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.
We are taking profits from the position in the FCX. (We might re-enter the short position here soon, though.)
What a slide in juniors and the FCX! And you know what? That’s not the end – that’s a start. And gold price’s parabolic performance confirms it.
Before I move to the analysis of the precious metals sector, here’s a quick info regarding our (now previous) position in the FCX. I’ve been featuring $27.13 as the downside target for this short position, but it seems that the risk-to-reward ratio at this time no longer favors keeping it open, which is why I think that taking profits off the table is now justified.
We entered this short position on April 5, when FCX was still trading close to $40. It just closed close to $33.
Congratulations to everyone who participated in this trade!
On one hand, the technical picture for the medium-term still favors severe (!) declines in the FCX, and the short-term technical situation in stocks doesn’t look good, but on the other hand, we might get some sort of “relief rally” when the debt ceiling scare is over (as a reminder, I see less than 0.1% chance of the U.S. defaulting on its debt).
Technically, the FCX just moved to a declining support line, which could be viewed as a neck level of a head-and-shoulders pattern, but we would need to see a breakdown (and its confirmation) first in order to say that this formation is indeed likely to lead to much lower FCX values.
And we’re likely to get it, but at this point, seen a corrective upswing is too likely for me to keeping a short position open. Just because I initially placed a lower downside target doesn’t mean that I won’t adjust the trade whenever the situation justifies it. Of course, the same goes for the precious metals sector, too, which might get oversold relatively soon… (more on that later today).
So, again, congratulations to those who are taking big profits from this less-than-2-month-long trade. This profitable trade extends our streak of profitable trades by one more. It’s now at least 7th profitable trade in a row (of course, taking unleveraged instruments into account; not options etc.) – I’m starting the counter in early 2022 here. And yes, I’m fully expecting that the current trade in junior miners will be very profitable as well.
I’ll keep my Gold Trading Alerts subscribers up-to-date regarding the upcoming trades.
Having said that, let’s start the main part of today’s analysis with a quote from the beginning of this week. On Monday, May 22, I wrote the following:
This time, the critical context is provided by the mining stocks. And more precisely, by the fact that miners were weak relative to gold.
While the GLD ETF (proxy for gold, which I’m using to have an apples-to-apples comparison with GDX and GDXJ) moved above its early-May lows, that didn’t happen in case of GDX or GDXJ – proxies for senior and junior mining stocks, respectively.
Miners tend to be weaker than gold during declines, and they tend to be stronger than gold during upswings, especially in upswings’ early parts.
This is the extra angle that one wouldn’t get while looking at gold price alone. Thanks to knowing how miners performed relative to gold (poorly), one can estimate, what’s the most likely outcome with greater accuracy than without this information.
Given what miners just did, the odds are that Friday’s upswing was just a correction and not the beginning of another bigger rally.
Moreover, please note that GLD, GDX, and GDXJ tend to either “close the gaps” or correct in the “gap’s territory”. And that’s what we saw once again on Friday.
A price gap is created, when a given market opens well below or above the closing price from the previous session. The space between the previous days’ close and the new open is a “gap”. It’s essentially a group of price levels at which there was no trading as the markets were closed.
Gold and gold miners tend to then – after such a price gap is formed – to move back to the previous closing price and then continue the trend.
We saw something like that earlier this month, and we saw it on Friday.
What does it mean? It means that since the gap was closed / almost closed, the precious metals sector can now decline once again – quite possibly in a profound manner.
You already know what happened next. Gold price declined, and mining stock prices truly plunged.
Interestingly, the way in which they all declined suggests that there’s more to come. After all, miners continue to be exceptionally weak relative to gold.
While the GLD remains above its recent lows, both: GDX and GDXJ are already after a breakdown to new short-term lows and a sizable extra decline.
And here’s the best part:
It looks like gold is about to plunge too, thus contributing to an even bigger (!) slide in the mining stocks.
The thing is, if you look at the price performance of gold since mid-March, it’s clear that it’s been moving in a parabolic manner.
Parabolas have a sharp start, then the rally decelerates, we have a broad top, and then the decline starts to pick up. And then, it accelerates to the downside just as the rally initially accelerated to the upside.
After invalidating the breakout above its initial 2023 high, gold made two more attempts to rally above it, and both failed. This is not surprising, given the rallying USD Index, but what might have been surprising is that those attempts took place at all.
However, looking at gold’s performance from the point of view of this parabolic pattern, it’s obvious why this back-and-forth movement materialized.
It was too early for gold to plunge even lower when it first invalidated the breakout above the early 2023 highs. However, now, after the back-and-forth action, it seems that the time is up, or almost up.
And just like it took just a short while for gold to rally in March, it might take just a short while for it to slide. Besides, miners’ performance has this “big slide” written all over it.
This might be a bold statement, but this big move lower might even happen this month. No promises here, but please note the above chart and the below chart featuring the USD Index.
The USDX is in the full-rally mode, and we also know (based on even the most recent observations) that the USDX tends to reverse its course close to the end of the month. However, it’s still a week until the new month starts. This means that the USDX could rally some more this month, which could give gold the extra push to move to much lower levels.
If it weren’t for miners’ extremely weak performance, I’d say the above is just “possible” and not “likely”. But since miners DID underperform gold to a great extent… It does appear likely.
Also, in Friday’s flagship Gold Trading Alert, I wrote that I didn’t trust the S&P 500’s breakout above its previous highs and that I expected it to be invalidated soon.
Not only was it invalidated, but it was followed by a sizable (from the short-term point of view) decline almost immediately.
Right now, the S&P 500 futures are verifying the breakdown below the rising support line. If they succeed, another move lower is likely in the cards. That’s the likely scenario.
And yes – this decline is likely to cause further damage to mining stock prices, especially junior mining stock prices.
I know that it might be difficult to believe that we have such a powerful combination of multiple bearish factors in play for junior miners, but this is really the case. Can they really fall substantially from here? Not only can they fall substantially, I actually expect them to fall in a truly extreme, 2008-style manner.
Remember the carnage of 2008? Or 2020? (And the fact that I wrote about going long in the mining stocks on March 13, 2020, extremely close to their intraday bottom on the day when the yearly bottom was formed? see below for details)
Back in 2020, it took just 5 trading days for GDXJ’s price to be cut in half. This time it’s likely to take more time, but if something like that was possible just a few years ago, it’s definitely possible this time as well!
Think about it – the real rates are already high and moving higher, and it was probably only the “return to normalcy” emotional stage of the bear market in stocks that prevented people from really acting on it. And since they are now starting to wake up to what’s real-ly (pun intended) happening, the prices are starting to reflect it.
This is a tremendous opportunity, but it won’t be around forever. In fact, given gold’s parabolic pattern and the invalidation that we saw in stocks, it looks like this is one of the final days to prepare for this downswing in the miners (and for reaping enormous rewards from it).
Overview of the Upcoming Part of the Decline
- It seems that the recent – and probably final – corrective upswing in the precious metals sector is over.
- 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.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24. In other words, I’m currently planning to go long when GDXJ is close to $20 (which might take place when gold is close to $1,450), and I’m planning to exit this long position and re-enter the short position once we see a corrective rally to $24 in the GDXJ (which might take place when gold is close to $1,550).
- 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 prices close to $1,400 and GDXJ close to $15 . 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 nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Please post your questions in the comments feed below the articles, if they are about issues raised within the article (or in the recent issues). If they are about other, more universal matters, I encourage you to use the Ask the Community space (I’m also part of the community), so that more people can contribute to the reply and enjoy the answers. Of course, let’s keep the target-related discussions in the premium space (where you’re reading this).
To summarize, we recently took profits from the additional FCX trade (right before the trend reversed!) and the current short position in it is VERY profitable as well.
The short position in junior mining stocks is – in my view – poised to become very profitable in the following weeks.
Things might appear chaotic in the precious metals market right now, but based on the analogy to the previous crises (2020 and 2008), it’s clear that gold, miners, and other markets are pretty much doing the same thing all over again.
The implications of this “all over” are extremely bearish for junior mining stocks. Back in 2008, at a similar juncture, GDX’s price was about to be cut in half in about a month! In my opinion, while the decline might not be as sharp this time, it’s likely to be enormous anyway and very, very, very profitable.
If I didn’t have a short position in junior mining stocks, I would be entering it now.
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 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: $26.13; stop-loss: none.
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: $13.87; stop-loss for the JDST: none.
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: $17.83 (stop-loss: none)
SLV profit-take exit price: $16.73 (stop-loss: none)
ZSL profit-take exit price: $32.97 (stop-loss: none)
Gold futures downside profit-take exit price: $1,743 (stop-loss: none)
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $10.97 (stop-loss: none due to vague link in the short term with the U.S.-traded GDXJ)
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $25.47 (stop-loss: none)
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.
On a side note, while commenting on analyses, please keep the Pillars of the Community in mind. It’s great to provide points that help others be more objective. However, it’s important to focus on the facts and discuss them in a dignified manner. There is not much of the latter in personal attacks. As more and more people join our community, it is important to keep it friendly. Being yourself, even to the point of swearing, is great, but the point is not to belittle other people or put them in a position of “shame” (whether it works or not). Everyone can make mistakes, and everyone does, in fact, make mistakes. We all here have the same goal: to have a greater understanding of the markets and pick better risk-to-reward situations for our trades. We are on the same side.
On another – and final – side note, the number of messages, comments etc. that I’m receiving is enormous, and while I’m grateful for such engagement and feedback, I’m also starting to realize that there’s no way in which I’m going to be able to provide replies to everyone that I would like to, while keeping any sort of work-life balance and sanity ;) Not to mention peace of mind and calmness required to approach the markets with maximum objectivity and to provide you with the service of the highest quality – and best of my abilities.
Consequently, please keep in mind that I will not be able to react / reply to all messages. It will be my priority to reply to messages/comments that adhere to the Pillars of the Community (I wrote them, by the way) and are based on kindness, compassion and on helping others grow themselves and their capital in the most objective manner possible (and to messages that are supportive in general). I noticed that whatever one puts their attention to – grows, and that’s what I think all communities need more of.
Sometimes, Golden Meadow’s support team forwards me a message from someone, who assumed that I might not be able to see a message on Golden Meadow, but that I would notice it in my e-mail account. However, since it’s the point here to create a supportive community, I will specifically not be providing any replies over email, and I will be providing them over here (to the extent time permits). Everyone’s best option is to communicate here, on Golden Meadow, ideally not in private messages (there are exceptions, of course!) but in specific spaces or below articles, because even if I’m not able to reply, the odds are that there will be someone else with insights on a given matter that might provide helpful details. And since we are all on the same side (aiming to grow ourselves and our capital), a ton of value can be created through this kind of collaboration :).
Przemyslaw K. Radomski, CFA