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 analysis, we explained why rising stock prices might not lead to significantly higher gold prices before the latter turned south again. The manner in which yesterday’s session was conducted seems to have confirmed it. Stocks (S&P 500) were up by 1.64%, with the second-highest daily close this index has made – ever. And did gold rally that strongly as well? Absolutely not. Gold futures were up, but only by a mere 0.14% ($2.70). Silver futures were up by only $0.16, and the mining stocks – GDX ETF – declined by 0.27%.
Just minutes before writing this, gold invalidated its breakout above the declining resistance line. Before the invalidation happened, we reported that – unless gold declined – it would be just the second day when gold closes above the declining resistance line, and for the breakout to be confirmed, we would need three of such closes.
But, since gold did decline, and invalidated the breakout, the implications are already bully bearish.
At the same time, let’s keep in mind that gold did not break above the 38.2% Fibonacci retracement level based on the recent decline. Gold is also verifying the previous (August and September) lows as resistance. So far, it managed to move just slightly above the lowest daily close from the Aug-Sep consolidation. The resistance holds on.
All in all, gold is trading more or less, where it was trading at the beginning of the month, while the USD Index is trading visibly lower. Keep in mind that based on Friday’s upswing alone, gold does not show any strength here, despite what one might think, particularly in light of yesterday’s upswing on the stock market.
Gold is after a confirmed breakdown below the important red, medium-term support line, which means that it will most probably slide in the upcoming weeks or months, even if that doesn’t happen right away.
Based on the chart above, the likely downside target for gold is at about $1,700, predicated on the previous lows and the 61.8% Fibonacci retracement, based on the recent 2020 rally.
As far as the white metal is concerned, previously, we’ve indicated the following:
Silver is also after a major breakdown and it just moved slightly below the recent intraday lows, which could serve as short-term support. This support is not significant enough to trigger any major rally, but it could be enough to trigger a dead-cat bounce, especially if gold does the same thing.
Once again, that’s precisely what happened on the market!
So, is the counter-trend rally over? That’s quite possible, particularly if we consider yesterday’s (less than clear, but still) reversal. But, given the possibility that the stock market moves higher, silver could move somewhat higher as well before it slides once again.
Back in early March, silver moved higher before indeed plunging, so the current move up doesn’t invalidate this similarity, especially given that the Covid-19 cases are rising in a quite similar way (most visibly in Europe).
On an intraday basis, technically, silver moved as high as it did on July 28th. The corrective rally is not as big as one might think if we focus on Friday's upswing alone. However, that’s not the critical matter here. The key point in case is that the breakdown below the rising support line was more than confirmed.
At the moment, one might ask how we can know if that really is just a dead-cat bounce and not the start of a new strong upleg in the precious metals sector. The answer would be that while nobody can say anything for sure in any market, the dead-cat-bounce scenario is very probable due to multiple factors, the clearest of them being the confirmed gold and silver breakdowns, and most importantly – the confirmed USDX breakout.
Meanwhile, the mining stocks had barely done anything yesterday.
To be more precise, this “nothing” is quite informative, as a small decline in miners is a big sign when contrasted with the sizable rally in stocks. It’s a bearish indication, given that miners failed to react to stocks’ positive lead.
Moreover, please note that the miners touched their 50-day moving average, without closing above it. In March, this level served as the initial resistance, which was then broken for three days, the final top before the massive slide. This moving average then served as resistance twice in March and in April. Being broken downwards in September, right now, we can clearly see the verification of this breakdown. Hence, the implications remain bearish for the next few weeks.
Letters to the Editor
Q: I have read your latest article regarding the US dollar index and PM sector. Your analysis is following the technical and fundamentals, however , any single news about a new stimulus package is ruining and damaging all of these fundamentals like what we saw in the crash of the Dollar index and fuel up of the PM . Don’t you think that its more wise to take any near expected news into consideration bearing in mind if the buying power of silver or Gold is so huge based on the new stimulus talks, don’t you think it supersedes these fundamental analysis and deviate from it like what we saw in the PM sector
A: I disagree that the news regarding stimulus ruin or damage all these fundamentals and/or technicals.
The “expected news” was already considered by the market. If something is already or near certain, then the markets have already moved accordingly. There is a saying among the traders “buy the rumor, sell the fact”, and there is a lot of truth to it.
Remember how silver was supposed to take off after the SLV ETF was launched? Instead, silver rallied before the SLV ETF was launched, plunging shortly after the launch. Silver investors bought the rumor and sold the fact, that’s what they did.
It is true that unexpected news could change the situation on the market, but it is most often the case that they only manage to cause delays or brief corrections, and once the dust settles, the markets once again focus on whatever they were focusing before the unexpected news arrived. That’s one of the reasons why geopolitical events tend to have only temporary effects on prices.
The massive printing of money and the very loose monetary policy is indeed a factor that’s likely to result in much higher gold and silver prices in the following years. However, in the short run, the USD Index is still expected to rally, in my opinion. At some point, gold is likely to refuse to decline more as the USDX climbs higher, and that’s when I think the next extreme buying opportunity will be. But we are not there yet, and the current opportunity is based on the upcoming decline, in my view.
Q: I have read that dollar shorts are at an extreme not seen since 2011. Do you have charts that verify this? Thanks
A: Yes, please look below.
The upper part of the chart is the USD Index values, and the lower part of the chart is the futures positions, as revealed in the Commitment of Traders reports.
The current situation is extreme, which is represented by exceptionally low readings of the blue line. The interpretation is quite straightforward – when the situation gets too excessive, the USD Index moves up. The biggest rallies in the USD Index started with situations like the current one – when the sentiment was very bad.
The implications are bullish for the USD Index for the following weeks and months, and they are bearish for the precious metals sector.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think it has already begun.
During the final part of the slide (which could end later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we expect silver to decline more than miners. That would be aligned with how the markets initially reacted to the Covid-19 threat.
The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run, but it doesn’t make the short-term decline improbable. Markets can and will get ahead of themselves and then decline – sometimes very profoundly – before continuing their upward climb.
The plan is to exit the current positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 5 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is a very soft and broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to execute such a strategy successfully.
The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.
Summary
Summing up, given the recent move higher in the general stock market, it could be the case that the decline is delayed, but there also signs pointing to the corrective upswing being already over, like today’s invalidation of the breakout in gold.
Considering gold's breakout invalidation above the 2011 highs, it's evident that the big rally (that ended $4 above our upside target) is entirely over. Given this invalidation and the confirmed USD Index breakout, gold will probably slide much lower over the next few weeks. There are indications that the corrective upswing in the precious metals market and the pullback in the USDX are close to being over, so the decline could resume any day – or hour – now.
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 wasn't 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 $1,700 or lower), 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.
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 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 in the trading section we describe the situation for the day that the alert is posted. 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, 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 to do 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
