Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Some might consider an additional (short) position in the FCX.
Gold, silver, and mining stocks declined on Friday as the USD Index invalidated its breakdown. Is the top in the PMs in?
While I can’t make any guarantees, that’s very likely at this point. Gold hasn’t moved back below $2,000 yet, but what it did, however, indicates that such a move is just around the corner.
Namely, gold moved lower on visibly higher volume, and this – after a profound rally – marked the beginning of the decline in many cases. This includes the March 2022 and January 2023 tops.
The indication coming from the USD Index seems more important, though.
Breakdowns to new yearly lows and moves below the previous important bottoms are viewed as important bearish events… As long as they are confirmed. Conversely, while many don’t realize it, there’s an even stronger signal in the opposite direction if the breakdown gets invalidated. And the more important the support level is, the more profound the bullish implications of the invalidations are.
What did the U.S. currency do on Friday?
It soared.
Right back above the previous lows.
And it wasn’t just “some lows.” It was the yearly low! Just when everyone and their brother had been expecting to see another powerful slide, the USDX rose back from the ashes like a phoenix!
This might not seem exciting right now, but just wait. The history tends to rhyme, and the current rhyme ends with “and then the USDX soared”.
Why is this important for those who are interested in the gold price outlook?
Because of the very negative correlation between gold and the USDX. You can see it at the bottom of the above chart. It’s very close to -1, which is as low as it gets. But even without looking at the so-called linear correlation coefficient, it’s pretty clear that gold and the USDX have been moving in a mirror-like fashion for about a year.
As the USD Index appears to have bottomed, gold likely topped. The move back below $2,000 will confirm this.
Please note that silver volume increased visibly as well during Friday’s decline. When did that happen after a sizable short-term rally as well? In early 2023. And yes – that’s when the rally ended.
The above, thus, serves as a bearish confirmation.
The GDXJ – proxy for junior mining stocks – declined on Friday, but just like gold and silver, it didn’t move back below its previous yearly high… Yet.
Just like in the case of silver, we see a subtle clue on the above hourly chart that this invalidation is about to take place. Namely, the size of the move below the rising, dashed support line is much bigger than what we saw earlier in April. That first attempt was invalidated, and (remember what I wrote about invalidations earlier today?) it was followed by a rally. This time, the rebound took GDXJ only a little higher and definitely not back above the support line, which has now turned into resistance.
So far in today’s (Monday’s) pre-market trading, gold and silver are up only barely (chart courtesy of https://SilverPriceForecast.com), which suggests that the breakdown in the GDXJ is not going to be invalidated.
This, plus the situation on the forex market, suggests that gold is about to move below the all-important $2,000 level and that the next big move in the precious metals sector is going to be to the downside. It’s now very easy to be bullish on the precious metals market because it’s just as easy to look into the most recent past and think that what happened recently is going to be repeated. That’s what most people tend to do. And most people don’t tend to get great results on the markets, do they?
That’s the key reason – people tend to do what’s easy instead of looking beyond the initial impression, and then acting based on cold logic and analysis of previous patterns. You see, people had been emotional… Probably for longer than our species exists, as many other species are emotional as well. That’s not likely to change anytime soon. Instead of blindly following the herd, it’s best to take a deep breath and look at the situation from a broader point of view. It’s much easier to notice that some patterns are being repeated if one looks at the situation from a proper distance.
Right now, this “broad look” tells us that the situation on the precious metals market is not as bullish as many think. In fact, it’s not bullish at all.
Yes, I would very much prefer for the junior mining stock sector to move lower already, just as you would. And I know that waiting for the decline is unpleasant, boring, and discouraging. Fortunately, it seems that the prolonged waiting is over or about to be over. The patience (and doing what is difficult) is likely to be very well rewarded. There doesn’t have to be any specific fundamental or news-based trigger for the medium-term decline to continue. Seeing one, would speed things up, but it’s not necessary.
Stay strong.
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Overview of the Upcoming Part of the Decline
- It seems that we’re seeing another – and probably final – corrective upswing in gold, which is likely to be less visible in the case of silver and mining stocks.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all – perhaps with gold prices close to $1,500 - $1,550.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, we recently took profits from the additional FCX trade (right before the trend reversed!) and the current short position in junior mining stocks is – in my view – poised to become very profitable in the following weeks. The same goes for the additional short position in the FCX.
Things might appear chaotic in the precious metals market right now, but based on the analogy to the previous crises (2020 and 2008), it’s clear that gold, miners, and other markets are pretty much doing the same thing all over again.
The implications of this “all over” are extremely bearish for junior mining stocks. Back in 2008, at a similar juncture, GDX’s price was about to be cut in half in about a month! In my opinion, while the decline might not be as sharp this time, it’s likely to be enormous anyway and very, very, very profitable.
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 junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; stop-loss for the JDST: none.
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.):
Silver futures downside profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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’ve 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 (as 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 K. Radomski, CFA
Founder, Editor-in-chief
