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 wait continues... PMs declined yesterday, but the move was nothing to call home about. Still, it was more or less in tune with what we saw in March - provided that one takes into account the lower volatility in the short run.
In the silver market, we saw that the small intraday breakout above the declining resistance line was invalidated, just as we had indicated in yesterday's analysis. Silver takes longer to start its move, but apart from that, the situation continues to be similar to what we saw in the first half of March. Our previous comments on the above chart, therefore, remain up-to-date.
On Thursday, the white metal reversed and declined profoundly on relatively big volume - just like it had done on March 9th. In the following two trading days, it had moved lower, but just slightly so. That's exactly what happened also this month - on May 1st and May 4th. And then...
In March, silver then plunged, and it took the white metals just three more days to slide below $12 from about $17.
As the starting point for silver for now is approximately $15, could it slide to about $10 in just 3 trading days?
Obviously, silver didn't slide profoundly yesterday (conversely, it moved higher), so the day-to-day similarity is no longer perfect. Does the lack of perfection invalidate the similarity altogether? No, at least not yet.
A useful question to ask is if this similarity - aside from the previous several days - was perfect from the beginning? It wasn't.
The mid-April bottom appears to be analogous to the late-February bottom, and the blue dashed lines (might not be clear at first sight, but once one knows where to look, they become visible) that connected these bottoms along with initial and final tops, were almost identical.
Almost.
Almost, means that they were not perfect, and the difference was in the length of the consolidation. The final short-term top took place a day later than the blue dashed line suggested. Initially, it even seemed that silver was breaking higher - above the declining resistance line.
Did this daily delay or the initial move in the other direction change the analogy? No. It delayed its consequences. Silver reversed and declined, anyway. And it did so in a profound manner, just like it did on March 9th. Throwing the analogy out of the window in late April would have been a mistake, a moderately costly one. Now, if the analogy does remain intact, then throwing it out of the window would now be very costly, as the follow-up move is likely to be much bigger.
In our opinion, the bearish implications remain intact, especially since it's just one of the markets that showed similarity to this period.
USDX Moves Higher - Again
Gold and mining stocks moved lower yesterday, but the moves were not huge and they didn't invalidate our previous comments. Our observations on the link between gold and the USD Index remains up-to-date as well:
The USD Index moved higher (invalidating the breakdown below the 50-day moving average), but not particularly sharply, so it's little wonder that gold didn't plunge. Gold futures and GLD ETF moved lower, but they didn't close below the highest closes of March, so most traders and investors probably view this move as anything but ground-breaking. This might also explain why miners didn't react in a more meaningful manner.
Another reason might be the indecisive (at least at first sight) action in the general stock market.
The Action in Stocks
The stock market is still trading relatively close to its recent highs, which means that while its rally stopped, it didn't turn into a decline, let alone become a violent one that back in March led the mining stocks much lower.
Still, given the fact that stocks have already corrected to the 61.8% Fibonacci retracement level, broke below their rising support line and confirmed this move, the odds are that we'll see a decline once again shortly. The severity of the decline is likely to magnified by the disappointment resulting from market participants' too optimistic expectations regarding re-opening of the economy.
From the Readers' Mailbag
Q: I believe you intimated that GDX will have a bigger bounce off the bottom than GDXJ. If so, which indicators and prices will cause you to rotate into GDXJ?
A: That's not really the case. I think it's rather unclear if GDX or GDXJ will outperform right after the final bottom. On one hand, it's likely to be GDXJ as this sector is likely to move lower than senior miners during the slide. Consequently, the rebound is likely to be more volatile - we saw something like that in March. On the other hand, the junior miners tend to perform better than seniors in the latter part of a given upswing.
The indicator that might be used to detect if juniors are likely to outperform seniors could be the general stock market (S&P 500), as juniors are more correlated with it than the seniors. The more bullish the outlook for the stock market, the more likely the juniors are to outperform the seniors during upswings. The outlook is currently bearish for the stock market, which is why we prefer to bet on juniors' decline rather than on seniors' decline.
Overall, we plan to diversify between both: senior and junior miners and once the rally matures, we plan to put emphasis on silver.
Q: Hello: Don't you think this time can be different. Comex is going down, manipulation ends. Magire says it clear. May the 5th can be the end of game. What do you think?
A: We think that the Comex will almost certainly not go down this or the next week (or this month). We've heard and read predictions that inevitable destruction of Comex, futures markets and so is just around the corner for decades. In most cases when we read it, the author of the comments was certain that it's going to happen in a few days or next week. And it was almost always based on some kind of unofficial, confidential, or otherwise hidden from the investment public information. Usually something unverifiable (or as Karl Popper would say - unfalsifiable, therefore not scientific). The SLV ETF was supposed to trigger such a crash in case of the silver market futures - the demand for physical silver created by the ETF was supposed to squeeze the paper silver market, force traders to close their short positions, and make silver price go to the moon. Not only nothing like that happened, but silver actually plunged once the SLV ETF was launched as people bought the rumor and then sold the news.
Now, at some point the above might happen - there are too many papers (derivatives) chasing limited amount of commodities, and we have the insurance capital in place for that. But while this is something that could happen, it's very likely that it won't happen anytime soon. At least it hasn't happened for many years despite hundreds of calls for that to happen. Consequently, our approach is to be prepared for it, but focus on making money if it doesn't happen, anyway.
Q: Gold & Miners showed continued strength today. silver also held onto $15. The upcoming FOMC might cause gold's safe heaven appeal to go up.
Is it the time we should be building long position in Gold/miners? Could 1700 be the new bottom.
A: With regard to implications of the moves in gold, miners and silver, we already commented on them in the above part of the analysis. The FOMCs might also cause gold's safe haven appeal to go down. People are somewhat concerned (to say the least) already, and unless the FOMCs are increasing the uncertainty above the current level, they are not necessarily bullish for gold.
$1,700 could be the new bottom and that's probably what a lot of people think right now - however, based on multiple reasons that we have been outlining in the previous - and current - Alerts, we view that as highly unlikely. It might become likely if gold holds up very well despite a sharp (!) upswing in the USD Index and a bigger decline in the stock market. We don't think that this will happen before a bigger ($100+, likely $200+) decline in gold.
Q: Looking at the Gold Futures the last month, it looks like a pennant. Because gold is in an uptrend, will the break-out off the pennant not be to the upside? How do you see this pattern in context with your analysis expecting downside break-out?
A: If gold breaks above the pennant to the upside and confirms this breakout, it would indeed be bullish. Based on factors other than the pennant itself and the direction of the preceding move, we think that the pennant will be broken to the downside. In fact, perhaps this breakdown will be the technical trigger for the next big slide - especially that it would happen more or less simultaneously with the invalidation (in terms of the closing prices, and also in case of the GLD ETF) of the previous inverse head-and-shoulders pattern.
Q: I read your analysis with great interest and learn a lot. I have been reading about your views of potential sharp decline in Gold (1430 level).
But I noticed USD and Markets are up and down over last 2 weeks or so but Gold seems to have a very strong support at 1700. What do you think will take this to break the support and dip approx $250 dollars.
Also your price target for ETFs seem to be extremely high 10x of where they are trading today. Do you see such a big movement in GDX or JDST?
Thank you in advance for taking time to read and respond to my questions.
A: Yes, gold has strong support at $1,700 right now, and we think that it will finally not hold and that it will slide back below it. The USD index is indeed up, but it has been moving up in a rather dull manner - gold is likely to react once the USD Index rallies in a more profound way, similarly to how it rallied in March.
The rally in the USD Index is likely to be the main trigger for the decline in the PMs. And the decline in the stock market is likely to make mining stocks decline more than other parts of the precious metals market. To make a long story short, the missed expectations regarding re-opening of the US economy (and economies in general) and the rapidly deteriorating situation in the BRIC countries (we don't know about China, though) is likely to increase the demand for the US currency - which is still viewed as safe haven. The former reason for USD's upswing is also a reason for the stock market to decline once again.
The above doesn't tell us when exactly the moves are going to take place, and as we wrote yesterday, the trigger can come from more or less anywhere. Quoting yesterday's reply:
What would trigger the moves? There doesn't have to be absolutely any meaningful trigger. When the market is ready to slide from the technical / emotional point of view, it will just react to some random event or news announcement. There are tens of them released each day and the market could attribute greater weight to any of them. If something profound happens or a profound news is released, it could speed things up, but regular news are likely to be enough anyway. Good candidates are ADP nonfarm employment change (released today), initial jobless claims (released tomorrow), non-farm payrolls (released on Friday), inflation, and GDP numbers. Plus, any official and unofficial (speeches) from monetary authorities (especially by the Fed). Or it could be something as small as Donald Trump's tweet. Or a new record in the Covid-19 death toll.
And yes, the target prices for mining stocks are rather extreme - extremely low for the unleveraged ETFs and extremely high for the leveraged ones. They are this way, because we view such extreme moves as likely. Please note that similar moves have happened less than two months ago.
Q: Przemyslaw, you said bullion dealers really do have silver, but don't want to sell at a low cost. What if silver hits $9 or $10/oz? Well, the dealers really still sell? I am looking for the 1000ozers which most can't afford or don't want. You think there will be plenty of those? If so who would have these?
A: To clarify, we don't know if all of them have silver available, but in general it's not that there is none left. We think the dealers would sell silver, even if silver futures prices hit $11, $10, $9, $8, $7, $6, $5, $4, $3, $2, or even $1. Of course, silver is not likely to decline that low, but the point is that silver bullion dealers will always want to sell you their silver - that's what they do for a living, after all. The better question would be at what price would they be willing to sell their silver bars and coins if the silver futures price is that low.
If they view the moves as temporary, they might not adjust their prices much based on silver futures price's decline. The premium that they will charge over the spot price would likely increase substantially, and it would partially make up for the decline. For instance, at this moment, we have silver at about $15 and the 1000 oz silver bars are at about $18,000 (about $3 over the spot). With silver at $10, they might trade at $14,000 or $15,000 ($4 or $5 over the spot) - so they would be cheaper than they are right now, but they would not decline as much (percentage-wise) as silver spot/futures. With silver at $7, the difference could get even more extreme, perhaps $12,000 - $13,000 (so $5 or $6 over the spot).
Will there be plenty of those bars? Unless you're buying in terms of hundreds of $ millions, these bars should be available, but at a hefty premium.
Who could have those bars? Probably the biggest dealers. It might be a good idea to call many of them once you're close to the purchase and ask about the availability and prices. These two links might be a good start: List of dealers worldwide, Silver Monthly's silver bullion dealer ranking
Summary
Summing up, the outlook for the precious metals market remains very bearish for the next few weeks. The general stock market seems to have already topped, which means that the bearish pressure on the mining stocks and silver is now likely to be much bigger than it was in April. Gold declined along with the USD Index last week, which has very bearish implications for the precious metals sector, because gold is likely to truly plunge once the USD Index finally rallies in a meaningful way. And it is likely to rally in a meaningful way, not only for purely technical reasons, but also thanks to plunging stock markets, and demand coming from the BRIC (and other) countries.
The above is particularly likely given multiple signs pointing to self-similarity between the current situation and what we saw in early March. The spike-high volume in the UUP ETF, and silver's very short-term outperformance yesterday serve as additional bearish confirmations.
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.
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 (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
