Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Barely any short-term change happening in the precious metals market doesn't mean that no insights can be gleaned elsewhere. Quite to the contrary, as we're witnessing a key currency development that won't be without consequences. Time for taking a snapshot of the current situation, and summarize what all the mid-term outlook elements mean for the precious metals exactly.
Today's Gold & Silver Trading Alert is going to be relatively short and it will consist of two main parts. The reason for the former is that practically nothing happened in the precious metals market yesterday. Gold, silver, and mining stocks closed yesterday's session almost unchanged and as you can see on the chart below, gold is trading just where it was 24 hours ago.
No changes mean that we have nothing to add to our previous short-term analysis.
Not to despair that the Alert would be over soon, we'll once again go through multiple details that are currently in play in the precious metals market - there are many of them, and it's easy to get lost among so many signals, as it's impossible to cover all of them in a single Alert. In the latter half of the Alert, we will summarize the situation by linking to the previous analyses containing more details. Thanks to this approach, we will be able to include more factors in a single Alert.
Let's start with a worthwhile change though. The one thing that we would like to cover today is the quiet, yet very important development in the USD Index.
At the first sight, nothing really happened in case of the US currency. This is very far from the truth. The USDX didn't rally profoundly - it was just a 0.12 upswing - but this move means a lot. The reason is yesterday's close was the third consecutive daily close above the May high. This means that the breakout above the May high was just confirmed. This is important, because it's the first time it happened. The USD attempted to break higher in a volatile way in late July, but this move was invalidated due to Trump's additional tariff threat.
Invalidations of breakdowns are bearish for the short term, and the USD Index declined. It didn't move below the rising support line and the neck level of the previously completed inverse head-and-shoulders pattern. The only thing that a huge additional tariff threat was able to generate was a weekly correction, which was a bullish sign on its own.
Invalidations of breakdowns and their confirmations are different as night and day. Invalidations are bearish, but confirmed breakouts are bullish. The outlook here has become more bullish than it was in late July - back then, we never got the third day confirmation close - and we just got it yesterday. Moreover, the rising support line that stopped the decline in early August, is now very close to the current USD Index values suggesting that the downside potential here is very limited, while at the same time the upside...
The upside is huge, because the last year or so has been a running correction that we saw after the powerful 2018 rally. These consolidations are known to be the most bullish type of consolidation and are likely to be followed by strong gains. "Strong" from the long-term perspective, which means that we are not only looking at a rally above 100, but also likely above the 2017 high. The most important reason for the above rally is not visible on the above chart, though, it's visible on the very long-term chart that shows that the entire 2017 - 2018 decline was actually a corrective rally that followed a major long-term breakout.
This connects us with the second part of the Alert, in which we will emphasize the key developments regarding the precious metals market and the USD Index that are taking place right now and that one should keep in mind.
The take-away from the above USD Index analysis is that the breakout above the May high was confirmed yesterday, which makes the subsequent gains very likely. This means that the rally in the precious metals market is most likely over.
Having said that, let's move to the list of key factors that are currently in place, starting with the background information for the above USD Index analysis:
- The USD Index broke above the very long-term resistance line and verified the breakout above it. Its huge upswing is already underway.
- The USD's long-term upswing is an extremely important and bearish factor for gold. There were only two similar cases in the past few decades, when USD Index was starting profound, long-term bull markets, and they were both accompanied by huge declines in gold and the rest of the precious metals market
- Out of these two similar cases, only one is very similar - the case when gold topped in February 1996. The similarity extends beyond gold's about a yearly delay in reaction to the USD's rally. Also the shape of gold price moves prior to the 1996 high and what we saw in the last couple of years is very similar, which confirm the analysis of the gold-USD link and the above-mentioned implications of USD Index's long-term breakout.
- The similarity between now and 1996 extends to silver and mining stocks - in other words, it goes beyond USD, gold-USD link, and gold itself. The white metal and its miners appear to be in a similar position as well, and the implications are particularly bearish for the miners. After their 1996 top, they erased more than 2/3rds of their prices.
- Many investors got excited by the gold-is-soaring theme in the last few months, but looking beyond the short-term moves, reveals that most of the precious metals sector didn't show substantial strength that would be really visible from the long-term perspective. Gold doesn't appear to be starting a new bull market here, but rather to be an exception from the rule.
Very important, but not as critical factors:
- Long-term technical signs for silver, i.a. the analogy in terms of price to what we saw in 2008, shows that silver could slide even below $10.
- Silver's very long-term cycles point to a major reversal taking place right now and since the most recent move was up, the implications are bearish (this is also silver's technical sign, but it's so important that it deserves its own point)
- Long-term technical signs for gold stocks point to this not being a new gold bull market beginning. Among others, it's their long-term underperformance relative to gold that hint this is rather a corrective upswing within a bear market that is not over yet.
- Record-breaking weekly volume in gold is a strong sign pointing to lower gold prices
- Extreme volume reading in the SIL ETF (proxy for silver stocks) is an effective indication that lower values of silver miners are to be expected
- Silver's short-term outperformance of gold, and gold stocks' short-term underperformance of gold both confirm that the precious metals sector is topping here
- Gold topped almost right at its cyclical turning point, which makes the trend reversal more likely
- Copper broke below its head-and-shoulders pattern and confirmed the breakdown. The last time we saw something similar was in April 2013, when the entire precious metals sector was on the verge of plunging lower.
Moreover, please note that while there may be a recession threat, it doesn't mean that gold has to rally immediately. Both: recession and gold's multi-year rally could be many months away - comparing what happened to bond yields in the 90s confirms that.
Summing up, taking the big investment picture into account, out of the following: gold, silver, gold stocks, silver stocks, the recent upswing was visible only in case of gold. Most of the precious metals portfolio: silver, gold miners, and silver miners suggest that what we saw in the last several months is nothing more than a corrective upswing within a bigger downtrend. There are multiple signs pointing to much lower precious metals and mining stocks prices in the following weeks and months and we have listed them in today's Gold & Silver Trading Alert. To make a long story short, one should be prepared for much lower, not higher precious metals prices in the following months.
As always, we'll keep you - our subscribers - informed.
Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,241; stop-loss: $1,552; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $25.37
- Silver: profit-take exit price: $13.81; stop-loss: $17.73; initial target price for the DSLV ETN: $39.08; stop-loss for the DSLV ETN $18.27
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $17.61; stop-loss: $33.37; initial target price for the DUST ETF: $32.28; stop-loss for the DUST ETF $5.78
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so - we think senior mining stocks are more predictable in the case of short-term trades - if one wants to do it anyway, we provide the details), here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $23.71; stop-loss: $48.42
- JDST ETF: profit-take exit price: $73.32 stop-loss: $9.67
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.
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Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager