Briefly: in our opinion, full (300% of the regular position size) speculative short positions in junior mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Some might consider an additional (short) position in the FCX.
I wrote in number of occasions that the gold price was unlikely to hold the breakout above the $2,000 level. Last week provided the final confirmation.
Gold price not only declined below $2,000 in a decisive manner. It not only closed the day below this level. It even closed the week below it.
And that’s big news.
Weekly price moves tend to be much more important than the daily ones as they are better for filtering out the “price noise” caused by events and triggers that are important only at the first sight.
Based on my analysis of gold prices over the past decades, weekly closing prices tend to be particularly important, and thus the fact that gold managed to move below those levels has particularly bearish implications.
And it’s not just a breakout above $2,000 that was just invalidated in this important manner.
It was also the breakout above the April 2022 high that was just cancelled. The fact that it all happened similarly to what we saw last year at the same time of the year only adds to the bearish mix.
Yes, last year, gold price didn’t manage to move to short-term highs in April, but when looking at volume levels and how they changed over time, the similarity becomes more apparent. Namely, gold soared on huge volume at first, then the volume declined while gold consolidated / declined, and the final upswing in gold price caused an upswing in volume – but a barely visible one. And the final top formed in April.
Well, here we go again. The forecast for gold price is currently very bearish based on the above alone, but there are many other factors pointing to lower gold prices as well.
Silver prices, for example, soared significantly recently, and they even showed strength on a very short-term basis by not declining below their previous highs even though gold did.
I’ve emphasized it numerous times in the past, but it’s worth repeating once more. The fact that silver outperformed its yellow counterpart is not a bullish indication. Conversely, that’s something that we’ve seen many times in the past.
Remember the early-2021 when silver soared, but gold hasn’t? That was not just the start of a short-term decline in silver. It was the beginning of a 2+ year decline that is still taking place.
Silver price breakouts are not to be taken at their face value as well. The white precious metal is known for its tendency to break out above its previous highs, exciting those who are new to the silver market and/or investing/trading in general, and then sliding profoundly to the said investors’ / traders’ surprise (and disappointment.
It seems that silver tends to attract the investment public that buys into this market at the final stage of a given rally. There might be multiple reasons for it, and I don’t want to cover all of them here, but one of them is the simple fact that the silver market is much smaller than the gold market, thus it’s impossible to enter the silver market by many big institutions. It is available for small investors, though. Consequently, it’s normal to expect more individual investors on the silver market than big institutions. And since individual (especially beginning) investors tend to follow the emotionality of the market more so than institutions do, we can notice the above-mentioned pattern.
Anyway, all the current analysis of silver prices implies that silver breakouts should not be trusted on their own – additional confirmations from other markets are necessary to validate them. And in case of their absence, one could even view silver breakouts as good shorting opportunities. Of course, one needs to be careful in case of any trading position, limit their positions, consider other indicators / factors, but the fact is that silver breakouts very often turn into “fakeouts”.
So, even though it might seem otherwise, the silver price forecast is currently bearish, not bullish.
This is especially the case that instead of seeing a bullish confirmation from mining stocks… We saw a bearish one.
While silver remained above its previous 2023 high, the GDXJ ETF – proxy for junior mining stocks – moved decisively lower in a sharp manner. It managed to close the week only a few cents above the $40 level. It’s not important that it closed above $40; what is important is that it closed the week well below the January 2023 highs.
This confirms the invalidation that we saw on the gold market.
If we saw this move on its own, it would be very bearish, but since it’s combined with gold’s invalidation and silver’s relative strength, it’s super-bearish for the following weeks.
Is it bearish also for the following days? It might be, but it doesn’t have to be. Let’s keep in mind that no market can move up or down in a straight line, and periodic corrections will happen regardless of the strength of the primary move.
Still, the current picture for the precious metals sector is very bearish, because it managed to move lower and invalidate the breakdowns practically without help of the markets that usually impact its moves.
One of those markets is the general stocks market.
Stocks didn’t move at all (almost) on Friday, and it didn’t prevent mining stocks from falling. And let’s keep in mind that mining stocks are… Well… Stocks. In particular, junior mining stocks tend to be more linked with the performance of the general stock market than senior miners do.
Yet, junior miners declined visibly pretty much on their own.
This tells us that the precious metals market just can’t wait to decline more.
And since the forecast for stock prices is bearish in my view, it seems that juniors will get a very bearish “extra push” in the following days / weeks.
Why would the outlook for stock prices be bearish? Because the interest rates are already high and still likely to rise (yes). Likely more than most people currently anticipate, which means that the market is likely to be negatively surprised by those moves. And this is a global phenomenon, that’s likely to affect other countries as well, likely causing a decline in commodity prices. So, yes, I’m currently forecasting lower oil prices as well. Not necessarily (it could happen soon, though) today or in the following week, but in the following months.
What about the currency markets? The USD Index is one of the two key fundamental drivers of gold prices (the other one is the level of real interest rates), so let’s check what just happened in it.
Pretty much nothing happened in it on Friday. It declined by 0.01, which means that it was practically flat.
Yet, gold declined and ended the week well below the $2,000 level. This shows that gold – just like mining stocks – just can’t wait to decline here.
This is bearish for the gold price on its own, but when we combine it for the likelihood for the USD Index to move higher, it becomes obvious that gold can truly slide in the following weeks.
Why would the current forex forecast for the USD Index be so bullish?
There are many long-term reasons, but looking at the above chart we see one short-term example: the USD Index just invalidated its small breakout below its previous yearly low. This is a very bullish indication.
Additionally, the situation in the RSI indicator is currently very similar to what we saw in mid-2021 before the massive rally.
And since the correlation between gold and the USD Index is so strongly negative (you can see it at the bottom of the above chart) and gold and the USDX have been indeed moving in the opposite directions for more than a year now, the bullish outlook for the USD Index is very bearish for the precious metals market.
On the final note, please take a look at what happened in the FCX stock price on Friday.
It plunged by over 4% and it declined below the entry point for our current short position in it (which I wrote about in early April), which means that the short position in the FCX is profitable.
The position in the GDXJ is likely to become profitable in the not-too-distant-future as well. And the profits on both are likely to be very significant before those trades are completed.
Just as the night is darkest before the dawn, it “seemed most bullish” right before the top – and the biggest slides.
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Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place and if we get this kind of opportunity at all.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold prices close to $1,400 and GDXJ close to $15 . This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,400, but at the moment it’s too early to say with certainty.
- The above is based on the information available today, and it might change in the following days/weeks.
You will find my general overview of the outlook for gold on the chart below:
Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
Summary
To summarize, we recently took profits from the additional FCX trade (right before the trend reversed!) and the current short position in junior mining stocks is – in my view – poised to become very profitable in the following weeks. The same goes for the additional short position in the FCX.
Things might appear chaotic in the precious metals market right now, but based on the analogy to the previous crises (2020 and 2008), it’s clear that gold, miners, and other markets are pretty much doing the same thing all over again.
The implications of this “all over” are extremely bearish for junior mining stocks. Back in 2008, at a similar juncture, GDX’s price was about to be cut in half in about a month! In my opinion, while the decline might not be as sharp this time, it’s likely to be enormous anyway and very, very, very profitable.
If I didn’t have a short position in junior mining stocks, I would be entering it now.
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 junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:
Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $26.13; stop-loss: none.
Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged). The binding profit-take level for the JDST: $13.87; stop-loss for the JDST: none.
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.):
Silver futures downside profit-take exit price: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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Optional / additional trade idea that I think is justified from the risk to reward point of view:
Short position in the FCX with $27.13 as the short-term profit-take level.
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’ve 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 we describe the situation for the day that the alert is posted in the trading section. 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 to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).
Additionally, 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 (as 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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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 daily 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. Furthermore, 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.
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief
