Briefly: in our opinion, small (50% of the regular size of the position) speculative long position in silver is justified from the risk/reward point of view at the moment of publishing this Alert. We took profits off the table in case of the long positions in gold and mining stocks.
In yesterday's analysis on gold price in December 2019, we wrote that while the outlook for the yellow metal for the following months was bearish, it was bullish for the short term. And indeed - gold, silver, and mining stocks rallied. In fact, the rally continues in today's pre-market session. As it's happening even without a decline in the USD Index, many investors might think that something more than a short-term rally is actually taking place. But is that really the case?
The odds are that it's not, and that we're actually seeing a business-as-usual kind of situation. That is if one knows the details of the gold trading business.
The key detail in the current gold-USD dynamics is its shape and strength during the final part of the moves in both USD and gold. Long story short, gold tends to react much more to the final moves in the USD Index than to the ones that we see initially or in the middle of the USD movement.
USD Index Done Pulling Back?
What do we see right now in the USD Index? Most likely, it's the final part of the its pullback that we predicted when the USDX was topping in mid-November. The size of the decline is in tune with previous similar cases, and so is the time factor.
We marked the similar cases with green rectangles. All the setups are similar in terms of shape, and half (two) of them are similar in terms of the price action that preceded the consolidation (sharp rallies). In all four previous cases, the USD Index moved back and forth. Twice (July and October) it created two distinct bottoms, and twice (April and September) it moved quickly up and down, creating multiple intraday tops and bottoms.
In all cases, it took about two weeks before the USD Index started to rally. Moreover, in cases that were preceded by a sharp rally - just like the early-November upswing - the USDX corrected less than half of the upswing. It also declined until moving to the previous local extreme. In case of the April correction, it was the mid-Feb top, and in case of the July correction, it was the early-June bottom.
Right now, we have a situation when the USD Index has been correcting for about 2 weeks, it corrected a bit less than half of the preceding upswing and it appears to be bottoming (second distinct bottom) close to the previous local extreme (late-October top). The history seems to be rhyming.
What does it mean to gold? The same thing it meant previously. If you look at the lower part of the chart and focus on what happened when the green rectangles were drawing to their ends, you'll see that gold rallied relatively strongly at that time after being more or less muted previously. That's exactly what we see this week.
What does it mean? It means that gold is most likely in the final part of its rally and that we should expect to see a local top any day now.
And by any day now, we mean that it could very well happen today.
PMs Right Now
Two, confirming each-other, triangle-vertex-based reversals point to a turnaround taking place today. This does not have to be a very precise indication - a daily or even a 2-day delay would be well within the "normal" category. Still, the exact reversal day is today, meaning that the odds for a quick reversal are highest within the next several hours.
Silver showed some strength in today's pre-market session, but at the moment of writing these words, both gold and silver are relatively close to where they had closed yesterday. Today's intraday high in gold futures so far is $1,489.85 - mere 5 cents above our profit-take price. This means that even if one was able to read and act upon our yesterday's intraday Alert and take profits in miners and gold, today's pre-market upswing should have automatically closed the position, securing profits in gold.
Gold moved to the lower of its declining resistance lines, which means that the top might already be in, but gold might move even higher before truly reversing. Why? Because silver showed just a little strength here and it would be more natural for the rally to end if silver faked strength in a much more visible way.
Sure, silver rallied yesterday, but the rally was not visibly bigger than what we saw in gold or miners. And a visibly bigger rally, that's what to look for right at the top.
Also, the shape of today's session might appear very bearish as it looks like a shooting star reversal candlestick, but please note that the above chart is based on real-time prices and the session is not yet over. In fact, at the moment of writing these words, the regular U.S. trading hasn't even begun. Consequently, there are no bearish implications of gold's small, pre-market decline - at least not yet.
Naturally, the key bearish factors for the medium term remain intact.
Key Factors to Keep in Mind
- 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.
- Gold stocks appear to be repeating their performance from 20 years ago, which means that a bottom in the entire precious metals sector is quite likely to form at much lower prices, in about a year
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, the outlook for the precious metals sector remains very bearish for the following months (also because of the record volume and open interest in gold), and it seems that we will see the next local top shortly - perhaps later today. If not, then in the following part of this week. We expect to close the remaining part of our profitable long position (silver) shortly. We plan to open a short position shortly thereafter.
As always, we'll keep you - our subscribers - informed.
Trading capital (supplementary part of the portfolio; our opinion): Small speculative long position (50% of the full position) in silver is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:
- Silver futures: profit-take exit price: $17.47; stop-loss: $16.27; initial target price for the USLV ETN: $89.33; stop-loss for the USLV ETN: $72.44
NOTE: We substituted "silver" with "silver futures" to clarify which prices - specifically - are binding. The charts (Stockcharts, Stooq) that we feature in these Alerts are based on the futures contracts, so the implications of the analysis is also for this instrument. Of course spot prices will move in tune with futures, but when it comes to binding exit price levels, it's important to note which price we mean.
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.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager