EDITED: Please note that we changed the profit-take levels mentioned in the analysis below in the March 16, 2020 Gold & Silver Trading Alert.
Briefly: We are closing the remaining short positions in gold and silver and we are taking profits off the table. We are opening full LONG positions (100% size of the regular position size) in the mining stocks.
The easy, moderate, and even part of the hard part of the short trade in gold and silver are over, and it seems that aiming to catch the very last part is too dangerous. It is simply not justified from the risk to reward point of view. Consequently, we are closing the entire short position in gold and silver. We would like to emphasize that this doesn’t mean that the entire decline in the precious metals sector is over. No. We expect it to continue in the following months, but it seems that the market might have declined too far too fast, especially in case of the mining stocks.
The week is ending and…
It’s been the worst week for GDXJ ever.
It’s been the worst week for GDX ever.
It’s been the worst week for the HUI Index ever (it was launched in 1996)
It’s been the worst week for the XAU index ever (it was launched in 1983)
Yes, the mining stocks lost more during this week, than they have during any previous week since 1983. Even when we take the 2008 plunge into account.
There is little comparison in historical standards, but there’s one week that was pretty close. In July, 2002, there was a week, when the XAU Index lost almost 22%, and the HUI Index lost almost 27%. They both lost about 30% this week.
In July, 2002, the general stock market was sliding profoundly and the USD Index rallied (after a sizable decline). Gold plunged, but not as much as miners (about 6% vs. about 9% this week). Silver declined more than gold (over 8% vs. about 16% this week).
As you can see quite a few things are similar. And back in July 2002, that was the final bottom for the mining stocks. It was not the final bottom for silver, nor the general stock market, but miners and gold moved higher from there (taking weekly closing prices into account). Miners rallied particularly strongly during the following week. The HUI Index regained most of the previous week’s losses in just one week.
The time to be brave is when there’s blood on the streets. And there was never more blood on the mining streets in weekly terms - ever.
Also, please note how well miners - especially junior miners performed in the very first part of the session. They rebounded very well
Consequently, we are opening a speculative long position in mining stocks - and only in mining stocks. That’s based on how different parts of the precious metals market reacted during the most similar week in the past.
Trading capital (supplementary part of the portfolio; our opinion): Full speculative LONG position (100% of the full position) in mining stocks is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:
Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $22.94; stop-loss: to-be-determined-later; binding profit-take level for the NUGT ETF: $16.48; stop-loss for the NUGT ETF to-be-determined-later
Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $28.94; stop-loss: to-be-determined-later; binding profit-take level for the JNUG ETF: $24.48; stop-loss for the JNUG ETF to-be-determined-later
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
As always, we'll keep you - our subscribers - informed.
Przemyslaw Radomski, CFA