Briefly: in our opinion, full (250% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
Rallying mining stocks? Forget about them. Silver is the new cool kid in the neighborhood. Having rallied by almost 50 cents in just one day, silver stole the spotlight and seems to be ready to move much higher… Or much lower. Does anyone still fall for silver’s fake rallies? Based on the size of the rally and the corresponding volume, it certainly seems to be the case. But you don’t have to fall for it – that is if you prefer to analyze the market’s emotionality instead of acting on it. It’s not an easy thing to do, because each silver rally seems to be “it”. But what’s easy and what’s profitable is rarely the same thing.
Today’s analysis will be quite specific, because we already wrote about “the silver signal” several times in the past several days. We did emphasize our take on the silver market more than once, because the market itself provided us with the signal more than once.
First, there was the spike in the ratio of volumes between SLV and GLD (charts courtesy of http://stockcharts.com).
The red arrows mark cases when we saw huge volume spikes in the ratio. More precisely, they show spikes in the ratio of volumes, as the ratio, by itself, doesn’t have any volume.
On numerous occasions, we wrote that silver tends to be the metal of choice right before the local tops and before sizable price declines. The likely reason is that the silver market is dominated by individual investors that tend to be more emotional than institutions. For those, we have not been following our analyses previously – the “silver signal” is seen when silver outperforms gold on a short-, or very-short-term basis. Ideally, it should be confirmed by rather weak action in mining stocks (Friday’s action in the miners was indeed weak)
The spike in the ratio of volumes was recently the highest in months, which makes it very likely that we are at a major top or very close to one. We saw this signal a few times earlier this year and, in all cases, big price declines in gold and silver followed – if not immediately, then shortly.
A few days after the initial spike in the ratio of volumes, we saw the repeat of this signal along with a move higher in the SLV to GLD ratio itself. That was a perfect confirmation. Yet, instead of declining right after that move, we saw a move higher… And another screaming signal. The ratio of volumes was not extremely high, but the price ratio jumped dramatically. Seems like a game-changer? It’s not – we saw the same thing in mid-April and mid-June. In fact, the mid-April rally in the ratio was even sharper.
It was not a game-changer; it was in tune with what we saw recently; and it came from both: price and volume. The major sell signal.
To be honest, it’s not that surprising to see this kind of action right now. If there’s a big slide coming, then it’s not odd for the preceding sign to also be quite visible.
Speaking of the big slide, we previously emphasized how similar the current situation is to what we saw in 2013 right before the huge April downswing. Consequently, the question arises, if the current action in silver is anything like what we saw in 2013?
You bet!
The Silver-Gold 2013 Analogy
The above charts show what happened in gold and silver right before the decline. The data cutoff is just before the first day of the powerful slide. What did silver do? It outperformed and the scope of the outperformance was not minor – it was clearly visible. In particular, during the final daily rally, silver moved higher by 67 cents, while gold moved up by $11.80. Last Friday, gold rallied by $8.80, while silver moved up by exactly $0.42. The recent moves are smaller, but the starting price is also smaller. Here’s how it looks in relative terms:
In 2013, the final daily rally in gold was: 0.75%
In 2013, the final daily rally in silver was: 2.46%
This Friday, the daily rally in gold was: 0.74%
This Friday, the daily rally in silver was: 2.95%
It’s not 100% identical, but still remarkably similar.
Consequently, silver’s rally that we saw on Friday is not a bullish development, but a strong bearish sign that makes the current situation even more similar to what preceded the epic April 2013 slide.
Before summarizing, let’s take a look at what happened in platinum.
Platinum’s Breakdown
The most important detail is what didn’t happen. Based on the previous week’s closing prices, the breakdown below the 2016 bottom was not invalidated, which means that it’s very bearish implications remain in full force.
Important Analyses
Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:
- Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
- Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
- Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
- Preparing for THE Bottom in Gold: Part 7 – Buy-and-hold on Steroids - description of a strategy dedicated to significantly boosting one’s long-term investment returns while staying invested in the PM sector.
- Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
- Gold: What Happened vs. What Changed - discussion of the latest extreme readings from gold’s CoT report
- Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.
- The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
- Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.
Summary
Summing up, it seems that the next big downswing in the precious metals sector is already underway. We saw the repeat of short-term outperformance, which is a bearish sign on its own, and it’s particularly bearish because of the analogy to what happened in 2013 right before the big price slide. All in all, it seems that the huge profits on our short positions will soon become enormous.
As always, we’ll keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,062; stop-loss: $1,226; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $53.67
- Silver: profit-take exit price: $12.72; stop-loss: $15.16; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $31.37
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $19.61; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $33.37
Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. 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: $17.52; stop-loss: $29.43
- JDST ETF: initial target price: $154.97 stop-loss: $64.88
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
Important Details for New Subscribers
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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Stocks were virtually flat on Friday, as investors continued to hesitate following the recent record-breaking rally. The S&P 500 index remains close to its September the 21st record high, but will it resume its uptrend?
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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