Briefly: in our opinion, full (250% 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. We are increasing the size of the short positions.
The precious metals sector was likely to decline, and it did exactly that. And based on what we just saw, it's likely to decline even more.
Once again, the situation yesterday and so far today developed quite in tune with what we wrote yesterday, so today's analysis will take form of a broad update. Let's take a look at the GLD ETF. In yesterday's and Monday's analyses, we described it in the following way:
[Monday] As far as the short-term is concerned, we have a good indication from the GLD ETF that the rally is about to end today. This is the case due to the triangle-vertex-based reversal that we have right now. This trading technique has proven to be useful many times in the previous months, so it seems to be worth to pay attention to its indications also this time.
[Tuesday] The GLD ETF has indeed moved higher yesterday (less than 0.5%, though), and gold futures are moving lower in today's pre-market trading (so far declining by about 0.3%). This might have indeed been the top, especially that silver invalidated its tiny breakout above the previous 2020 highs and gold showed weakness relative to declining USD Index.
GLD ultimately declined by 0.65%, which means that it erased more than Monday's gains. The triangle-vertex-based reversal technique seems to have worked once again. This is further confirmed by the fact that gold is once again down in today's pre-market trading - despite lower USD Index values.
In yesterday's analysis, we emphasized that the length of the current decline is very similar to the length of the February - March decline that we saw right before the big USDX run-up. We also argued that the situation is relatively similar on the fundamental front. To clarify, there are obvious differences, but the key similarity is that it's relatively clear that the Covid-19 cases are going up and the economic implications are going to be more severe than it is currently perceived in general, but the numbers don't yet reflect that. Which is probably why the USDX is still not soaring and stocks are not yet declining. Again - it's a "yet" in my view.
What we would like to add to the above today is that in March, the USDX bottomed on the third day after breaking below the previous important support (the January low). Today is also the third day when the USD Index moved below the important support in the form of the 61.8% Fibonacci retracement. It could be the case that the big run-up is just around the corner. And since gold is already declining despite the lack of USD's help, such an USDX rally would likely have a devastating effect on the precious metals sector.
As you can see on the above chart, silver is now visibly below the previous highs, and it's now crystal-clear that silver's small attempt to break to new 2020 highs was invalidated. This is something that we often see as a confirmation that the top is already in, and it seems that this is the case also this time.
Please note that the huge slide below $12 in silver futures started from almost the same levels and it took less than a month for the white metal to move there. If the first part of the slide is similar to what we saw previously, we can expect to see a decline below $17 shortly.
Miners' performance also suggests that another slide is starting. And it's not only because of HUI's profound monthly reversal, or the invalidation of its breakout above the 2016 highs.
Monday's rally on low volume was followed by a bigger decline on visibly bigger volume. GDX has almost erased three days of gains, declining more on a relative basis than GLD did during the same time. This serves as yet another confirmation that the top is already in.
The thing that we would like to add today is the note about similarity between the price patterns that we saw between mid-February and early March and the last few weeks. The areas marked in red are identical. As you can see the shape of the price moves is very similar, and so is the timing of the price extremes. In fact, the latter is almost identical. "Almost", as it seems the move lower started one day earlier this time.
It's just like the PMs and miners got fed up waiting for the USD's rally and stock market's decline and are moving lower even without them. This is the perfectly bearish situation, because once we do get the above-mentioned signs, the decline is likely to simply accelerate.
Summary
Summing up, the very bearish situation became extremely bearish as silver's fakeout became crystal-clear and gold miners continue to show weakness to gold, and the latter is showing weakness relative to what's happening in the USD Index.
In our view, the above, plus GLD's triangle-vertex-based reversal, gold's seasonal patterns and other factors that we outlined in this week's flagship Gold & Silver Trading Alert, makes an even bigger short position justified from the risk to reward point of view. Consequently, we are increasing its size.
After the sell-off (that takes gold below $1,400), we expect the precious metals to rally significantly. The final decline might take as little as 1-3 weeks, so it's important to stay alert to any changes.
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 (250% 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: $10.32; 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: $231.75; 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: $9.57; 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: $284.25; 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: $8.58 (the downside potential for silver is significant, but likely not as big as the one in the mining stocks)
Gold futures downside profit-take exit price: $1,382 (the target for gold is least clear; it might drop to even $1,170 or so; the downside potential for gold is significant, but likely not as big as the one in the mining stocks or silver)
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
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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
