Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Pre-FOMC, we haven't seen much of a movement in the precious metals. It has been only the miners that registered a gain yesterday. Any rise must be a bullish development, right? Well, we better assess the chart context of that move. Combined with miners-to-gold ratio, that tells us something valuable carrying significance over to the rest of the precious metals sector.
Gold moved a few dollars higher yesterday, but it happened after the futures markets closed, so the short-term chart doesn't reflect it. What it does reflect, however, is the small corrective upswing in the gold miners that we saw right after the breakdown below the rising support line.
Check on Yesterday's PMs Action
This is a quite normal course of action. The market is checking whether the breakdown was real, or will the bulls show delayed strength after all. So far, the strength was too insignificant to take the HUI Index back above the rising line - and that gives yesterday's price action an overall bearish slant. If the HUI closes below the line also today, the breakdown will be confirmed and implications fully bearish.
As far as the few-dollar rally in gold (the post-trading hours one not on the above daily chart) is concerned, it didn't change anything as it didn't result in a breakout above the pennant pattern. Overall, the very short-term outlook became a little more bearish based on what we saw yesterday.
We might see some intraday volatility later today and tomorrow due to the Fed's interest decision and the follow-up comments that are scheduled for Wednesday. After this day, gold might actually decline even though the Fed is likely to lower the interest rates. Why? Because practically everyone expects the rates to be lowered, while some investors expect them to be lowered by 50 basis points, not just 25. They are likely to be disappointed (the Fed is unlikely to shoot a bazooka as a warning shot), which means that the interest rate decision - even though it is likely to be a rate cut - might be actually viewed as something hawkish. Again - not because it is such per se, but because it is hawkish compared to the average expectations.
Quite a lot will depend on what the Fed says during the press conference, so the final part of tomorrow's session will likely be quite volatile.
We already commented on multiple long-term charts and how they point to lower prices of the precious metals in the following months and weeks, but there's one thing that we didn't discuss in a long time and that's the relationship between gold miners and gold.
Miners-to-Gold At Resistance
There are two main take-aways from the long-term chart featuring the gold stocks to gold ratio.
The first is that the long-term trend remains down. There was a small attempt to break above the declining resistance line that's created based on the 2011 and 2016 highs, but it was not successful. It's not clear on the above chart, but the breakout was invalidated and right now the ratio is back at the declining line once again. Since the breakout was already invalidated, it's very likely that the ratio will now move lower.
Before moving to the second major thing that we see on the above chart, let's consider the way in which the ratio moved since early 2016. It first soared in a volatile manner, then it declined in a rather regular way and we now saw a sharp rally above the 200-day moving average (marked with red). When was the previous time when we saw something like that? It was right after the 2008 rebound. The ratio soared in a volatile manner, then it declined in a rather regular way (until mid-2012) and then we saw a sharp rally above the 200-day moving average (marked with red). We recently commented on the situation in silver being very similar to what we saw at the late-2012 top and the shape analogy in gold stocks to gold ratio serves as a perfect confirmation. It's perfect because of two reasons. One, the ratio is based on entirely different dataset than silver (so we're definitely not looking at the same thing only from different angles). Two, because this analogy is confirmed by one more, very important, development.
This brings us to the second major point that we would like to make about the above chart. It's not the ratio itself, but the RSI based on it that's particularly interesting. It's value just soared above 70 and it now moved back below it. It may sound like something insignificant, but it is very significant. There were only three times when that happened in the last decade. Now, at the 2016 top and at the late-2012 top. Both the 2012 and 2016 events very important for the entire precious metals sector and you can see how huge rallies followed in gold right on the above chart (gold's in the background, marked with orange).
Did you note how the late-2012 top popped up once again? That's yet another sign suggesting that we are in a very similar situation to what we saw back then. That was right before the biggest decline in the precious metals sector in many years. We continue to think that the final bottom in the precious metals sector is still ahead and that we will see gold below $1,000 before the next powerful rally starts. The current combination of factors resembling the late-2012 top is a great way to start this final washout.
The same goes for the situation in the USD Index, which continues to support lower precious metals values in the following months. Let's take a closer look at the charts.
USD Index Clawing Higher
In short, our previous comments on the USD Index chart remain up-to-date as the currency is showing strength, just like we had been expecting it to. The USD Index has more than confirmed the breakout above the inverse head-and-shoulders pattern, which means it's now likely to rally well above the previous 2019 highs. The target is based on the size of the head and it's at about 99.1.
The key thing about this target is that it implies a breakout not only above the recent highs, but also above the running correction pattern that's visible from the long-term point of view.
Breakouts from consolidations are quite often followed by moves similar to the moves that preceded them. The move that preceded the current consolidation was the big 2018 rally. If it is to repeat itself, we're looking at about 105 as the next upside target.
The thing about this target is that it would be a major breakout above the 2017 high, which would then be likely to be followed by yet another rally - to about 108 - 110 area as that's where we have the next strong resistance.
This is a great environment for a decline in the precious metals sector.
Of course, there is the question if the USD Index can really move higher if the interest rates move lower. The answer is yes. Please note where the USD Index currently is - it's very close to its previous 2019 high. And what happened with the Fed's very hawkish tone? It's gone. It changed entirely and the market expectations shifted from expecting higher to expecting lower interest rates. And yet, the USD Index showed exceptional strength and came back up after the initial decline. With this kind of resilience, the U.S. currency can continue to move up even in light of declining interest rates. The U.S. dollar may not be a perfect currency, but it still appears to a better alternative than the euro and the Japanese yen and in the last few months it has already proved its mettle.
Summing up, the breakdown in the gold stocks, the multiple signals coming from the silver market and strong bearish indications from the gold stocks to gold ratio clearly confirm that the rally in the precious metals sector has most likely already ran its course. Moreover, let's keep in mind that gold has recently invalidated its breakout above the previous highs, the late-2013 highs, and the upper border of the pennant pattern, which is also a very strong bearish sign. The situation in the currency market confirms the bearish outlook for the PMs. In those circumstances, we simply cannot predict higher gold price in the medium term. There will most likely be times when gold is trading well above the 2011 highs, but they are unlikely to be seen without being preceded by a sharp drop first.
Today's and tomorrow's sessions could be volatile due to the interest rate decision and the follow-up comments, but once it's all said and done, the main trend is likely to resume. And the main trend is down.
As always, we'll keep you - our subscribers - informed.
Trading capital (supplementary part of the portfolio; our opinion): Full short position (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 exit profit-take price levels:
- Gold: profit-take exit price: $1,241; stop-loss: $1,468; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $30.27
- Silver: profit-take exit price: $13.81; stop-loss: $16.73; initial target price for the DSLV ETN: $39.08; stop-loss for the DSLV ETN $22.87
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $17.61; stop-loss: $29.27; initial target price for the DUST ETF: $32.28; stop-loss for the DUST ETF $6.88
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: $43.47
- JDST ETF: profit-take exit price: $73.32 stop-loss: $13.87
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
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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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Last week, Boris Johnson became the PM of the UK. The odds of hard Brexit increased, sending pound lower. Now, markets await tomorrow's FOMC meeting. Gold closely monitors these events and thinks about which way to go next.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager