Briefly: in our opinion, full (300% 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.
Gold moved higher yesterday (Feb. 23) and so did the rest of the precious metals sector. But as you will see below, this didn’t really change anything. And there’s one detail that actually perfectly fits this kind of movement. Let’s take look at the charts, starting with the key one – and no, it’s not the one featuring gold.
Figure 1
Despite yesterday’s (quite sharp for a daily move) upswing, the breakdown below the neck level of the broad head-and-shoulders remains intact. It wasn’t invalidated. Consequently, all its bearish implications remain up-to-date.
Having said that, let’s move to the detail that actually fits what happened yesterday (and so far today). Namely, silver is going through a triangle-vertex-based reversal at the moment.
Figure 2
Indeed, after moving slightly above yesterday’s intraday high in today’s overnight trading, silver moved back down. The move lower is not yet super significant, but given the reversal point, it could just be the beginning. Remember the triangle-vertex-based reversal at the beginning of the year? Back then, practically nobody wanted to believe that silver and the precious metals market was topping at that time. It was the truth, though. Gold and mining stocks were never higher since that time and the same thing would have most likely happened to silver if it wasn’t the #silversqueeze popularity that gave it its most recent boost.
Now, there’s also another triangle-vertex-based-reversal in a few days, and since these reversals tend to work on a near-to basis, silver might top any day now, even if it hasn’t topped earlier today.
Figure 3
The move higher in gold was notable, but nothing game changing. The last time gold moved above the declining short-term resistance line, was when it actually topped. The invalidation of the breakdown marked the start of another very short-term decline. The small decline in today’s overnight trading might be the very beginning of this invalidation that leads to another slide.
Also, you might be wondering if the decline in the USD Index made its outlook bearish.
Figure 4
In short, it didn’t. The decline is still a part of the verification of the breakout above the declining medium-term resistance line that I marked with blue (figure 4). Based on the obvious similarity to early 2018, the verification of the breakdown is likely the final step before a major rally in the USDX. This will likely translate into lower precious metals and mining stock prices, especially if the general stock market declines as well.
Before moving on to the “Letters to Editor” section, I would like to thank everyone for all the get-well wishes that I recently received! I’m feeling a bit better today, and I think that by tomorrow the fundamental part of the analysis will be back as well.
Letters to the Editor
Q: What gold or silver miners should I put on a watch list? If possible, please provide ticket symbols.
A: Done, I added the list of the ETFs that I will most likely be covering as the situation develops. You’ll find it in the “Trading” section within the “Summary”.
As for the individual stock selection, you will find the details in the tools that I designed for picking the stocks that are likely to provide the “biggest bang for the invested buck” (among senior mining stocks): Golden StockPicker and Silver StockPicker.
Q: I have a quick question. In your analysis, under the Letters to Editor section, you said "Please note that if we exit short positions now (and perhaps enter brief long ones), then I initially (most likely) plan to re-enter short positions in mining stocks, and only switch to silver once the miners are already after a significant decline and silver only starts moving lower"
Are you going to let your subscribers know when you'll change from short to perhaps brief long positions and then re-enter with shorts? Please let me know.
A: Of course, I’m going to let you – my subscribers – know about that. As far as the first exit is concerned – you already know the answer regarding exit prices, as they are in the “Trading” section of the “Summary”. I would like to see where gold is when miners move to these levels before making a decision regarding the very temporary long positions.
Q: Some people talk about getting our stops run in a flash price move, driven by the upcoming silver future expiration with expected delivery failures. Does an onslaught of revanchist amateurs add up to “force majeure”?
A: We don’t have stops for the positions in mining stocks, and we don’t have any positions in silver. Since the nearest expiration date is on Feb. 25, and the last day of delivery of physical silver is on Feb 26, it seems that you mean these takes as the possible days when something big could happen.
I view this as very unlikely, although a temporary spike top based on the perceived bullishness might indeed take place.
Figure 5 - Source: ycharts.com
On the above chart you can see the open interest of silver futures – in other words, how many silver futures contracts there are active. The current value is by all means normal. One could say that the data is one week old, but it doesn’t really matter as its already after the moment when silver got the public’s interest.
As the number of contracts is normal, I’d say that the reaction to the expiration is likely to be normal – meaning either small or nonexistent. As above, we could see some very short-term buying because of the “hype” surrounding the futures expiration, but nothing more than that. I don’t think that the short positions in mining stocks would be affected to any significant degree. In fact, it could be one of the “buy the rumor, sell the fact” type of events. Of course, the above is just my opinion.
Overview of the Upcoming Part of the Decline
- I expect the initial bottom to form with gold falling to roughly $1,700, and I expect the GDX ETF to decline to about $31 - $32 at that time. I then plan to exit the short positions in the miners and I will consider long positions in the miners at that time – in order to benefit from the likely rebound.
- I expect the above-mentioned decline to take another 1 – 7 weeks to materialize and I expect the rebound to take place during 1-3 weeks.
- After the rebound (perhaps to $33 - $34 in the GDX), I plan to get back in with the short position in the mining stocks.
- Then, after miners slide once again in a meaningful and volatile way, but silver doesn’t (and it just declines moderately), I plan to switch from short positions in miners to short positions in silver (this could take another 1-4 weeks to materialize). I plan to exit those short positions when gold shows substantial strength relative to the USD Index, while the latter is still rallying. This might take place with gold close to $1,500 and the entire decline (from above $1,700 to about $1,500) would be likely to take place within 1-10 weeks and I would expect silver to fall hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold – after gold has already declined substantially) is likely to be the best entry point for long-term investments in my view. This might happen with gold close to $1,500, but it’s too early to say with certainty at this time.
- Consequently, the entire decline could take between 3 and 20 weeks, while the initial part of the decline (to $1,700 in gold) is likely to take between 1 and 7 weeks.
- If gold declines even below $1,500 (say, to ~$1350 or so), then it could take another 10 weeks or so for it to bottom, but this is not what I view as a very likely outcome.
- As a confirmation for the above, I will use the (upcoming or perhaps we have already seen it?) top in the general stock market as the starting point for the three-month countdown. The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector would be likely to bottom about three months after the general stock market tops .
- The above is based on the information available today and it might change in the following days/weeks.
Summary
To summarize, the PMs’ short-term downswing has likely just begun, as miners broke below the neck level of their almost-yearly head-and-shoulders formation. We saw a small invalidation, but we don’t trust its bullish implications – we just saw something similar that failed to ignite a lasting rally and the USD’s decline seems to be a normal, post-breakout pullback.
In addition, because we’re likely entering the “winter” part of the Kondratiev cycle (just like in 1929 and then the 1930s), the outlook for the precious metals’ sector remains particularly bearishduring the very first part of the cycle, when cash is king.
Silver’s strength seems bullish at first sight, but taking a closer look at this move, and comparing it with previous cases (when silver got so much attention) and with miners’ weakness, provides us with bearish implications for the medium term.
The confirmed breakout in the USD Index is yet another confirmation of the bearish outlook for the precious metals market.
Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway.
After the sell-off (that takes gold to about $1,500), we expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.
Most importantly, please 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 earn much more in the following weeks and months), but you have to be healthy to 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 (300% 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: $31.22; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade); binding profit-take level for the DUST ETF: $24.88; 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: $42.72; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade); binding profit-take level for the JDST ETF: $14.19; 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: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.
Gold futures downside profit-take exit price: $1,703
Symbols to be on a lookout for in case of possible future transactions (leveraged and non-leveraged):
Gold: GLD (non-leveraged, regular), UGL (2x leverage, regular), GLL (2x leverage, inverse)
Silver: SLV (non-leveraged, regular), AGQ (2x leverage, regular), ZSL (2x leverage, inverse)
Mining stocks:
Senior mining stocks: GDX (non-leveraged, regular), NUGT (2x leverage, regular), DUST (2x leverage, inverse)
Junior mining stocks: GDXJ (non-leveraged, regular), JNUG (2x leverage, regular), JDST (2x leverage, inverse)
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Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash
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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 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 (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: 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.
Thank you.
Przemyslaw Radomski, CFAFounder, Editor-in-chief
