't break above the April highs, but it moved to them, and it seems that gold traders assumed that this will result in yet another USD top - and they bought gold in anticipation thereof.
Gold and silver moved to new May highs in response to that. Is the USDX likely to break higher? Yes, that remains to be the case. Is gold likely to respond with a big drop, once the above happens? Yes, it is. That's exactly the way, in which gold formed the final top before the biggest slide of 2008, and our previous comments on that matter remain up-to-date:
Let's keep in mind that back in 2008 (and the current situation is still very similar to 2008 i.a. due to the sudden nature of the crisis) the final slide in gold started when the USD Index rallied decisively, breaking above the previous highs.
Back then, gold more or less ignored the earlier USDX gains, but when it finally broke higher, gold plunged, just as if it was catching up with the declines that it ignored previously.
The USD Index has been trading back and forth for several weeks now without a meaningful breakout whatsoever. Perhaps the confirmed breakout above the 101 level will be what triggers the first part of what we think is going to be the final washout slide in the precious metals market.
All in all, we can say that the implications of the relationship between gold and the USD Index appear bearish for gold at this time.
With regard to gold and mining stocks, we emphasized that the latter are not performing as well as they theoretically should given what's happening in gold. And yesterday's price moves have further confirmed the above.
The GLD ETF moved decisively to new May high, while the GDX ETF didn't. That's exactly what one should expect to see at a major top in gold.
And you know what else one should expect to see? Silver's short-term outperformance. And what did we see yesterday and in today's pre-market trading?
We saw exactly that - gold moved higher, but silver moved even higher. Yesterday, the white metal moved to its April highs (while gold didn't) and in today's pre-market trading, silver soared above the April highs, while gold hasn't done almost anything. This is a clear show of silver's very short-term strength. This is something that appears very bullish at first sight, but it is actually far from being so. Please note how silver soared on April 14th, while gold moved only a little higher - that was the monthly top in both metals.
Moreover, let's keep in mind what recently happened in the gold to silver ratio.
Namely, it had broken above the very long-term and critical resistance of 100. Is it really that surprising that silver is verifying the breakout by moving back to the previously broken level? It's not. At the moment of writing these words, the gold to silver ratio (based on futures prices) is at about 105. It corrected from above 125, and right now, the extremely strong support is at hand.
In fact, the ratio might not need to move to the 100 level to bottom. The support line based on the two historical near-100 highs would be slightly above 100, which suggests that silver's top is quite likely at hand.
Yes, on a short-term basis, and looking at silver chart alone, the breakout above the April highs is a clearly bullish phenomenon. However, this ignores the fact that silver is known for its fakeouts (fake breakouts) and that looking at its relative performance to gold has been more useful (and profitable) than looking at its individual technical developments, especially if they were not confirmed by analogous moves in gold.
Consequently, we view the current action in silver as bearish, not bullish.
Let's get back to gold - we received a request to include its analysis in terms of the euro, so we deliver.
In short, there are relatively few things that change from this perspective. Gold priced in the euro moved above its February high and verified this breakout by bouncing from it twice. Still it lost its momentum and broke below the rising support line (and then verified this breakdown by moving back to the rising line and verifying it as resistance).
Will this breakout hold? We doubt it. Please note that gold price in terms of the euro declined profoundly in March, when gold declined in the USD terms. Why? Because gold declined more than the USD Index rallied. The history tends to rhyme, so it's likely to do it again.
And it is not only analogy to March that suggests so, it's also the way gold finished the previous bear market before staring the long-term bull market.
When the USD Index soared in 1997, gold declined heavily from both: US and European point of view. Of course, the decline took years back then, but the overall shape of the relationship was similar.
The analogies to both previous situations, the very recent one and the more distant one point to the same conclusion. If the USD Index soars in the following weeks, gold is likely to decline - also in terms of the euro. And the USD Index is likely to soar in the following weeks.
From the Readers' Mailbag
Q: Let me state that I find no fault in your efforts of charting and predicting Gold prices based on your assumptions. However you are pegging a decline in Gold based on a projected rise in the USD, this seems to be an increasing risk of not happening. Congress is going to continue to provide additional money for Virus Relief which would continue to put pressure on the USD. Additionally as the debt increases so does the National Debt and this is very disinflationary at least in the near term. At what point does the USD break down, because more congressional money is coming. Inflation is a fantasy within the next two to three year period.
A: We don't think that the chance for seeing a big upswing in the USD Index decreased. All governments and monetary authorities are going to stimulate their economies, it's not going to happen only in the US. Consequently the currency exchange rates are not likely to be impacted by that factor to a major extent. The same with debt - it's not something exclusive to the US. What is exclusive to the US is the status of the US currency. The US dollar is still the world reserve currency and something that people view as safe haven. And something they will likely buy when the stock-market-hell breaks loose once again, just like it did in March. Please note where the USD Index is trading right now vs. where it was trading in January, before the enormous stimulus - its trading higher.
Q: Hello, I have a question regarding technical analysis, I have been following you for a while and agree that the gold market will go down and then will go up as you mentioned and this will all take place as you mentioned however i am sure a big part of your technical analysis is Elliott Wave and Fibonacci as well as patterns. I cannot help but to see pattern that has formed for the past few weeks that is basically screaming triangle pattern and forth wave that is close to breaking to the upside for a 5th wave before the lower price is to happen in gold that you mention.
(...) If it is correct and the gold is going to go up for the short term before crashing I would rather sell and either wait for a better price to re-enter or have the opportunity to take a short term quick trade and re-enter the short with a better position and more shares.... I am only asking because I have rarely seen a triangle pattern like this that doesn't go to the upside temporarily. I may be wrong of course but would like to know your thoughts.
A: That's a very good question and the situation described is indeed something that could take place. If gold moves higher from here - very briefly, but still - then it would be quite likely to top and decline relatively similarly to how it declined in 2008... Quite suddenly. Gold kind of ignored USD's strength... Until it didn't. And when it plunged, it did so without almost looking back. Yes, one could have entered the short position later and still catch a large part of the move, but exiting during the broad 2008 top and re-entering short positions after the initial slide would have ultimately lowered the gains. The green area on the 2008 chart that we featured above shows how difficult it was to really re-enter a short position, if one had closed it shortly before the top.
Theoretically, it is ideal not to be short before the top, and enter short positions right at the top. However, realistically, it's almost impossible to know when and where exactly the top is going to take place (what if the top is just a penny below the previous highs?), and it seems better to be prepared (and already have a position on) when the risk to reward ratio is favorable enough.
With miners refusing to move to new monthly highs, while gold moves to new monthly highs, and with silver clearly outperforming on a short-term basis, the risk to reward ratio seems to favor the short positions at this time.
Summary
Summing up, the outlook for the precious metals market remains bearish for the next few weeks, mostly based on what we saw last week and on Monday. The latest additions to the bearish picture are silver's outperformance (especially today's pre-market action in it) and miners' underperformance.
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 (150% 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
