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. We are moving the exit prices higher for gold and silver.
Monday's precious metals session brought us little newness overall. Gold attempted to break above the late-2011 lows... and failed. Silver clearly outperformed, and the miners lagged. Such a constellation only strengthens the case of what we've written about recently. Today, we're bringing you an additional point of view in support of the above. We'll take a close look at gold seasonality. Actually, it'll be two close looks.
Very little happened since we published our yesterday's analysis, so it has remained up-to-date for the entire day and it's also up-to-date right now.
The two key developments that we outlined yesterday: USD's breakdown's invalidation and gold's reversal, were confirmed by daily closing prices. This is very important in light of the ever-growing U.S. - China trade dispute. This emphasizes that while the markets were practically forced to react to the news, they no longer really want to, and both will start moving in line with their key trends shortly. In case of the USD Index, this means a huge upswing, and in case of gold, it means a huge downswing.
Trump increased the supposed tariff level and he called for the U.S. companies to get out of China (precisely, to look for an alternative). The USD plunged, but this big decline lasted only one day.
USD Index Breakdown Invalidated
The USD Index closed the day back above the rising support line, which means that the breakdown was just invalidated. Of course, Trump wanted to see the decline continue - that's probably why he made the comments on China in the first place. Despite that, despite the dovish approach of the Fed, and despite the rest of the Trump tweets that should have taken the USD much lower... The strength of the U.S. currency is truly astonishing. Friday's comments didn't even manage to result in a confirmed breakdown.
From the long-term point of view, can you see any decline in the recent past?
Exactly - there was none. All that the USD Index did in the past several months was to consolidate while more and more bearish news hit it. This means that by not declining, it continued to show bigger and bigger strength. It was now able to get back up within a day after it was knocked down. This is a perfect start for a really dramatic upswing. But we don't want to write more about the USD Index today, as we've written quite a lot about it already.
What we want to talk about is what tends to happen in the precious metals market after the U.S. Labor Day. But, before we move to that, we want to show you how yesterday's session ended in case of gold, silver, and mining stocks.
The Short-Term in PMs
Gold formed a classic shooting star reversal candlestick, silver clearly outperformed, and mining stocks slightly underperformed. Silver's outperformance is clear, but the miners' underperformance isn't, as the chart doesn't provide details regarding the exact percentage change of either silver or the HUI Index. The latter declined by 0.33% yesterday, which is not a lot, but it's still 11 times bigger decline than the one of gold, which moved lower by 0.03%.
This means that all the points that we made recently, both: long, and short-term, are up-to-date right now:
- 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.
Having said that, let's move to the very specific seasonality that's present on the gold market.
Gold and Labor Day
The key thing is that something special is often happening on the gold market around the U.S. Labor Day. In almost all cases, gold is either topping or already after a nearby top. In other words, it's perfectly set for a major decline in the following weeks, and sometimes, months.
6 out of the last 8 U.S. Labor Days were a great time to profit on yellow metal's medium-term price declines. There was only one bullish case (in 2018), and was one unclear (in 2015, when gold moved higher in the short run, but then declined anyway). Consequently, it appears that it's high time for gold to end its recent rally.
This analogy in terms of time as a building bridge to yet another analogy becomes obvious once you take a look at the RSI indicator in the upper part of the chart. It's currently above the 80 level. There was only one other case in the previous years when we saw something similar. It was at the 2011 top.
The 2011 top is usually just mentioned as the 2011 top, or THE top, as it was the most prominent high of the past decades, so there's no way to mistake it for a different high. Consequently, it's easy to forget when did exactly this top take place. The initial high took place on August 23, 2011, and the final (THE) top took place on September 6, 2011 (the first session after the U.S. Labor Day).
Interestingly, the August 13, 2019 session was very volatile overall, which might be similar (to a smaller extent, but still) to the initial August 2011 top.
To summarize, gold is after a sharp rally that took the RSI above 80, indicating extremely overbought conditions, and the only similar case from the recent past is the 2011 top. The 2011 decline started shortly after the U.S. Labor Day, and gold then erased over 61.8% of its most recent upswing - and very fast. It formed a temporary bottom a bit below the previous local high. Gold didn't move to its 50-day moving average at that time.
The 61.8% Fibonacci retracement of the most recent rally is at $1,318. The most recent local high is at about $1,350. The 50-day moving average is at about $1,315 right now. Consequently, applying the 2011 details to the current situation provides us with a short-term target at about $1,320.
This is where gold is likely to move next before bouncing. It's likely to then decline once again, but since no market moves up or down in a straight line, we're adjusting our exit target for the current short position to accommodate the above - we're moving them to $1,332, in order to maximize the chance of realizing the trade.
Before summarizing, please note that if we discount all the price moves surrounding the early September without looking exactly at this particular date, we get a picture in which gold might be topping right now or a one in which it has already topped.
Gold's Seasonality and the Third Quarter
Our gold seasonality charts show that the rally in the yellow metal might already be over. The accuracy of the prediction (i.e. the difference between the previous cases) is relatively big right now, so it's unclear whether the top is already in or not, but please note how the accuracy rises after the first part of September, along with lower predicted gold prices. This means that whenever the top forms (whether it formed yesterday, will it form on Tuesday right after the U.S. Labor Day, or anytime in between), gold is already likely to be much lower in mid-September.
By the way, we are transforming the way the True Seasonals section works on our website - so it might be a good idea to visit it. The gold section is ready, and we will add more sections shortly. We also improved the Correlation Matrix section - we made the text more straightforward and we added sample uses to meet your needs even better.
We strived to make these sections as easy to use as possible, but if something is unclear, please tell us, we'll be happy to listen to it.
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 practically none of them were invalidated by Friday's and yesterday's price moves. Conversely, USD's almost immediate comeback and gold's reversal suggest that both markets are barely reacting to additional trade threats. This means that such news is unlikely to prevent the main trends (up for the USD and down for gold) from unfolding for much longer, if at all.
Moreover, due to gold's tendency to decline in the period following the U.S. Labor Day, it seems that we will not have to wait for much lower gold prices for long.
As indicated above, we are moving the exit prices higher in case of gold and silver. We plan to exit the trading positions in mining stocks when gold moves to its exit target as well, however, it's unclear at this time, what will the exact GDX price be at that time, so we are leaving the more aggressive exit prices intact. We will send out a special Alert with confirmation about exiting the short positions in mining stocks, or we will adjust the miners' exit prices once gold and silver move closer to their respective exit prices.
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: $1,332; stop-loss: $1,603; initial target price for the DGLD ETN: $39.87; stop-loss for the DGLD ETN: $23.37
- Silver: profit-take exit price: $14.62; stop-loss: $19.13; initial target price for the DSLV ETN: $32.96; stop-loss for the DSLV ETN $16.37
- 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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In recent months, the World Gold Council released a few interesting reports. What can we learn from the publications? We'll then supplement it with the view of the Fed policies. Will gold like the message?
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager