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.
Practically nothing changed on the precious metals market in the last 24 hours (except for the miners’ decline), so today’s analysis will generally be almost entirely a quote from what I wrote yesterday. I will take this opportunity, however, to reply to the questions that we received recently.
I’ll start with a quote from yesterday’s analysis, and I will update it whenever necessary (removing italics from the changed parts).
Gold truly plunged on Monday, erasing practically the entire election-uncertainty-based rally in just one day. I admit that I didn’t expect this decline to be as big on a single day, but the gold market was definitely ready for a decline, and since it got an unexpected boost from Pfizer (the optimistic test results regarding the possible Covid-19 vaccine), gold sank.
This situation emphasizes why it’s often a good idea to stick to one trading position even if it’s possible that one sees a counter-trend move on a more short-term basis.
Of course, there will be some who will say that all the technical work resulting in me expecting gold to slide shortly after the U.S. elections was useless, as gold simply responded to more-or-less random news from Pfizer.
But why did gold decline in light of this news at all? Back in March, gold was declining as Covid-19 cases increased rapidly, so if we’re about to see this trend reversed, shouldn’t gold rally instead?
And even if one agrees that the Covid-19 vaccine is fundamentally bad for gold (and it is, as it decreases the demand for safe-haven assets, since the situation is seemingly getting back to normal), then why did gold decline almost $100 in a single day, instead of declining $4, $7, $15, or any other – insignificant – number of dollars?
And why did gold end the session lower without a visible rebound, even though the general stock market erased most of its intraday gains before the session was over ? Given the above, it seems the market realized that initial testing is far from being proof that the vaccine is indeed safe (for long-term use as well), and even further away from being introduced. If people realized that they got ahead of themselves with regard to stocks, then why didn’t the same happen with regard to gold?
With all these questions in mind, things are no longer as simple as they might have appeared at first sight.
I’ll tell you why – because the vaccine announcement was just an additional trigger that wasn’t even necessary for gold to decline. The trigger’s presence caused gold to decline more than it would have otherwise, however without it, gold would have declined anyway, due to all the technical reasons.
I featured multiple reasons in Monday’s analysis, and I encourage you to read it, if you haven’t had the chance to do so, and today, I would like to show you one thing that might be too obvious for one to notice.
It’s about gold’s, silver’s, and miners’ relative performance to what happened in the US Index, and the general stock market since early September.
The USD Index moved close to its September low, while the S&P 500 moved to its September high. Did PMs and miners exhibit similar strength? No! Gold closed about $150 below its September high, silver closed about $5 lower, and the GDX closed about $4 lower.
Gold ended Monday’s session close to $1,850, and based on what I wrote on Monday, it seems that the USD Index is on the verge of moving much higher, which will likely trigger more declines in gold. And indeed, since gold just moved to its September lows on Monday and ended the daily decline there, it will now likely take a breather.
Since gold moved about $20 higher in terms of the daily closing prices yesterday, this might have been “it” – the breather might already be over. Whether that was the case or not, I expect to see a breakdown shortly. This breakdown would be likely to lead to gold declining to about $1,700 – in tune with what I’ve been writing for weeks. I expect gold to rally back up (above $2,000 and beyond) only after declining significantly. And this decline is likely already underway.
There’s one more important question that I would like to discuss here. Namely, while gold declined to its September lows, miners are still relatively above them. Are miners really showing strength here?
In yesterday’s analysis I wrote exactly the following:
In short, not really. It’s hard to call a 6%+ daily decline strength. Instead, I think that miners’ ability to decline even though the general stock market soared yesterday is a bearish piece of news.
As gold declines, and the general stock market declines as well, miners are likely to truly slide, taking bearish cues from both.
Gold moved somewhat higher yesterday, and miners moved lower yesterday – even below their Monday intraday lows. Based on these moves, we have a situation where all key parts of the precious metals sector: gold, silver, and mining stocks are somewhat above their recent lows, but still close to them. In other words, what might have appeared to be strength in the miners (Monday’s decline was limited in the case of miners when compared to the one in gold), is no longer present.
Moreover, please note that on the above chart we see at least three self-similarities:
- GDX just behaved and topped like in the previous cases that I had marked with blue ellipses
- GDX just invalidated the short-term breakout above the declining blue resistance line – just like in September
- GDX just rallied for a bit more than a week and stayed above the 50-day moving average for a few days, after which it declined in a rather volatile manner – just like what we saw in the first half of March 2020
All these self-similarities have bearish implications for the following days, so expecting a bigger rebound or a rally, might not be the best course of action at this time. Besides, if the general stock market moves lower, and given the likely decline in gold, miners would be likely to magnify S&P’s declines – just like they did in March.
And why would the general stock market decline from here?
It just got a significant boost from Pfizer as well as a boost from lower uncertainty based on the U.S. presidential election results. How did it react to it? It soared above the previous highs…
But only initially. The S&P 500 index failed to hold onto its gains, and it erased most of the rally before the session was over. It declined back below the previous 2020 high, which means that it invalidated the initial breakout. The bearish forces were too strong.
If the bearish forces were too strong right now – given both above-mentioned bullish boosts – then the bulls are unlikely to push stocks above their September high anytime soon.
Technically speaking, we just saw a profound shooting star reversal candlestick, which formed on huge volume, as well as invalidation of the breakout above an important level. This is a very bearish combination.
Consequently, I think that miners will get a powerful bearish push from the stock market and that they will slide further. Not necessarily today, as Monday’s decline might (! – doesn’t have to) require an additional quick breather, but the following days and weeks look very bad for the precious metals sector (including the miners).
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think it has already begun.
During the final part of the slide (which could end later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we expect silver to decline more than miners. That would align 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 incredibly positive in the long run, which does not make the short-term decline improbable. Markets can and will get ahead of themselves and decline afterward – sometimes very profoundly – before continuing with their upward climb.
The plan is to exit the current short positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 4 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is a soft, but simultaneously broad instruction, so additional confirmations are necessary.
I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to successfully execute such a strategy.
The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.
Letters to the Editor
Q: I propose to invest in gold but when can I expect price to touch in the range of 40,000? Or rather when are prices expected to fall below 45,000.
Am looking for gold price for 24 carat gold in India and currency being Indian rupees.
I want to buy physical gold jewelry in India.
After Pfizer announcement to what levels gold is expected to fall and by when.
A: The prices that you provided suggest that the question is about the 10 gram unit. I have no opinion regarding the rupee vs. the U.S. dollar as far as the next several weeks are concerned, so it’s difficult to provide a precise price, but assuming that this currency pair is going to be relatively stable in the next several weeks, the gold price might move similarly in percentage terms. At the moment of writing these words, gold futures are trading at 1,875 USD, and the price for 10 grams of gold is about 50,650 INR. So, if gold declines to 1,700 USD (by about 9.3%), it could mean that 10 grams of gold will be worth 9.3% less in INR terms as it is right now (about 46,000).
If gold slides below $1,700 temporarily (and they might, but that’s not the most likely outcome in my view), the gold price in rupees (per 10 grams) could decline below 46,000 as well. Either way, I expect these moves to take place within the next several weeks – likely this year.
Q: I wanted to first say a big thank you for your very disciplined and consistent updates that have been coming through these past few months. I look forward to these each day as I am very much interested in the timing around all of your projections. Further, I’m less concerned about the future strength in prices of the PMs (thinking that their strength will be a given in the medium to long term). Instead, I am more concerned about the validity and whether gold (and silver) will actually retrace to the ~USD1,700 and ~USD21 price points, and the timeframe that that is likely to happen. For example, I have read for some time now that you expect gold to retrace to USD1,703 and in the same context, gold to increase to USD2,100+ around the end of the year or into early next year. My questions are centered around the order in which you think these ‘events’ will happen and, in particular, the likelihood and confidence that you maintain that gold and silver WILL retrace (either before or after Jan 2021) and therefore present an opportune time to enter into trade positions (SIL, SILJ, GDX, GDXJ etc) from a very clear bottoming of those PMs.
A: Thank you for the feedback, I’m happy to hear that you enjoy my analyses. I tried to clarify the outlook in the previous analyses, but to clarify it even further – I think that gold will first decline to about $1,700 (or even lower) and move higher (above $2,100) only after this decline takes place. Furthermore, I expect that the decline in gold will be accompanied by a sizable upswing in the USD Index (and perhaps a decline in the U.S. stock market, but this part is relatively unclear). I think that there’s a good chance that this move lower is already underway – given what we saw on Monday. It would take an additional downswing that’s twice as big as what we saw on Monday alone – it’s definitely not something unthinkable, even though it might have appeared to be the case before Monday’s slide.
The question about “confidence” is a tricky one, as there are no certainties in any market, and also no analyst or trading tool can be correct 100% of the time. So, I don’t want to say that I’m confident in terms of being certain, but I’m confident in terms of viewing the above outcome as the most likely one. And yes, my money is on the table as well, I’m (unsurprisingly) shorting miners at this time.
Q: We’ve been seeing in different parts of social media show that gold could reach $2300 by December. Your analysis demonstrates that gold should decline before reaching those levels. Is there any chance that the current political outlook made investors switch to Risk On and lean towards gold and the equities market? Could all of this alter the cycles, momentum and sentiment and make gold take off instead? Thanks for your analysis, I appreciate it.
A: Thank you for the question. As connected with the final part of my previous reply – there are no certainties on the market, and yes, it is possible that things could work differently than I expect them to. But I don’t view it as likely. Gold, silver, and miners are not showing strength relative to the USD Index (as discussed today and yesterday) and the latter appears to have formed a major, broad bottom similar to what we saw in 2008 and 2011. Given the latter, it could be the case that my target of $1,700 is actually not bearish enough… Which is why I’m emphasizing that it will be gold’s relative strength to the USD’s continuous rally that will be the key sign for the trend reversal (we saw the same thing in March!) that will be more important than any price level on its own. I’ll be on the lookout for this indication and I’ll report to you – my subscribers – accordingly.
Q: This para has been at the end of your articles for months.
In other words, the following days are not likely to be pleasant times for anyone who refuses to jump on the bullish bandwagon just because prices moved higher in the previous months. But what's profitable is rarely the thing that feels good initially. Does it make sense to you? I have reread it and it is not going to be pleasant for anyone who doesn't invest but you are saying that it is not a good time to invest. Is this what the words mean?
A: Good catch! The “who refuses to jump” should have been substituted by “who jumps”. I’m sorry about the confusion. To clarify:
People tend to buy investment goods because they have become more expensive, regardless of other factors. That’s what happened in case of the precious metals sector recently – markets seem to have gotten ahead of themselves. People were jumping on the bullish bandwagon, for instance in August – they looked back and saw a strong uptrend and felt that this is going to continue indefinitely, which made them “feel good” about buying PMs and entering long trading positions. Monday’s slide was likely not pleasant in this case, and what’s likely to follow is probably going to be even less so.
Summing up, the next big move in the precious metals market is likely to be to the downside and – given the decrease in political uncertainty as well as yesterday’s slide in gold, silver, and mining stocks – it seems that this move lower has already begun.
Considering gold's breakout invalidation above the 2011 highs, it's evident that the big rally (that ended $4 above our upside target) is entirely over. Given this invalidation and the confirmed USD Index breakout, gold will probably slide much lower over the next few weeks. There are indications that the corrective upswing in the precious metals market and the pullback in the USDX are close to being over, so the decline could resume any day – or hour – now.
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 increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway.
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, please 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 earn much more in the following weeks and months), but you have to be healthy to enjoy the results.
As always, we'll keep you - our subscribers - informed.
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
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 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 (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 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.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager