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.
The markets are closed in the U.S., and we’re normally not posting anything on the non-market days, but I thought that I’ll make an exception to provide you with a quick heads-up before tomorrow’s session.
Just a quick administrative note before I share the latest insights - I would like to stress that today’s Gold & Silver Trading Alert as the early publication of tomorrow’s technical analysis. We’ll send you the fundamental analysis on tomorrow, so tomorrow’s analysis will simply be shorter than usually.
Having said that, let’s take a look at two bearish confirmations that we just got, starting with the gold-USD link.
The USD Index declined somewhat on Friday and in today’s trading (on the futures market).
It also moved very close to its 23.6% Fibonacci retracement level, which is one of the lesser-known retracements, but at times it’s worth paying attention to it – especially during the most powerful uptrends, where even correcting 38.2% of the rally is too much. And based on the fundamental factors (rising real interest rates), the rally in the USD is likely to be a powerful one.
So, the USD Index could bottom any day or hour now. And… That’s not the most important thing from the precious metals investors’ and traders’ point of view. Gold’s relative weakness is.
The most important detail is that while the USDX moved to new short-term lows, gold didn’t. Despite intraday attempts, it refuses to rally.
This gold-USD dynamic is bearish for the following weeks. This is especially the case given that gold already corrected 38.2% of the previous decline, so “technically” the correction might already be over. And the relative weakness vs. the USDX suggests that it is indeed over.
And you know what else should be making new highs?
Junior miners.
Are they making new highs?
No.
In fact, on the above chart, we can see that juniors failed to close the week at the previous week above the lower border of the previous price gap. The resistance held.
Instead, the GDXJ closed the week below the very short-term trading channel, which means that we just saw a breakdown.
Now, the above performance could have been viewed as “normal” and not “weak” if the general stock market was weak on Friday.
However, exactly the opposite was true!
The S&P 500 moved about 2.5% higher on Friday, so – theoretically – junior miners should have shown some kind of strength. We didn’t see it. Instead, we saw junior miners move back and forth, which is weak performance given the stock market’s rally.
So, gold is weak relative to the USD Index, and junior miners are weak relative to the general stock market. This is a profoundly bearish combination, and I’m very happy to be on the short side of the junior mining stocks trade once again. If I had any second thoughts about the recent profit-taking from the long position and entering into a short one, I would act (and make the switch to the short side) based on the above.
However, since we’ve already done that – you were warned in advance – we can simply view this as an additional confirmation that the market most likely agrees with us. And it appears likely that our streak of profits will grow bigger in the following weeks (it could be days too, but it’s a tough call to say if the decline will resume immediately).
As always, we’ll keep you - our subscribers - informed.
Overview of the Upcoming Part of the Decline
- It seems to me that the short-term rally in the precious metals market is either over or very close to being over. It’s so close to being over that I think it’s already a good idea to be shorting junior mining stocks.
- We’re likely to (if not immediately, then soon) see another big slide, perhaps close to the 2021 lows ($1,650 - $1,700).
- 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 – perhaps with gold close to $1,600.
- 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 close to $1,400. I expect silver to fall the hardest in the final part of the move. 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 or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.
Letters to the Editor
Q: Do you think that silver miners will bottom with gold miners?
A: I think that’s likely (and that’s what happened in early 2020, too). And if they don’t bottom on the same day, then I think that those bottoms will be very close to each other.
Q: Thank you for the close follow-up of the markets and views.
As a am trading with GDXD, what would be the new target price please?
Since miners JDXJ is for 27 it,
Would it be a good assumption that GDXD is around 26 range?
A: On May 10, I wrote the following after replying to a question about the triple-leveraged ETFs (GDXD/GDXU):
On a side note, the current position is the last one for which I’m featuring any price levels for the GDXD/GDXU pair – it seems to me that featuring them might be doing more harm than good, as those who can use those instruments don’t really need specific exit levels and they will easily select them on their own, and those who really need those levels (as they can’t calculate those levels on their own), shouldn’t really be using them as they are generally too risky for beginning investors or those that have less experience in trading.
I will reply to your question as the final exception from the above new rule.
Yes, in my opinion, the GDXD in the $25 - $29 range would probably correspond to the targets being reached in the positions that I’m mentioning in the analysis.
Please note that GDXD/GDXU don’t provide leverage to only juniors, but to mix of GDX and GDXJ, where the former gets approximately 75% weight and the latter gets approximately 25% weight, so it’s more of a bet on GDX’s decline then GDXJ’s decline.
Yes, I expect both (GDX and GDXJ) to decline profoundly, but I expect the GDXJ to decline more, so while GDXD provides even bigger leverage than DUST or JDST, please note that it doesn’t focus primarily on juniors, but on seniors.
I will not update this target and I will not reply to further questions about GDXD and GDXU targets, due to the reasons listed previously.
Summary
Summing up, it seems to me that the short-term rally in the precious metals market is either over or close to being over. In fact, it’s so close to being over that I think it’s already a good idea to be shorting junior mining stocks.
I previously wrote that the profits from the previous long position (congratulations once again) were likely to further enhance the profits on this huge decline, and that’s exactly what happened. The profit potential with regard to the upcoming gargantuan decline remains huge.
As investors are starting to wake up to reality, the precious metals sector (particularly junior mining stocks) is declining sharply. Here are the key aspects of the reality that market participants have ignored:
- rising real interest rates,
- rising USD Index values.
Both of the aforementioned are the two most important fundamental drivers of the gold price. Since neither the USD Index nor real interest rates are likely to stop rising anytime soon (especially now that inflation has become highly political), the gold price is likely to fall sooner or later. Given the analogy to 2012 in gold, silver, and mining stocks, “sooner” is the more likely outcome.
After the final sell-off (that takes gold to about $1,350-$1,500), I expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.
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: $27.32; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)
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: $19.87; stop-loss for the JDST: 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.):
Silver futures downside profit-take exit price: $17.22
SLV profit-take exit price: $16.22
ZSL profit-take exit price: $41.87
Gold futures downside profit-take exit price: $1,706
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $11.87
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $31.87
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 Radomski, CFA
Founder, Editor-in-chief
