Briefly: In our opinion, full (150% 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. We are moving the stop-loss levels a bit higher for gold and silver.
We are normally not providing alerts during the days when the markets are closed in the U.S., but since there were major moves during Friday’s session, we thought that you would appreciate an alert sooner than according to our regular schedule.
Gold moved to new highs on Friday and mining stocks rallied substantially as well. The real action, however, took place in the USD Index. The latter managed to close the week below its 2017 low and that was the lowest weekly close in the last 3 years. The USD seems to be doomed – is gold about to soar?
In short, the above statements are an exaggeration. The USD Index has indeed moved to new lows, but the breakdown is not confirmed and – as always – context is king. The chart below provides it (chart courtesy of http://stockcharts.com).
The context is that the two of the sharpest rallies of the past 20 years and two other major upswings started with a small breakdown. This includes the 2014 bottom and the subsequent rally.
Besides, please note that the rally that we saw in the second half of 2015 started after the USD moved a bit below the previous low in mid-2015. The 2016 rally started after the USD moved a bit below the mid-2015 low. The late 2017 rally started after the USD moved a bit below the 2016 low. Now the USD moved a bit below the 2017 low.
If something analogous to what we just saw happened in few of the most bullish situations in the recent and not-so-recent history, then how can we view it as something bearish?
We shouldn’t. At least not yet. If the USD Index continues to slide, then at some point the situation will indeed become bearish, but a single session is definitely not enough to make the picture bearish.
There is a declining support line that could stop the current decline – the one based on the 2015 and 2016 lows. It’s currently at about 90.2.
While the USD Index is at new lows, gold is definitely not at new highs. This, by itself is a subtle sign that gold doesn’t want to move much higher before it moves much lower.
In yesterday’s alert we wrote:(...) the entire upswing is more or less a reflection of the USD’s move. The latter moved to (slightly below) its previous lows and gold moved to its previous highs.
In other words, the period in which gold is following in the USD’s footsteps is still here and the vulnerability in the yellow metal remains present.
During Friday’s session, the yellow metal moved higher most likely based on the USD Index’s decline – the vulnerability in the yellow metal still remains present.
The 30-day column in our Correlation Matrix shows the correlation for gold and the USD at -0.96, which is very low. Still, the 10-day correlation coefficient is not as extremely low. At -0.75 (a bit less negative than previously) it’s still significant, but it shows that the trend in the link may be changing.
While the direction of gold’s movement is tied to the USD, the strength of the reaction isn’t and while it may not appear to be the case at first sight, gold has actually rallied very little compared to how much the USD declined.
In fact, in terms of the euro, gold has actually declined quite visibly, which illustrates the above phenomenon. The value of gold for the euro holders declined as the currency that it’s priced in (USD) declined more than the price of gold in the USD increased.
In today’s pre-market trading, the USD Index is down by about 0.5 (to 90.37) and gold is up by less than $5 – that’s a very weak reaction and a bearish sign for the yellow metal.
In Friday’s alert, we wrote the following regarding gold’s near-term resistance:
The declining, long-term resistance line is very close and a breakout above it is very unlikely. Based on the weekly closing prices, the line is at about $1,325, and based on the intraday highs, the line is at about $1,336. Today’s pre-market high (at least at the moment of writing these words) is $1,333.60 – only $2 below the upper of the resistance lines.
The price of gold closed the week practically at this line, without a major breakout. Different sources report different closing prices (the above chart shows a closing price below $1,335) and the overall conclusion is that there was no major breakout. Without it, the implications of the declining resistance line remain bearish.
Today’s pre-market move above it doesn’t invalidate the bearish implications – there was no meaningful breakout in terms of closing prices and we would need to see one confirmed before it has bullish implications.
One of the reasons behind the USD’s decline and gold’s upswing was the rally in the Japanese yen. Please note that the value of the Japanese currency moved higher, but it stopped at the rising red resistance line. The same line stopped the late-2017 rally, so we could see a repeat of the above also this time. Still, back then the yen moved temporarily above the line before reversing, so Friday’s action might have not been the final top. Today’s intra-day top, however, might already be the final reversal.
Before summarizing, we would like to get back to the issue of two triangle patterns with apexes that take place this week. In the December 28, 2017 Alert, we wrote the following:
What might be even more important, however, is that the mentioned resistance line together with the rising support line create a triangle that has an apex in the second half of January. This indicates that we can expect some kind of turnaround at that time. This wouldn’t be much of a deal if…
If we didn’t get exactly the same indications from an entirely different triangle in mining stocks. The size of the triangle and the parts of the capital market are entirely different so both patterns perfectly confirm each other.
Some kind of a big turnaround is likely to take place in the 3rd week of January or very close to it.
In terms of weekly closing prices and lines based on them in the GDX, the apex of the triangle was between last week and this week. The Euro Index chart shows that the apex is sometime this week. Overall, it seems the turnaround is at hand.
Naturally, this is not what appeared likely when we first wrote about the mentioned apexes over 2 weeks ago. Much more factors favored a decline from that point and a local bottom this week. However, based on the data that we have right now and knowing that the most recent move was up, it now appears that the turnaround will in fact be a major top.
Silver’s performance looks much more like a reversal than like a continuation of the rally. Yes, silver moved higher in today’s pre-market trading, but compared to what’s going on in the USD and in the general stock market, silver’s performance is still disappointing. It should be soaring and it just moved to its previous high.
This is not a bullish sign, but a bearish one.
Gold stocks moved higher and even broke above the rising resistance line, but that was just a single daily close. We’ve already seen the same development during the first session of the year. If the history is to repeat itself, gold miners might have already topped.
Summing up, too many times similar performance in the USD Index had very bullish implications for us to view the current breakdown as something profoundly bearish, especially that it was not confirmed. Gold moved higher when the USD declined also during Monday’s early trading, but the strength of gold’s reaction was weak and very weak, respectively. This is a bearish sign. Mining stocks rallied sharply on Friday and broke above the resistance line, but that’s not bullish, because when we saw the same thing previously, it meant that the rally was over.
Since the outlook didn’t change, but precious metals’ prices are now higher, we are moving the stop-loss levels a bit higher in the case of gold and silver.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:
- Gold: initial target price: $1,218; stop-loss: $1,364; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $38.28
- Silver: initial target price: $14.63; stop-loss: $17.72; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.28
- Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78
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 initial target prices:
- GDXJ ETF: initial target price: $27.82; stop-loss: $38.22
- JDST ETF: initial target price: $94.88 stop-loss: $37.78
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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Hand-picked precious-metals-related links:
PRECIOUS-Gold hits over 4-month high as dollar index slumps to 3-year lows
ScotiaMocatta: Commitments of Traders (CFTC)
Planetary Resources a step closer to mining asteroids with spacecraft launch
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China Escalates Crackdown on Cryptocurrency Trading
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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