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.
It could have been. But what is more likely, it could have been the final pre-plunge top in case of the mining stocks. Why? Because the history tends to rhyme, and the verses appear more similar to what we already "read" in the mining stocks than they what we can see on the gold market.
Before digging into details, we would like to quote what we wrote on mining stocks on Monday:
Back in March, gold moved back to its previous highs (in fact it moved slightly above it) before topping and right now, it's consolidating lower. Still, we should keep in mind that there's also the possibility that gold won't repeat the March performance to the letter and history will rhyme instead.
Consequently, it might be more useful to monitor the market for signs of weakness and to pay extra attention to the time factor.
After all, time is more important than price; when the time is right, the price will reverse.
Back in February, it took 4 days after the top for the miners to form their initial bottom and we saw the same thing also this time.
Back then, it then took 4 (closing prices) or 5 (intraday extremes) trading days for the miners to top. Today will be the 4th trading day after the bottom, so if the history is to repeat itself with regard to time, miners might form the final top today or tomorrow. This would be in tune with where the general stock market is trading right now. It's so close to its previous high that it could easily break to new highs and then invalidate this breakout today or tomorrow.
If gold does indeed rally to the previous highs or even moves slightly above them, we don't expect miners to do the same thing. In fact, we think that they would be likely to top close to the 61.8% Fibonacci retracement level (at most) - at about $43.
Yesterday, we clarified the "close to" part: "close" means that miners could move a bit above it, just like they did in March. Gold miners moved to exactly $43 on Monday and closed at $42.96, so if gold moved significantly higher from here (say, $100), miners would also be likely to move higher temporarily.
Since miners already reached the $43 level on Monday, yesterday we wrote that we wouldn't be surprised to see GDX at $44 or even $45 at the top.
In short, miners - and the general stock market - did exactly what we have outlined above.
The GDX ETF moved to $44.09 yesterday, but then declined on an intraday basis, and ended the session lower, despite gold's daily gain.
This means that at the same time, we saw:
- Miners' extreme weakness relative to gold and general stock market, which serves as the perfect "sign of weakness" that we previously wrote about
- Small breakout to new highs in the S&P 500 Index (and in the most popular ETF on it: SPY) that was then invalidated in case of the intraday terms
- Miners' had formed a top in terms of the daily closing prices 4 days after the recent bottom, and they formed a top in intraday terms 5 days after the recent bottom - exactly the same thing that we saw in March, right before THE slide
- The shape of yesterday's candlestick in the mining stocks is very similar to what we saw on March 6 - right before THE slide.
The above is a profoundly bearish combination for the next few days - weeks.
Wait - didn't you say that gold could rally more?
Yes, we did. And gold could move higher while at the same time miners might not. That's exactly what happened in March. Please take a look at the chart below for details.
The vertical, black line shows the day right after the top (we didn't want the line to cover the daily performance at the top), and it clearly shows that while gold was one day after the top, miners were already 2 days after the top.
The top in the mining stocks (in terms of the daily closing prices) took place on March 5, which we marked with red, vertical line.
On March 5, gold was still below its initial February high and the USD Index was just starting to move lower after briefly pausing. In other words, miners decline started earlier than what we saw in gold or the USD Index.
One could say that the reason for it is was the situation in the general stock market. Indeed, the latter was already declining in early March. However, the fact that miners declined yesterday despite a daily rally in stocks makes the current case even more bearish for the miners. Besides, the invalidation of the intraday breakout in stocks is a sign that miners are likely to get a bearish push from other stocks.
What does that all lead to? To the likelihood that we saw the final top in the mining stocks, which might be the right shoulder of a head-and-shoulders top pattern (the red line on the HUI chart would be the neck thereof). At the same time, it could be the case that gold will make another attempt to rally above the previous 2020 highs. They key word here is "could" - it's not something that is carved in stone. In fact, back in March, silver was weaker, and gold was stronger. We're seeing the opposite right now - overall, the situation is already similar to what happened when the PMs were topping in March. Therefore, if gold moves slightly the previous highs - just like it did in 2011 - it could trigger the sell-off, but at the same time we would like to stress that this kind of move is not required for the sell-off to start. Especially in case of the mining stocks.
Naturally, the sell-off would be a temporary event and PMs and miners would be likely to soar in the following months.
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 $1,900, gold, silver and miners will bounce back at least above $2,000 in gold (which already happened) and perhaps even to or slightly above the previous highs. Then we will probably see another - bigger - move lower. The latter would likely be triggered by a visible upswing in the USD Index and / or the invalidation of the breakout in the U.S. general stock market.
During this final part of the slide, we would expect silver to decline more than miners. That would be in tune 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 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.
We previously wrote that gold might (it was not likely, but we were mentioning this as one of the possibilities) even end its decline at about $1,900, but this is now quite unlikely. The reason is that gold already declined to this level, even though the USD Index's rally didn't really start just yet. So, when the USDX does indeed soar, gold would be likely to decline more.
Summary
Summing up, it seems that after reversing $4 above our upside target, gold has finally topped. The opposite appears likely in store for the USD Index from the medium-term point of view, however, it seems that the short-term (triple)bottom is still being formed. While I can't rule out a situation in which the PMs and miners move higher one final time before plunging (in fact, it's likely in my view), it seems that regardless of this move, the outlook for the next few weeks for the mining stocks is very bearish.
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 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 - 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
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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
