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.
In yesterday's Gold & Silver Trading Alert, we wrote about the toppy nature of the current movement in the precious metals market and we just saw a perfect confirmation of these comments during the overnight trading.
Namely, gold plunged over $70 in a flash, and it moved below the very short-term rising support line. As surprising as it may be, it was not the most important thing by itself that just happened. The most important thing is how the above relates to what happened in the USD Index.
The breakdown in gold corresponded with a breakout and a move higher in the USD Index. What is the key here is how the tiny rally in the USD Index triggered such a big immediate-term slide in gold. This shows just how vulnerable the gold market currently is.
The size of the overnight rally in the USD Index - that caused a $70+ decline in gold - was just 0.43.
This is very important given that this tiny breakout in the USDX is most likely just the very early part of a bigger move, as the U.S. currency just reached a combination of powerful long-term support levels.
Quoting yesterday's analysis:
Speaking of indications pointing to the situation being excessive, let's take a look at the USD Index.
Remember when in early 2018 we wrote that the USD Index was bottoming due to a very powerful combination of support levels? Practically nobody wanted to read that as everyone "knew" that the USD Index is going to fall below 80. We were notified that people were hating on us in some blog comments for disclosing our opinion - that the USD Index was bottoming, and gold was topping. People were very unhappy with us writing that day after day, even though the USD Index refused to soar, and gold was not declining.
Well, it's the same right now.
The USD Index is at a powerful combination of support levels. One of them is the rising, long-term, red support line that's based on the 2014 and 2018 bottoms. The other support levels are visible once we zoom in a bit.
The USD Index just moved slightly below the 38.2% Fibonacci retracement level that's based on the 2014 - 2020 rally, and below the 61.8% Fibonacci retracement level that's based on the 2018- 2020 rally.
Each of these retracements is powerful on its own, but taking them both into account and then combining them with a rising long-term support line creates a very powerful support.
And this time, people are also hating on me due to me speaking out about what I see on the charts and what is my opinion about it. I can't imagine what obscenities are written about the analyst who - on Forbes.com - wrote an article entitled "Stay The Hell Away From Gold".
On a side note, the hateful comments are quite surprising. Yes, it would have been much better to become bearish only right now, and not early before the mining stocks refused to move to new highs. Yes, we were too early with the current short position in the miners (we didn't feature shorting suggestions for silver or gold, though, only price targets as they were requested by our readers). Yes, if possible, we would love to get back in time and delay opening our current trading positions. We are not 100% correct and will never be, and the same applies to everyone else in this business, which is why position sizing is so important. With the benefit of hindsight, all tops and bottoms are obvious, and nobody will pick all of them. However, at any given time, when I made an observation, comment or decision, I did so with greatest care about my subscribers and readers.
The thing that's not that intuitive is that for an analyst this "greatest care" means being as objective as possible and not automatically going with majority or with what's currently most popular, easy to write, or easy to read. In fact, an analyst, who would do that, would be completely useless, as a simple online survey asking about people's sentiment, could easily replace them.
The value that the analyst can generate comes from providing a synthesis of what they view as important, including analogies, patterns, fundamentals, cycles, and whatever they find as justified based on a reasonable methodology. Then, investors can use this information along with some other details about the market (perhaps other analysts, perhaps their own research, perhaps a certified investment adviser) or about themselves (risk tolerance, ability to take on risk, liquidity requirements and so on) to make informed investment decisions. By not speaking their mind (even against what the majority thinks), the analyst is actually refusing to do what they are supposed to do, and how they should be providing value to investors.
The analysts' responsibility is to provide their opinions as objectively, as thoroughly as possible and without worrying about "pleasing" others with their comments. That's how they can really care about people. Analysts are not responsible for each investor's gains or losses, as they are not pulling the final strings. Of course, the analyst can exercise extra care by providing hints regarding position sizing (we're linking to our complex article on that matter in each of our Gold & Silver Trading Alerts, usually more than once; plus we are providing a simple simulation of excessive and relatively normal position sizes), but it is the investor who is responsible for executing all that.
Sadly, it is sometimes the case that people use the analyses as a "scapegoat" should they need it - and they need it rather sooner than later if they use excessive position sizes. Instead of really digging into the details of a given analysis and position sizing, people sometimes use all or most of their capital for a single (perhaps even leveraged) trade, especially if a single article makes a good job explaining a given analyst's reasoning. If this trade works in their favor, they are ecstatic and ready to gain more adrenaline on their next over-leveraged trade. When a trade finally doesn't go as well as planned (it has to, as nobody is always correct), their losses are already so big that they can't recover. And then they find a scapegoat in the form of someone, whose opinion they decided to use, as if it wasn't their investment decision, but this "someone's". And the more they are really angry with themselves (and the less they are willing to accept the responsibility for their investment decisions), the more anger they will express toward others, regardless of what they've done previously for them or in general (like very few people remember that we made money on the March decline and then we made money on the rebound buying precisely on March 13).
This is all very much connected with the overall concept of ego and ownership that a former Navy Seal leader Jocko Willink is discussing in his book called "Extreme Ownership". That's one of the best books that I read, definitely worth your time, but watching him speak about it on YouTube would also be a good idea if you're short on time (who isn't?).
I think that I already diverted from the regular analysis too much, so I will be getting back on track, but I would like to say that again regarding the responsibility:
The analysts' responsibility is to provide their opinions as objectively, as thoroughly as possible and without worrying about "pleasing" others with their comments. That's how they can really care about people. Analysts are not responsible for each investor's gains or losses, as they are not pulling the final strings. Investors/traders are responsible for their gains and losses, and for making sure they get enough details before making their investment decisions. I - and everyone at Sunshine Profits - strive to help you as much as I can, but these will be your profits, and your responsibility if you make them (or not).
Analysts will be right, and analysts will be wrong. No exceptions. We disagree with Mr. Larry Light, who suggests one to "stay the hell away from gold", as we think that gold is a great buy long term, but it still needs to correct profoundly before soaring. However, we realize that Mr. Light might be right here or in many other ways, and while we disagree with him, we disagree respectfully.
We also disagree with those, who say that gold will soar indefinitely without bigger corrections, especially now, shortly after the Gold Miners Bullish Percent Index flashed the extreme oversold signal. And once again - we disagree respectfully.
Let's move back to USD's short-term picture. We're including it once again below, for your convenience.
The shape of the decline and the breakout itself are similar to what we saw in February and March. Back then, after the very first short-term breakout, the USDX kept on rallying until it reached the more long-term, but still short-term declining resistance line. There's also such a line right now, and it's currently slightly above the 95 level. This doesn't seem far, until...
Until you recall that gold declined over $70 as a response to a mere 0.43 move in the USDX. The USDX overnight top (so far) was 93.963. This means that it's about 1.1 index point away from being "a bit over 95".
This means that in order to reach this very short-term target, the USDX would have to rally more than twice as it had already rallied. Approximately 1.1 / 0.43 = 2.56 times as much.
If the huge leverage that is present in the gold-USD link remains intact for a while, it could translate into 2.56 x $70 = $179.2 decline below the overnight low, which is about $1,902. This means that USDX's rally to a bit above 95 could mean a huge decline in gold - to about $1,902 - $179.2 = $1,722.80
Interestingly, this is very much in tune with the initial downside target for gold that we've been featuring lately, which makes this target even more likely.
As you may recall from our previous analyses, gold declined to about $1,700 as well, when it moved above the $1,900 level for the first time.
At this point one may - and should - ask about the starting point of such a decline. In 2011, gold declined initially from $1,912, not $1,974, which is the overnight high right now. So, should one really expect the decline to end - initially - at the similar price level? In short, while it's not a sure bet, there's a very good reason why the current slide from above $1,900 might be bigger than the 2011 one. Why? Because of the USD Index.
Back in 2011, gold plunged before the USD Index broke higher and started its short-term upswing, which is probably why gold formed a second top instead of declining more after the first top.
Right now, we have a situation, in which the USD Index is breaking higher right away. Consequently, it can - and is likely to - add fuel to gold's fire-sale.
While were discussing the similarity to 2011, let's see how gold performed at its first 2011 top and how it's performing right now with regard to the shape of the intraday price moves.
In 2011, gold peaked in the overnight trading, it then declined, paused, declined again at about 3 AM EST, moved back and forth and peaked while the Hong Kong trading was ending.
And here's what's happening today.
Gold peaked in the overnight trading, it then declined, paused, declined again at about 3 AM EST, moved back and forth and peaked while the Hong Kong trading was ending.
Yes, these are the same words as above and they fit both charts, even though they are about 9 years apart.
If the history continues to repeat itself, we can expect gold to move lower in a sideways pattern in the next few hours, and to accelerate its decline in the second half of today's U.S. session.
Also, let's keep in mind that the initial post-top slide took only three days before gold rebounded. If the USD Index consolidates after moving above 95 within the next three days, we could see something similar. The difference could be that due to USD's rally, gold's initial decline could be bigger than the move that we saw in late August 2011.
What would be the implications for silver and miners? Naturally, they would be bearish.
Just like gold, silver broke below its rising support line and it's currently verifying this breakdown. If gold declines and the USD Index rallies (both are likely) silver would be likely to slide profoundly. Please note that multiplying silver's overnight decline by 2.56x would imply another decline of 2.56 x $3.77 = $9.65. The intraday low was $22.48, so this would mean silver at $22.48 - $9.65 = $12.83.
Now, the move in silver doesn't have to be that linear, so please don't take the above at its face value. The point is that silver could - and is likely to - slide very profoundly.
And speaking of profound declines, mining stocks are likely to magnify gold's decline, just like they have done it in March. Especially that the general stock market seems to have formed a short-term top - in my opinion. However, even without the latter, miners are likely to plunge if gold declines to $1,700.
At the moment of writing these words, the GLD ETF is down by 0.50% in the pre-market trading, while the GDX ETF is down by 2.71%. The GDXJ ETF is down by 3.20%. The miners are clearly providing significant leverage over the yellow metal.
The above implies a 5-6x leverage right now in case of the very short-term moves. If GLD was to decline to about $158 (which approximately corresponds to $1,700 in gold futures) from yesterday's closing price of $182.23, it would imply a decline by about 13.3%. Given the 5-6x leverage, this could result in a true carnage in the miners. 13.3% x 5 = 66.5% and 13.3% x 6 = 79.8%.
Given yesterday's closing price of the GDX ETF of $43.84, a decline of 70% of the value would imply a slide to about $13.
Will miners really slide as low?
It's possible, but they could bottom much higher, as the initial downside leverage would likely wear off, and right before gold bottoms, miners might already rally back up.
Consequently, as it is the case with silver, the point was not to tell you that GDX has to decline to $13, but to show you that it could really decline very profoundly.
During yesterday's session, miners reversed on big volume and it happened almost right at the vertex-based reversal. It's not clear whether the reversal date was yesterday or today, so the overnight top in gold perfectly fits this technique's indication. The implications are very bearish for the short term.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think that after bottoming temporarily at about $1,700, gold, silver and miners will bounce back - perhaps $30-$50 or so in gold, and then we will probably see another move lower, with silver declining more than miners. That would be in tune with how the markets initially reacted to the Covid-19 threat.
At this time it seems that after the initial decline to $1,700, gold could correct and then decline to $1,500 - $1,600 and that would be the final bottom - one that would hold for years, perhaps decades.
Still, it's possible that the $1,700 bottom in gold would be the final bottom.
How will we tell, which scenario is more likely - a decline visibly below $1,700 or just to it? Based on the way different parts of the precious metals sector react to the decline and to the initial rebound. If silver catches up with the decline when gold moves to $1,700, but miners lead on the way back up (strongly so), it will be more likely that the bullish scenario prevails. If we see the opposite - miners are weak during the rebound and silver doesn't catch up with the decline once gold approaches $1,700, the bearish case will prevail. Anything in between will require additional confirmations and we will keep you - our subscribers - updated in any case.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is very positive in the long run, but it doesn't make the short-term decline unlikely. In the very near term, markets can and do get ahead of themselves and then need to decline - sometimes very profoundly - before continuing their upward march.
Summary
Summing up, it seems that gold has just formed its final top in the overnight trading, just as the USD Index seems to have finally bottomed. Gold and silver have both reacted very strongly to the USDX developments, which has very bearish implications for the following days.
The miners have reversed yesterday on strong volume and practically right at the vertex-based reversal, and it all happened after they had flashed the extremely overbought signal through the Gold Miners Bullish Percent Index.
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 to increase its size if it wasn't already sizable, it's now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it's a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.
After the sell-off (that takes gold below $1,600), we expect the precious metals to rally significantly. The final decline might take as little as 1-6 weeks, so it's important to stay alert to any changes. Especially that if gold repeats its 2011 performance, the very initial bottom could form as early as this week.
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.
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: $32.02; 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: $28.73; 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 SL order in case of this particular trade); binding profit-take level for the JDST ETF: $21.22; 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
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
