Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Friday's session may seem boring, but only to those, who don't know where to look. Friday was the day. The day we have seen the missing piece of the puzzle. The piece that we've been waiting to see for many days. It's here and it fits perfectly.
Namely, silver finally outperformed gold without invalidating the uptrend in the gold to silver ratio. The latter was unlikely to be invalidated given the confirmed breakout above previous long-term highs, so we noted that it was not necessary to see silver's outperformance as a sell confirmation. And we just saw it anyway.
The Silver Outperformance
The changes in terms of closing prices were not huge, but still quite informative. The miners moved lower, gold was up just a little, and silver was up a bit more visibly. This is a classic bearish indication - the miners underperform while silver is performing relatively well.
The key thing happened during the session. Please check how much higher gold moved during the session - barely. Now, please check how far silver moved up before declining again. Silver erased half of its intraday rally.
On Thursday, silver had declined by 37 cents. On Friday, it initially rallied by 19 cents, which is more than a half (51%) of the decline. Gold temporarily erased only 28% of the Thursday decline before declining once again. The HUI Index temporarily erased 29%, but then it declined to new short-term lows, so it clearly underperformed.
Silver was the market that showed greatest strength on an immediate-term basis. This is precisely something that we wanted to see as a bearish confirmation. We had already increased the size of our short position and it's already extra-large, but if we hadn't done so previously, we would definitely do so now.
Silver Miners Concur
Let's take a look at the silver miners' ETF - SIL. On April 3rd, we commented on the above chart in the following way:
Gold price usually moves in tune with the silver price, and silver stocks usually move in tune with silver. The sizes of the moves are not identical, but the turnarounds often take place at the same time. The price moves are similar enough to say that the big moves will take place at the same time, but they are different enough for the markets to provide different signals. At times, one market might lead the other. There may also be other specific features and in today's Alert, we'll focus on one of them.
Namely, we're going to discuss the huge daily volume spikes. And in particular, we're going to focus on days when the silver miners (were using the SIL ETF as a proxy for the sector) declined on big volume. There were quite a few such days since early 2016 and they were almost all characterized by analogous price action - not only in the case of silver miners, but also in the case of gold.
To put it simply, gold usually took a dive after silver miners declined on huge volume.
The above doesn't reveal the efficiency, nor the severity of the signal, though.
As far as efficiency is concerned, there were 19 signals and 15 of them were good (or excellent) shorting opportunities. In two cases, it was unclear if it was a good shorting opportunity or not. There were only two cases when the signal clearly failed: in December 2016 and in December 2018.
The professional approach is to focus on the losses or things that invalidate a given theory first, and that's exactly what we're going to do now. Let's start with the two cases that were actually buying opportunities. In the opening paragraph, we have mentioned that these two cases are not similar to the current situation. Both cases took place in December and we're far from this month, but that's not the main point.
The main point is that in the first - 2016 - case, both: gold and silver miners were already after a several-month-long decline and thus big volume might have really signified the exhaustion of the trend. The second - 2018 - case is when silver miners were right after a breakout. Not only are the miners not after a breakout right now, but they are actually after a breakdown.
Having said that, let's move to the two unclear cases. One of them was mid-July 2016 case where the market moved higher one more time before forming the final top, and the other one was the September 2018 situation, when the market moved lower in the near term, but that was actually the start of a bigger upleg. One case was a good shorting opportunity in the medium term, but a bad one in the near term, and the other case was the opposite. None of them clearly invalidated the signal, but to be conservative, we can say that only one additional case confirmed the signal, while the other one didn't. This means that we get the ultimate efficiency of 84.2% (16 out of 19). That's an extremely high efficiency and...
That's not everything.
You see, the very recent price/volume action in silver stocks was not average. It was special. There are two reasons for it:
- The daily volume was higher than what we saw previously. In fact, it was highest daily volume that we ever saw in case of the SIL ETF.
- The volume spike took place right after a major breakdown.
Monday's volume in the silver miners was no April Fools' Day joke. It exceeded the previous record by about 30%. Out of the recent years, we saw the biggest daily volume during a decline in silver in 2016: in August and September. That was the beginning of the biggest decline in gold of the recent years. In other words, the only analogy that we have based on the size of the volume points to the biggest decline in the recent history. And the volume was even bigger this time - it broke the previous record. Will the decline be bigger than the late-2016 one? That's what is very likely based on many other techniques and what the above silver chart is confirming.
Moving to the second point, silver miners are right after a major breakdown. There were two similar breakdowns in the recent past that were then followed by the huge-volume signal. That was in August 2016 and in June 2018. In both cases, silver miners and gold continued to decline for many weeks.
Both the above-mentioned factors suggest that 84.2% efficiency is likely understated and should in reality be higher. In particular, both links point to analogy between the current situation and what we saw in August 2016. It then took gold less than 4 months to decline over $200. And let's keep in mind that the volume was much higher this time, so the move - based on the above chart alone - could also be bigger this time.
A few days after posting the above, we supplemented it with the analysis of silver from the non-USD perspective and we wrote that the above doesn't rule out the possibility of seeing a short-term upswing before the decline resumes. Silver stocks would likely simply verify their breakdown in this case.
This was exactly the case. Silver stocks simply verified their breakdown. Just like gold stocks, they also declined on Friday, even though their underlying metal - silver - moved a bit higher. This is a very bearish combination.
We recently received a question about the above analysis of SIL and we think that our reply might be useful also to you, so here it is. Let's start with the question.
Great analysis, except your big volume day in the SIL was quarter end book squaring on March 31, so I am not sure that the volume figures are legitimate bets, so to speak. Furthermore, those were the capitulation lows thus far, the absolute bottom for silver miners, while gold broke a bit lower two or three days after the SIL volume, it has since worked its way higher.
What do you think?
And that's our reply:
(...) You're right, the fact that it was the end of the quarter might have played a role here, but I think that it doesn't invalidate the point. That was not the first or only quarter that ended in the recent history and the preceding volume during analogous days was not as huge.
Based on [the recent] action it does seem that the medium-term indications are playing out as expected and the only thing that we saw recently was a counter-trend rally.
Indeed, after seeing the weekly closing prices, it's now clear that the record-volume decline was not a capitulation low, as silver miners are already below it.
Summary
Summing up, the small corrective upswing in the precious metals sector is over and the medium-term downtrend has likely resumed. Silver's intraday outperformance just confirmed the bearish short-term outlook. Based on the likelihood of seeing a temporary turnaround in the next 1-3 weeks, we might have a good chance of exiting the current short position or even switching to a long one at that time.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,252; stop-loss: $1,357; initial target price for the DGLD ETN: $50.97; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $14.11; stop-loss: $15.72; initial target price for the DSLV ETN: $36.97; stop-loss for the DSLV ETN $26.97
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $20.41; stop-loss: $24.17; initial target price for the DUST ETF: $24.28; stop-loss for the DUST ETF $15.47
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so - we think senior mining stocks are more predictable in the case of short-term trades - if one wants to do it anyway, we provide the details), here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $29.62; stop-loss: $35.67
- JDST ETF: profit-take exit price: $52.32 stop-loss: $30.97
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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
