Briefly: in our opinion, full (100% 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. Our long positions in gold were automatically closed yesterday and you took profits off the table - congratulations. We plan to increase the size of the short position in the mining stocks during today's session - 90 - 120 minutes after the opening bell.
We'll begin today's Gold & Silver Trading Alert in a rather odd way, as we'll reply to your questions first. The second set of questions gives a good intro to the technical developments that we will comment on later on.
From the Readers' Mailbag
Q: Do you know if UGLD-DGLD-USLV-DSLV complex are planning on remaining at 3X leverage.
A: The provider of these ETFs - VelocityShares - didn't make any statements regarding such plans, so we'd say that it's likely that they will remain 3x leveraged. The miners were particularly volatile, which explains why Direxion was particularly motivated to decrease the leverage. VelocityShares might keep their leverage intact even if metals decline profoundly in the upcoming weeks. Of course, that doesn't depend on us and we can't promise that this will indeed be the case.
Q1: I am a big fan of you in Taiwan. I love your way of thinking. Now I have a question for you.
What if, us dollar starts to roll over from 101, and what if, US stock market already bottomed two weeks ago?
A1: Thank you - we appreciate your comments, they mean a lot.
If the USD Index starts to decline from here and the US stock market moves higher from here, then precious metals market would be likely to rally from here, at least in the short term. Given long-term situation in the USD Index and the likelihood of the economic disaster (no point to mince words here) that will result from Covid-19 pandemic and the lockdown, we view the above scenario for both markets as very unlikely.
Q2: As you can see today, gold future formed inverse head and shoulder pattern with neckline 1700 and depth about 250.
This imply gold can go to 1950.
A2: Yes, it does imply that and that's probably why gold shot up so high once the previous highs were broken. Still... We have very little trust in this formation. One thing is that the breakout above it is not confirmed, and the other thing is that the recent rally was something that was very much in tune with the analogy to 2008. There was some strength, gold even broke to new highs, but... That's pretty much it. Neither silver, nor miners broke to new highs, or were close to doing so - that's exactly what we saw in 2008, before the final slide in gold.
At the moment of writing these words, gold futures are trading at about $1,702, which suggests that the odds for invalidation of the breakout are relatively high.
Please keep in mind the triple (gold, silver, miners) triangle-vertex-based reversals that suggest that a top should be formed today. This further confirms the likelihood of the formation being invalidated.
And once it is invalidated, the decline is likely to be profound. That's what happens whenever a formation is invalidated, and the clearer the formation is, the more people will realize that it was invalidated, and thus the decline is likely to be steeper and quicker. The inverse head-and-shoulders formation is very clear, so its invalidation would be likely to have very bearish implications for the short term.
Q3: I know you believe that us dollar will go to 112, and I know that you believe 2020 is like 2008.
But, what if, 2020 is not like 2008.
What if stocks and silver price has bottomed two weeks ago.
What if gold starts going up from 1700 neckline and never go below that?
A3: If the market moves differently, then at some point we'll see that the link between 2008 and 2020 is no longer intact. This would likely be accompanied by bullish signs from many markets and ratios. In this case, we would simply adjust our outlook, and our trading (and perhaps investment) positions. For now, the key analogies and trends that we outlined recently (for instance yesterday) remain intact.
Let's take a look at gold's breakout to new 2020 highs.
Gold has indeed moved sharply above the previous 2020 highs, but it also moved sharply back down. This could be viewed as a small pullback and a verification of the breakout... But only if the price of gold rallies and closes higher for the next two trading days. This seems doubtful due to the above-mentioned factors but also due to the short-term situation in the USD Index.
Gold soared as the USD Index stopped rallying and then corrected to the 38.2% Fibonacci retracement based on the recent upswing However, despite USDX's decline in case of the last four 4-hour candlesticks, gold didn't move to new highs - it was just trading sideways after having rallied above $1,740.
This means that on a very short-term basis, gold stopped reacting to USD's declines. It also means that the USDX might have just formed a local bottom. This is a very bearish combination for gold and one pointing to invalidation of the breakout above the inverse head-and-shoulders pattern in the very near future.
How near? Quite likely as early as today.
Today in the Markets
In yesterday's Alert, we commented on the above chart in the following way:
Silver moved higher, but not above its recent high, and miners corrected about half of their most recent downswing. It seems that the two periods in 2008 and 2020 (both marked with green) are indeed very similar.
Note: silver might exceed its recent high temporarily as the market might focus on the industrial demand due to the upcoming infrastructure projects. That's unlikely to be anything more than a temporary development.
As you can see, there are there are triangle-vertex-based reversals early this week in all key parts of the precious metals sector: in gold, in silver, and the mining stocks. We also get the same indication based on the GLD ETF.
This means that - based on this trading technique - it's very likely that we'll see some kind of reversal today or tomorrow. Based on the analogy to 2008, it's likely to be a local top, even despite the rally in the USD Index.
This remains perfectly up-to-date. In fact, silver did move above the previous highs, but it's nowhere close to its previous 2020 highs. The reversal is likely to take place today. Perhaps it already took place - after all, gold declined about $40 from its overnight high.
Stock market futures are rallying in today's pre-market trading, and it seems that they might move even higher before the final top for this short-term upswing is in. We wouldn't rule out a situation in which stocks top even below their 50% Fibonacci retracement.
After all, after the most volatile short-term decline of 2008, stocks corrected to a level that was more or less halfway between the 38.2% and 50% retracements.
How is this likely to impact the mining stock prices?
Miners are likely to move higher today, but they may not be able to close higher despite the intraday rally. In fact, we expect to see another high in the mining stocks during today's session.
Given the positive boost from both: gold, and the general stock market, miners should move sharply higher... And yet, we don't expect their rally to be anything to call home about. They might move to their late-March highs or even a bit (a few percent) above them, but - unlike gold - they will most likely not move to, let alone above their previous 2020 high.
Please note that the situation between late-March high and today is very similar to what we saw between the February top and the early-March high. The colored rectangles are based on the former price moves and they are copied to the current case. The first decline (yellow rectangle) fits perfectly in terms of time. If we see a reversal today, the green rectangle will fit perfectly as well.
If the analogy holds, we can see a few days of decline at a moderate pace and then a few days of a dramatic slide.
Then again... Please keep in mind that the final decline in gold and mining stocks was more volatile in 2008 than the initial decline. In case of silver, it was similarly volatile. This means that miners could decline even faster than the above chart suggest.
The GDXJ chart also confirms the likelihood of seeing a turnaround today.
Interestingly, the vertex of the triangle based on the closing prices (black) was yesterday, while the vertex of the triangle based on the intraday extremes (blue) is today. Perhaps yesterday was the high in terms of the closing prices, while today we'll see the high in terms of the intraday prices.
Summary
Summing up, gold moved above the previous highs (and our profits from the long position in it were automatically closed at a profit), but it seems that the days (hours) for this upswing are numbered. Based on similarity to 2008 and triple triangle-vertex-based reversals (both have been extremely useful recently) and other factors, it seems that we will see the top in the precious metals market shortly, perhaps as early as today. Gold has completed an inverse head-and-shoulders formation, but it's not confirmed and it seems that it will be invalidated shortly.
This might be the beginning of a decline that takes the PMs to their final lows. The time target for the final lows in the precious metals sector is the second half of April.
Speaking of time targets - yesterday we wrote about limiting one's exposure to the mining stock sector and it seems that it was a good decision. We plan to increase the position back to the previous 250% of the regular position size today. It's difficult to provide the price at which we think it should be done as there are too many intraday variables in place. However, we think that a good choice would be to increase the size of one's short position in the mining stocks about 90 - 120 minutes after today's US session starts. That's based on today's vertex-based reversals, and on the way miners topped (on an intraday basis) during the previous tops.
This rally might have made one feel bullish - after all, the prices of miners seem to have recovered to a large extent. Please be sure to keep in mind that what we saw, was the first big wave down of a much bigger move lower, also in the stock market. The coronavirus stock-market decline has likely just begun and once it continues - and as the rally in the USD Index resumes - the precious metals market is likely to suffer. Silver and miners are likely to be hit particularly hard.
The real panic on the US stock market will begin when people start dying from Covid-19 in the US in thousands per day. It might peak when the death toll is in hundreds of thousands per day. We hate to be right on this prediction, but we expect the number of the total confirmed cases in the US to be multiple times greater than the analogous number in China. At the moment of writing these words, the number of total confirmed cases in the US is about 368k. The US death toll is about 11k today.
It's 2008 on steroids.
Most importantly - stay healthy and safe. We're making a lot of money on these 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.
By the way, we recently opened a possibility to extend one's subscription for a year with a 10% discount in the yearly subscription fee (the profits that you took have probably covered decades of subscription fees...). 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.
Important: If your subscription got renewed recently, but you'd like to secure more access at a discount - please let us know, we'll make sure that the discount applies right away, while it's still active. Moreover, please note that you can secure more access than a year - if you secured a yearly access, and add more years to your subscription, each following year will be rewarded with an additional 10% discount (20% discount total). We would apply this discount manually - please contact us for details.
Secure more access at a discount.
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 - increase to 250% about 90 - 120 minutes after today's US session starts) 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: $11.47; 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: $14.87; 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
Gold futures downside profit-take exit price: $1,312 (the target for gold is least clear; it might drop to even $1,170 or so)
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
