Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Remember the Shakira hit "Hips Don't Lie" from - believe it or not - over 10 years ago? We have something similar in the precious metals market. The market was shaken yesterday by the clear (?) reversal in the USD Index, but the mining stocks - just like hips from the song - don't lie. At least they didn't lie yesterday. Initially they rallied along with gold, but the time that they managed to stay strong was so small that it was immediately clear that yesterday's upswing in gold and silver is very far from being a game-changer. The GDX ETF moved back above the lower border of its previous triangle pattern, and it even moved a bit above its upper border. But this didn't last - it declined and closed the day back below the lower border of the triangle pattern, thus confirming the breakdown, instead of invalidating it. And it all happened while gold stayed close to its intraday highs. Miners had little reason to slide and yet they did. On Wednesday, we explained the significance of the extremely-low-volume session in the GDX ETF and the subsequent breakdown below the triangle pattern along with yesterday's epic weakness clearly confirm these indications. What's next?
Yesterday's strength is likely to be invalidated sooner rather than later.
Universal Strength Across the PMs?
Gold moved higher on very strong volume. That was the fourth biggest daily rally volume. The other cases were:
- February 19th - right before the 2019 top
- March 21st - not really comparable as it was a daily reversal not a clear move higher like what we saw yesterday
- May 13th - the May top in terms of the closing prices
With only two clear analogies (February 19th and May 13th) that were both right at or right before tops, it's difficult to view yesterday's price action as something bullish.
What about silver?
The white metal moved higher and it reached its early-May low, without breaking above it (silver closed 1 cent below the May 2 closing price). Technically, that's simply a verification of the breakout.
And the miners? We already wrote how bearish the implications are in the opening paragraph. But let's take a look at the GDX ETF chart for details.
The volume was relatively high, but it's actually a bearish thing, because yesterday's session was a clear, bearish reversal. Big volume is something that confirms the above nature of the move. That was the factor that was lacking during Tuesday's supposedly bullish reversal (and a big decline on Wednesday followed).
What was the likely trigger for all this?
The King Dollar
The USD Index reversed in a clear way, which likely caught everyone's attention. No wonder that gold and silver investors reacted as well. But, let's check how often these reversals marked tops in the recent past and how often they were followed by some other price action. We marked similar cases with grey rectangles.
In April 2018 this kind of reversal formed early during a massive rally. [VERY BULLISH]
In August 2018 this kind of reversal formed at the top. [BEARISH]
In October 2018 this kind reversal formed within a rally - the final top was over 1 index point above the reversal's closing price. [BULLISH]
In February 2019 this kind of reversal formed at the top. [BEARISH]
In early May 2019 this kind of reversal formed close to local bottoms - higher prices followed relatively soon. [BULLISH]
So, we have 5 similar cases, 3 of which were actually bullish. So, should we really take the reversal as a bearish signal this time? What seems much more likely than a profound decline from here, is a tiny move lower to the rising black support line (about 0.3 below yesterday's closing price) and then another wave up. This action would be most similar to the most recent, early-May analogy. At the moment of writing these words, the USD Index is already down by 0.16 today and gold and silver are basically flat (precisely, gold is down $0.80 and silver is down $0.05) in turn.
Summary
Summing up, the quick rally in gold and silver is likely over or very close to being over. While the reversal in the USD Index may not be as bearish at it seems at the first sight, the one in the mining stocks almost certainly is. The epic weakness in the latter serve as yet another confirmation of the bearish outlook. The next big move lower appears to be just around the corner. The most likely time target for the next short-term (and temporary) turnaround is the end of May or the first days of June. In other words, gold might reach our interim target level of $1,240 shortly and thus we might adjust our trading position also relatively soon.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,241; stop-loss: $1,357; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $13.81; stop-loss: $15.72; initial target price for the DSLV ETN: $39.38; stop-loss for the DSLV ETN $26.97
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $17.61; stop-loss: $24.17; initial target price for the DUST ETF: $34.28; stop-loss for the DUST ETF $15.47
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 target prices:
- GDXJ ETF: profit-take exit price: $24.71; stop-loss: $35.67
- JDST ETF: profit-take exit price: $78.21 stop-loss: $30.97
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 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
