Briefly: in our opinion, full speculative short positions (250% of the regular position size) in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert. We are increasing the size of the trading position.
The precious metals sector reversed yesterday. It might not be clear based on yesterday's charts, but it becomes crystal-clear once we consider the overnight price changes.
Gold reversed on big volume, silver moved to its 2019 highs and gold stocks rallied but erased most of their gains before the closing bell.
On the GDX ETF chart we see clearly what happened as Stockcharts marks these specific sessions with black. "Specific sessions" means sessions when GDX closed higher in terms of the daily closing prices, but when it closed lower than it had opened. That's exactly what happened yesterday. We saw something similar in late October and in early January. In both cases, it was a local top.
The scale of the reversal is profound - GDX erased most of its daily gains. And that happened even though gold didn't give up more than half of its rally. That's a subtle sign of underperformance. Subtle signs are one thing, but you know what's not subtle?
Gold's overnight decline below $1,640.
Less than 24 hours after topping at 1691.70, gold declined below $1,640. The volatility is definitely significant. And bearish. At the moment of writing these words, the USD Index is at 99.06, which means that gold reversed practically without USD's help.
Silver already declined more than it had rallied yesterday.
The golden rally burnt itself out without taking direction from other markets. That's profoundly bearish. Once the price gets moving in one direction, it attracts trend-followers, which "add fuel to fire" and prolong the trend to the point that the price of a given asset rallies just because it rallied recently... And we have most likely just seen the tipping point - the moment when the excessive bullishness collapses on its own weight.
Markets and people creating them are emotional. This time (almost) everyone has most likely thought something along the lines of "Oh my God, we have a plague! Hold on to your gold and cash, and sell everything else!". And this way of thinking made people buy gold regardless of other factors, for instance soaring US dollar. But the moment of reckoning always comes. At some point, someone will think "hey, wait, this and that is also important, and the coronavirus is likely to be contained, anyway". In this case, we have myriads of factors to consider (we outlined them yesterday). And it seems that some people just realized that yesterday. More people are realizing it today.
That's what's behind a "no-reason" reversal - the emotionality of the market has just shifted. This is a very bearish sign, because so many other signs kept on screaming that gold should be heading lower, not higher. Yesterday's and today's overnight trading shows exactly that. If this is indeed the case, and today's decline was not accidental, this means that gold is now finally ready to respond to USD's very bearish lead.
Summing up, it seems that the precious metals sector has just topped. Today's pre-market decline along with yesterday's intraday reversal shows that the rally in gold is over. With more short-term confirmations on the bearish side, we think that much bigger short positions are now justified from the risk to reward point of view.
As always, we'll keep you - our subscribers - informed.
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (250% of the full position) in gold, silver, and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:
- Gold futures: profit-take exit price: $1,422; stop-loss: $1,712; initial target price for the DGLD ETN: $33.30; stop-loss for the DGLD ETN: $19.88
- Silver futures: profit-take exit price: $16.11; stop-loss: none (if gold moved to $1,712 we would view silver positions as no longer valid); initial target price for the DSLV ETN: $20.68; stop-loss for the DSLV ETN: none (if gold moved to $1,712 we would view silver positions as no longer valid)
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $20.22; stop-loss: $33.11; initial target price for the DUST ETF: $11.29; stop-loss for the DUST ETF $3.48
In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $28.32; stop-loss: $50.22
- JDST ETF: profit-take exit price: $20.97; stop-loss: $5.18
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.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager