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przemyslaw-radomski

Nobody Believes the U.S. Dollar Anymore

February 12, 2019, 7:51 AM Przemysław Radomski , CFA

Briefly: in our opinion, full (250% 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.

The USD Index moved substantially higher yesterday, proving that markets don’t necessarily move on the news (remember those dovish comments from the Fed?), but on expectations. “Buy the rumor, sell the fact”, or more precisely in this case, “sell the rumor, buy the fact” once again proved to be wise. The USD Index bottomed at the combination or bearish factors and it keeps on rallying relentlessly since that time. And gold? It’s not declining. Why not?

One reason might be that gold is simply showing strength, as it doesn’t want to move lower – it’s waiting for factors on which it could rally. But we don’t think that this the correct interpretation. There are multiple long-term bearish factors that remain in place and thus it seems that there might be a different interpretation. And there is. Actually, there are two reasons due to which this might be the case.

First, gold is often reacting to major breakouts in the USD Index (and breakdowns), not necessarily to smaller moves that lead to the breakouts (breakdowns). The investors simply doubt that the USD strength will be upheld and don’t sell their gold based on the above.

USD’s Relentless Rally

US Dollar Index - Cash Settle

The USD Index moved to the declining red resistance line. It’s not visible on the above chart, but the USDX moved a bit higher in today’s pre-market trading and thanks to this, the above-mentioned line was reached. The line was reached, but not broken, so the fact that gold investors are hesitating seems natural.

Moreover, the recent movement in the USD Index (approximately since the second week of January) looks like a corrective zigzag pattern. That’s yet another reason for traders to doubt the recent strength.

Naturally, the big picture for the USDX remains bullish (and our profits on the EUR/USD pair keep on growing even though we took part of them off the table yesterday). The fact that USD keeps on rallying since Fed’s dovish remarks (a strongly bearish factor for the USDX) is more important than the above assumptions.

Second reason may be the very recent discrepancy between the triangle-vertex-based reversals in the USD Index and the precious metals market. The USDX reversal took place earlier, so it may still be the case that the recent resilience of the precious metals sector is a way in which the natural delay takes place.

Consequently, the recent “strength” in gold may actually be no real strength at all.

Gold & Silver – Delay Rather Than Strength

Gold - Continuous Contract

Silver - Continuous Contract

Looking at both precious metals on a stand-alone basis, we see that nothing really changed yesterday. We saw yet another low-volume day, during which gold and silver did almost nothing.

Silver’s performance is quite similar to what we saw about a year ago. Before declining profoundly, silver moved a bit higher after the final top and this took place when silver was trading around its 20-day moving average. We’re seeing the same thing right now.

Overall, our previous comments remain up-to-date:

Some may say that gold’s decline on low volume is a factor that shows that gold doesn’t want to move lower. This claim would not be correct because of at least two reasons. One is that the price-volume mechanism is not symmetrical. If there were no buyers and no sellers, the price would decline, not stay at the same level. The implications of low volume are really different for the upswings and for the declines. That’s why upswings on low volume are bearish and declines on low volume are rather neutral.

The second reason is that gold didn’t decline for the entire previous week – it moved a bit higher on Friday.

Obviously, the Friday’s move higher – on its own – does not prove or indicate anything. The daily volume, on which it moved higher, however, does.

Last week’s decline took place on low volume, so many traders viewed it as a counter-trend pullback. However, if that was really the case, then gold should have rallied on Friday on strong volume. The volume was neither strong, nor average. It was weak. This suggests that the decline that we saw earlier last week was not just a pause in buyers’ activity. Taken together – both: declines and Friday’s rally – show that the buying power has most likely dried up. Everyone (or almost everyone), who was considering purchasing gold around current levels (before seeing an additional downswing) has already entered the market. And the price needs fresh buying power to keep rallying.

Miners’ Small Breakdown

Gold Bugs Index

Mining stocks moved over but eventually closed below the lower rising support line of those two rising support lines. In short, this is a bearish factor, even though the size of the move was not significant. This is especially the case since that the Stochastics remains in the sell mode. Moreover, please note that while yesterday’s breakdown was not yet confirmed, the earlier breakdown below the rising thick support line (based on the daily closes) was.

Summary

Summing up, the recent rally and kind of resilience in the PMs complex may appear encouraging, but it doesn’t change the medium-term trend and outlook, which remains bearish. It seems that gold’s reaction to the strength in the USD Index is simply delayed.

The upside is quite limited, while the downside remains enormous. The reversals have been reached last week. As PMs, miners, and the USD Index move beyond their reversal dates, the chance for any meaningful upswing in the former before medium-term decline’s continuation, is decreasing with the time passing.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (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: $1,062; stop-loss: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
  • Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.18
  • Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.27; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $16.27

Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1st Alert. 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: $17.52; stop-loss: $34.62
  • JDST ETF: initial target price: $154.97 stop-loss: $35.87

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

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.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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