Lower USD? Gold Declines Anyway. What Gives?

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Briefly: in our opinion, full (200% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

Today’s alert is going to be shorter than the previous ones, as not much happened yesterday and what happened was in perfect tune with what we described previously. The USD Index moved a bit lower yesterday, and the precious metals sector reacted by… moving lower as well. That’s exactly what we wrote in the last few alerts. Even though gold moves in the opposite direction to the USD Index on a very short-term basis, gold’s declines are relatively bigger, and gold’s rallies are relatively smaller. Overall, gold is not really reacting to USD’s decline, which is a consequence of the reason behind the previous simultaneous rally in gold and USD. The reason was increased risk in the Eurozone and as the geopolitical event’s impact fades away, so does gold’s gleam.

Let’s take a look at the details.

Gold and US Dollar - daily price chart - USD

Even though the decline was far from being spectacular, the USDX has indeed moved lower and it should have triggered a move higher in PMs. It didn’t, which suggests that even if USD is not yet done declining, we shouldn’t worry too much about gold’s upside potential as there doesn’t seem to be any – at least not a meaningful one in the short term.

PM’s and Miners’ Reaction

Gold price target

Silver price reversal date

GDX - Market Vectors Gold Miners - Gold mining stocks

The volume was not particularly significant, but it was not extremely low either, so we don’t think it should be used as a bullish signal. In general, low volume is a bearish signal during rallies, but it’s rather normal during declines (as the price declines when there are no buy and sell orders) and it takes a very low level of volume during a decline to indicate that something’s up.

Gold declined and the above chart doesn’t fully reflect it.

Gold prices over the last three days

In reality, gold closed yesterday’s session not only below Wednesday’s close, but also below Tuesday’s close. Let’s keep in mind that at the same time the USD Index moved visibly lower.

The implications are simply bearish and today’s triangle-apex-based turning point in silver may mark the start of the big upswing. Naturally, a daily delay would not be surprising, so if the decline starts on Monday, it will still be quite in tune with the reversal.

There’s really not much more to say about the short-term developments, but we don’t want to end this alert without providing you with an update on something that’s really worth discussing and that you will probably not see anywhere else.

After looking through over 100 charts today, we found something that deserves more recognition than it gets.. It’s the relationship between gold and the Japanese stocks.

Gold and the Japanese Stocks

Gold and Nikkei 225 Index (NIKK)

It’s been some time since we previously discussed the above chart and those who are new to our analyses may not recognize it. It’s implications, however, continue to be in place, so it’s definitely worth reminding them.

The first observation regarding the above chart is that both: gold and the Nikkei 225 Index move approximately in the opposite directions in case of the big moves. Consequently, when Nikkei is likely to move much higher, it means that gold is likely to move much lower. This is exactly the case right now.

The Japanese stocks had broken above the previous long-term highs in the late 2017 and they verified this breakout by moving back to them this year. Nikkei is now moving higher (taking medium term into account) after long-term breakout’s verification. It’s difficult to have any more bullish situation in a given market than the above one.

Now, gold didn’t plunge when Nikkei broke above its highs in the late 2017 – we saw a short-term decline instead. This may seem like a link-breaker until one recalls that it was the time when the USD Index was declining very significantly. Gold was unable to respond to Nikkei’s lead at that time, given such important temporary factor.

The situation in the USD Index changed and should no longer prevent gold from declining, just as the strong outlook for the Japanese stocks suggests.

The second observation regarding the above chart is precisely the way in which gold and Nikkei move together – their 50-week correlation coefficient. You can see how it changed over time in the lower part of the above chart.

There is only one situation when the shape of the correlation was similar to what we’ve seen in the past several months and it’s what we saw in the late 2012 and early 2013. That’s when gold topped and started a major decline. In particular, based on the shape of the correlation pattern, we marked the most similar situation with vertical, dashed line. Back in 2012, it was the transition point, when gold moved from the stage of a relatively slow decline to a more rapid one. The implications are very bearish.

All in all, since both signals from the above chart provide us with coherent and bearish implications, we have another strong reason to expect lower precious metals prices in the coming weeks and months.

Summary

Summing up, the USD Index seems to have formed the short-term top, and since gold and silver are not responding strongly, USD’s pullback (if it continues at all) is not a major threat to gold’s decline. While we may see higher PM prices in the very short term, it doesn’t seem that the rally would be anything to call home about. In the light of the above and multiple medium-term bearish factors (like gold’s link with the Japanese stock market), it seems best to keep the speculative short positions intact.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

Gold: initial target price: $1,251; stop-loss: $1,382; initial target price for the DGLD ETN: $48.88; stop-loss for the DGLD ETN $37.48
Silver: initial target price: $15.73; stop-loss: $18.06; initial target price for the DSLV ETN: $27.58; stop-loss for the DSLV ETN $19.17
Mining stocks (price levels for the GDX ETF): initial target price: $21.03; stop-loss: $23.54; initial target price for the DUST ETF: $28.88; stop-loss for the DUST ETF $21.16

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 – but if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ ETF: initial target price: $30.62; stop-loss: $36.14
JDST ETF: initial target price: $59.68 stop-loss: $40.86

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

Important Details for New Subscribers

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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Many analysts attempt to develop a fundamental model for the price of gold by focusing on such statistics as mine production and industrial usage. They thoroughly analyze the changes in physical demand, supply, the marginal costs of mining, etc. However, this approach is fatally flawed. We invite you to read our today’s article about two approaches to valuing gold and find out why you shouldn’t treat it as a commodity.

Once Again, Gold Is Not Commodity

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