Briefly: In our opinion, full (150% of the regular size of the position) speculative long 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 higher.
Not much happened in the precious metals market on Friday as the move higher simply continued to a small extent. The USD Index didn’t close the week above the 61.8% Fibonacci retracement but formed yet another reversal instead. Everything seems normal. And yet, we chose to adjust our trading position based on Friday’s action and two little-known, long-term signals.
The adjustment is not in size or in the direction of the trade. It’s in the stop-loss levels. The reason is that the prices moved higher and at the same time we saw additional signs pointing to higher prices in the near term. The key reason is the way in which the precious metals reacts to what’s happening in the USD Index.
Let’s take a look at what happened on Friday starting with gold (charts courtesy of http://stockcharts.com).
Rally in PMs Continues
As discussed earlier, the upswing simply continued in a regular way. The volume was rather average, and it was not as high as what we saw during the reversal or immediately thereafter, but that’s something normal for gold, silver, and mining stocks at this stage of the rally.
The buy signals from the Stochastic indicators are now more visible and it all simply looks like the early part of a rally.
It’s also clear that the cyclical turning points and the triangle-apex-based reversal in silver have worked once again.
There’s not much more that we can say about the short-term developments in the PMs – the outlook remains bullish and it seems that we have another week or so of higher prices ahead.
Let’s keep in mind that we shouldn’t count on more strength than that – the combination of three apex-based reversals (May 11th, 11th and 14th ) and the True Seasonal patterns (gold, silver and HUI patterns point to a local top on May 11th) very strongly suggests that we’ll see a top on Friday or very close to it.
USD Index Reversals
As far as the USD Index is concerned, nothing really changed regarding the outlook. The USD Index made another attempt to move above the 61.8% Fibonacci retracement and failed once again.
In the previous alerts, we warned that the USD could form several reversals and that the initial reversal doesn’t necessarily imply that the decline will start right away:
The USD Index could form another reversal as that’s what it used to do quite a few times in the past. For instance, the early December 2016 reversal was not the final one – the USDX topped two days later. The early April 2016 reversal was also followed by 2 (in terms of daily closing prices) or 3 (in intraday terms) days of higher prices. In such case, we could even see a quick move to the 61.8% Fibonacci retracement, which is approximately at the 2018 high and November and October 2017 lows.
Plus, there were several reversals in December 2016 and October/November 2017 before the USD finally declined.
We’ve been seeing reversal after reversal also this time and the implications remain bearish – the key thing is that all of the attempts to break above the 61.8% Fibonacci retracement were invalidated.
Moreover, please note that the recent upswing in the USDX was very steep and there is a clear rising support line that has held for days. It’s extremely recognizable, so a breakdown below it will likely be noticed by all traders and would be something that could trigger a more visible move. The most bullish thing for the PMs about this line is that… It has been broken only on an intraday basis and PMs have already responded very positively by moving higher. This kind of performance makes subsequent rallies in PMs very likely. Only for another week or so, though.
The interesting fact is that even though the USD Index made a new intraday high yesterday and also a new high in daily closing price terms, the session was actually bearish, because of the intraday move below the rising support line and close back right at it. It’s not a clear breakdown, but it was the first decisive move in this direction – it was the first move below it on an intraday basis.
Before summarizing, we would like to address three issues: two that are really important and get little publicity (none, actually) and the second that gets a lot of publicity, but in an incomplete way.
Let’s start with the former.
Gold Stocks’ Long-term Similarity
Many weeks ago, we discussed the similarities between the 2012-2013 decline and what we had been seeing. This analogy remains in place, although the patterns are definitely not identical on a short-term basis. For instance, it’s taking more time for the current decline to develop, and the extreme weakness in the USD in the late part of 2017 is the likely reason.
The thing that we would like to discuss is the counter-trend bounce that we saw during the early part of the final medium-term decline. Back in 2012, it formed at the very end of the year. We saw it after a bigger top above the 50-week moving average and this counter-trend bounce ended almost right at it. We connected the final 2011 top with the counter-trend bounce top to check the pace of the decline and we marked it with the purple dashed line.
Now, in 2018, we are after a bigger top above the 50-week moving average (which we saw in January) and we see a much smaller move higher. The HUI Index value is close to the 50-week moving average, but not as close as it was in 2012. It seems that it could rally to this level or almost to it and then reverse with a vengeance, just like it did in 2013. Moreover, the pace of the decline that we saw in 2012 seems to be in tune with what we’re seeing now and it supports a nearby reversal to the downside. The purple dashed line that we applied to the 2016 top ended in late 2017 (we kept the size of the line just as the one from 2012), but since this consolidation takes longer than the previous one, we might expect the top to be seen at the extension of the line (meaning that the HUI is declining at the same pace). The current value of the HUI Index and the possibility of seeing another week of higher prices seems to be in tune with the pace at which the medium-term decline should unfold if the analogy to 2012 is to be upheld.
The bottom line is that the prediction that the precious metals sector is going to top in about a week is confirmed not just by short-term signals, apex-based reversals and True Seasonality, but also by the long-term analogy in the HUI Index and thus it’s even more reliable.
Let’s move to the second issue.
The Silver Oscillator Update
We discussed silver’s oscillating nature about a month ago and if you’re not familiar with it, we encourage you to take a look at the details. The reason that we are mentioning it again today is that since we featured it, silver moved both: much lower and then back up. Consequently, you may be wondering if the pattern has already been broken, which would suggest that the big move has already begun (and thus seeing a rally here might be disappointing).
In short, the pattern was invalidated so slightly that it’s not unclear if the implications are already extremely bearish or just very bearish based on other factors. Let’s take a look at the details.
The decline that we saw in early 2018 was from $17.70 to $16.10 (thus $1.60) and the subsequent rally was from $16.10 to $17.36 (thus $1.26). The next decline was from $17.36 to $16.07 (thus $1.29). That’s the first time in years when a price swing was bigger than the preceding one. The implications should already be very bearish as this means that the volatility increased after a long period of declines in it. Still, it was just 3 cents and it’s hard to view this as something strong and important enough to change a pattern that’s been in place for years.
So, instead of stating that “this is really it”, it seems that we should be expecting another move higher that’s smaller than the previous decline. In other words, silver shouldn’t move above the April high. If it breaks significantly above it, the oscillating pattern will have bullish implications. This seems unlikely, though. What is more likely, is that silver will move higher along with the rest of the precious metals sector for the rest of the week (approximately) and then form a top below the April top. This is in perfect tune with what we’ve been expecting to see anyway, based on the short-term charts, so the scenario in which silver tops in a week close to (likely below) $17 is even more confirmed and probable.
Having said that, let’s move to the issue that gets a lot of coverage lately – the gold to silver ratio.
Gold to Silver Ratio Extremes
The gold to silver ratio moved to a 20-year extreme and it’s now moving lower, so the top is in and now we’re going to see a move back to historical norms well below 30 (there are different ways to measure it). The implications are that silver will now outperform gold and that both metals will move higher as a turnaround in the ratio has bullish implications, just like it had in early 2016.
At least that’s what the partial analysis of the topic would have one believe.
The reality is more complex. For instance, who would have thought that 20 years is not long enough to see the real extremes? Well, we did. Months ago.
We first discussed the gold to silver ratio from the very long-term point of view and emphasized the 100 level as the key resistance in July 2017 and we provided an update on January 23rd, 2018. The key details from it remain up-to-date and seem to be worth quoting in light of the renewed popularity of the ratio between metals.
The first thing that comes to mind while looking at the above chart is that the tops in the ratio usually correspond to bottoms in the precious metals market - silver tends to underperform gold to a big extent in the final part of the decline. The mid-2003 spike in the ratio doesn’t directly confirm this rule (there was a local bottom at that time, though), but the 2008 spike, 2011 bottom and the 2016 spike certainly do. So, while it is not inevitable, it seems likely that the major bottom in the precious metals will be accompanied by a big upward spike in the gold to silver ratio i.e. silver’s extreme underperformance.
So far, our analysis confirms the popular take on the subject. The thing is that a move to the 80 level or so doesn’t imply that a top is in.
Let’s consider the current trend. Despite the decline in 2016, the main direction in which the ratio is heading is still up. We marked the borders of the rising trend channel with blue lines and the ratio is still closer to the lower line than the upper one – meaning that the upside potential remains intact.
If the ratio is to continue to move higher (it’s likely, because an uptrend is intact as long as there is no confirmed breakdown below it), then we can expect the upper border of the trend channel to be reached (or breached – more on that in just a moment) before the top is in. If this is to be seen in the September – October timeframe, then we can expect the ratio to move to about 94 - 100. The upper border of this target area is provided by the upper border of the mentioned trend channel.
The lower border of this target area is supported by Fibonacci extensions based on the 2016 bottom, 2016 top and the 2015 top. Fibonacci extensions work similarly to Fibonacci retracements – they differ, because the latter provide targets between the levels that have already been reached, while the former are usually used to provide targets outside of the previous trading range. In this case, we get 94 as an upside target.
One might ask that if the above is the case, then why didn’t we draw the target area around the 94 level, but between 94 and 100 – actually even above 100. There are two good reasons for it.
The first reason is visible on the above chart. Namely, history tends to repeat itself to a considerable extent, and during the previous steady uptrend (the 2008 lack-of-liquidity-driven spike was far from being steady) at the beginning of this century, the gold to silver ratio moved temporarily above the upper border of the trend channel (marked with dashed lines) and formed a top above it. Consequently, the upper border of the current rising trend channel may not stop the rally in the following months. Instead, a breakout above it might indicate that the key top in the ratio and the key bottom in the precious metals market are just around the corner.
The second reason for a higher target is visible on the chart below that includes even more data than the previous one.
The tops that you saw on the previous chart appear to be the key long-term tops, but in reality, the key long-term tops are at / closer to the 100 level, while the ones from this century are not as important. Surely, they all are important long-term tops, however, we need to keep in mind that the strongest resistance will not be provided by the 2003 or 2008 tops, but by the 100 level.
Moreover, please note that round numbers tend to be important support and resistance levels as they tend to attract more attention (for instance, gold breaking below $1,000 will definitely get more attention than a breakdown below $1,032) – it would be difficult to find a rounder number for the ratio to reach than the 100 level.
Additionally, if the final bottom in the precious metals market was not reached in late 2015 / early 2016, because too many investors were still bullish at that time, then perhaps the extreme that the gold to silver ratio reached at that time was not extreme enough. The next resistance above the 2015 / 2016 tops is provided by the very long-term tops at or a little below 100.
All right, but what about the short-term chart? Wasn’t there some kind of breakdown in the ratio?
There actually was a breakdown, but not in the gold to silver ratio, but in the silver to gold ratio. The implications are exactly the opposite of one might initially think.
In the April 19th, 2018 Gold & Silver Trading Alert (that’s the day when silver topped), we commented on the above chart in the following way:
The silver to gold ratio shows that the ratio moved back to the rising black resistance line which it broke earlier this year. That’s the third time that that we’ve seen something like that in the recent history. Each breakdown below the rising black line was followed by a correction back to this line. Then the ratio moved lower once again.
That’s not the most important thing about the silver to gold ratio, though. The most important thing is that the RSI based on it moved very close to the 70 level and whenever the RSI gets above it and then declines, we see a major decline in the precious metals sector. To be clear, there are no certainties in any market, but please look at the areas marked on the above chart for details.
Now, the RSI is only at 66.84, not above 70, but let’s keep in mind that there were cases when the RSI didn’t move to 70 and we saw tops in its proximity. For instance, the early 2013 top and the late 2015 top.
This means that the precious metals sector could slide right away, but if silver outperforms just a bit more today (taking RSI above 70) and then declines in the following days, we’ll have a major and extremely effective confirmation that the final top is in.
The silver to gold ratio moved below its rising support line and just like it was the case in two previous cases, it moved back to this line (slightly above it) and verified it as resistance by declining once again. It seems that the next medium-term move in the silver to gold ratio will now be to the downside. This means another move higher in the gold to silver ratio.
So, should one ignore everything else and wait with the purchases until the gold to silver ratio spikes to 100? Of course not. That’s just one of the tools that one can use in order to determine the optimal entry prices. On a side note, please note that we wrote “optimal” instead of “final” lows. The reason is that it is not 100% certain that a bottom is in at a specified price (it can only be certain when one looks at the past prices after a longer while), so while it may be tempting to wait for the perfect target to be reached, it might be more prudent to place the buy order above the target price to greatly increase the chance of filling it at all – however, these details go beyond the topic of this essay.
When the ratio approaches its target area, all other signals will become more important – for instance gold reaching important support levels without the same action in silver or mining stocks - but with the gold to silver ratio at exactly 100 or only a bit below it and a couple other confirmations, it might be wise to invest at least partially in the entire trio (gold, silver and miners), as the confirmations would make gold’s reaching its target much more important for the entire sector than it would be without the confirmations. In other words, the gold to silver ratio serves as yet another tool in the investors’ arsenal that can help to determine whether or not the final bottom is in or at hand. It’s not a crystal ball, but one of the things one needs to keep in mind when investing capital in this promising sector. We’ll discuss other confirmations and tools in the following parts of the Preparing for THE Bottom series.
Summary
Summing up, it seems that we’ll see a weekly decline in the USD Index and a weekly rally in the precious metals sector. This prediction is confirmed by short-term charts, True Seasonal patterns, apex-based reversals, and long-term analogies in silver and the HUI Index. After this week, we expect the decline in the PMs to be resumed. Our long position became profitable almost immediately and it might be tempting to cash in the profits, but this doesn’t seem justified from the risk to reward point of view as the outlook didn’t deteriorate – it’s likely that our profits will increase further before the rally is over.
Based on the multiple signs pointing to higher prices of PMs this week and the fact that the recent bottom was confirmed, we are moving the stop-loss levels higher as it seems that a breakdown below the previous lows would change the outlook by itself. Naturally, it’s much more likely that instead of seeing these levels reached, we’ll see higher profits.
On an administrative note, due to your Editor’s travel schedule, the alerts that we publish on Tuesday, Wednesday and Thursday will likely be shorter than usually.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full long 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: $1,338; stop-loss: $1,294; initial target price for the UGLD ETN: $11.68; stop-loss for the UGLD ETN $10.56
- Silver: initial target price: $16.86; stop-loss: $15.94; initial target price for the USLV ETN: $10.68; stop-loss for the USLV ETN $9.12
- Mining stocks (price levels for the GDX ETF): initial target price: $23.78; stop-loss: $21.96; initial target price for the NUGT ETF: $29.78; stop-loss for the NUGT ETF $23.98
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: $34.78; stop-loss: $31.96
- JNUG ETF: initial target price: $16.88; stop-loss: $13.18
The stop-loss levels are quite far from the current price, but please note that the aim of the stop-loss is to take the investor off the market if the price move by its own is so meaningful that it changes the outlook. Naturally, if things go against us, we will aim to get out of the market much sooner – for instance based on signals from volume or other tools.
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:
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In other news:
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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