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 point of view at the moment of publishing this Alert.
Do you remember about platinum? You know, the other white metal that has fallen behind gold and that is being outperformed by its smaller (?) brother - palladium. Platinum is special because it's the weakest part of the precious metals sector. And the weakest part of a given market tends to act quite specifically at tops, so it's analysis could be particularly useful at times. Especially at times like this, because it appears that the next local top is just around the corner, or that it's already in.
By "acting specifically" we mean that it catches up with the rest of the market and does so with exceptional strength. This is most likely due to inexperienced investors entering the market close to the top. They are likely to buy whatever seems cheap regardless of its fundamental situation - after all, there might be a good reason why it's cheap. In case of platinum, it's the decline in the use of diesel engines, which means lower demand for platinum as it is used in catalysts of diesel-powered cars.
Platinum's Attempts to Rally
In the last several months we saw two major short-term upswings in platinum price and now we see the third one. Both previous cases were platinum's attempts to break above the declining red resistance line and they both failed. In both cases, the volume was relatively big, but it was much bigger in the first case.
How did gold, silver and miners respond? With declines. The times when platinum showed exceptional short-term strength were good times to prepare for lower prices. The situation when platinum rallied on huge volume was the situation when the top in gold was most profound - that was THE 2019 top (most likely as the year is not over yet). That's important, because the volume was very big once again this time. This increases the odds that the precious metals market is forming a short-term top right now and that the next short-term move will be to the downside.
As we explained yesterday, the silver chart fully supports the bearish outcome as far as the next 1-2 weeks are concerned:
First of all, silver broke below the rising support line that's based on 4 lows - the May low and three November lows. The white metal didn't manage to break back above this line, which means that the decline is likely to continue.
Having said that, let's focus on the three characteristics of a decline: its starting point, its ending point, and its shape.
The starting point is likely to take place early this week, perhaps even today. How do we know that it's likely? Because of the triangle-vertex-based turning point that's just around the corner. This technique proved to be useful many times in many parts of the precious metals market, also in silver when it reversed earlier this month. So, the next silver slide is likely just around the corner.
The ending point could be marked by the second triangle-vertex-based reversal happening right before Christmas that we see on the chart. These reversals could work on a near-to basis, so let's say that the next week or the final week of the year are likely to include the next major reversal. That's in tune with reversals on other charts, including gold's long-term chart.
This doesn't leave much time for the decline to take place, but... that's where point number 3 comes in. The shape of the decline. Silver is known for (at least it should be known for) its fake breakouts and volatile declines. The latter means that seeing a quick decline shortly would not only not be odd - it would actually be in tune with the way silver declined previously. The September decline, the November decline, even the early-December decline - they all happened fast. Silver dropped decisively and quickly. As history tends to rhyme, it seems that we might see yet another show of silver's bearish volatility shortly.
Our yesterday's comments on gold remain up-to-date as well:
The Gold Update
Gold hasn't done anything to invalidate the previously bearish outlook. In terms of the closing prices, gold topped on December 3, which is when we took profits from our previous long position. It hasn't closed higher ever since, even though it had a very good reason to. Namely, the USD Index declined profoundly since that time.
The context is always the king and this time, the action in the USD Index completely changes the implications of gold's sideways trading. If the USDX was rallying and gold was refusing to decline, it would have been bullish. But that's not what has been taking place. Gold has been reported to consistently refuse to soar despite sliding USD. That's profoundly bearish for the short term.
The thing that we would like to add today, is that on Friday and yesterday gold closed at the declining resistance line, which is based on the previous highs in terms of the closing prices. In other words, the resistance was reached. And gold reached it relatively close to the moment when the USD Index declined to our downside target area.
Turning to the USD Index
The red ellipse that we've been featuring on the above chart was reached. In particular, the USDX moved to its mid-July low and then reversed. It could move lower, to the rising medium-term support line, but it could be the case that the bottom is already in. The latter is more likely as yesterday we saw an invalidation of another attempt to break lower.
The mining stocks provide us with yet another confirmation. This comes in addition to the confirmation that we described yesterday, but since the implications of the low volume remain up-to-date it seems to be a good idea to quote yesterday's analysis:
The Miners Agree
This confirmation comes from the volume. It was extremely low. In general, whenever something rises on very low volume, it's actually a bearish sign, because it shows that the market doesn't really support this kind of move, and is rather forced to react in a given way. In case of mining stocks, it was probably a reaction to a sharp slide in the USD Index and a new high in the general stock market.
We haven't seen volume this low in months. The last time when the GDX moved higher on a similarly low volume, was in late July. And what happened immediately thereafter? Miners plunged. Yes, they came back shortly thereafter, but the immediate reaction was very negative. This perfectly fits the implications of gold and silver charts.
The thing that we would like to add today is a note about miners' relative performance. They were acting relatively strong in previous days, but the opposite was the case yesterday. Gold closed the day relatively unchanged, and miners declined over 1%.
The target area that we created several weeks ago for the GDX to GLD ratio was reached once again. The ratio between the miners and gold moved to its 61.8% Fibonacci retracement (the upper part of our target area) and then moved lower again. Yesterday's close was the lowest level at which this ratio closed in December. So far, the entire December has been a one big bearish reversal for the ratio.
This is a bearish sign for the short term. That supports what other charts had already been indicating. Precious metals are likely to move lower in the next 1-2 weeks.
Finally, we would like to tell you that the next very short-term triangle-vertex-based reversal is about 5 hours away (the above chart is based on hourly candlesticks), so even though we might see some quick strength here, gold might reverse and top later today. This could be the start of the above-mentioned 1-2 week decline.
Naturally, the numerous other factors that we discussed previously continue to support lower precious metals prices in the following months. If you haven't read these analyses - especially the ones from the "critical" section, we strongly encourage you to do so. These are not quick reads, but they are really well worth the time spent reading them.
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, platinum's strength along with miners' weakness serve as great confirmations of the bearish signs from gold and the bottoming USD Index. The outlook for the precious metals sector remains bearish for the next 1-2 weeks. It's quite likely (no promises, though, as it depends on what the market does) that we're going to take (partial or complete) profits from the current short position this month. We might also reverse the position, but - as above - it's too early to say with certainty at this time. For now, it seems that the USDX is about to rally and the PMs are about to slide.
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 binding exit profit-take price levels:
- Gold futures: profit-take exit price: $1,391; stop-loss: $1,573; initial target price for the DGLD ETN: $36.37; stop-loss for the DGLD ETN: $25.44
- Silver futures: profit-take exit price: $15.11; stop-loss: $19.06; initial target price for the DSLV ETN: $24.88; stop-loss for the DSLV ETN: $14.07
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $23.21; stop-loss: $30.11; initial target price for the DUST ETF: $14.69; stop-loss for the DUST ETF $6.08
In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:
- GDXJ ETF: profit-take exit price: $30.32; stop-loss: $44.22
- JDST ETF: profit-take exit price: $35.88 stop-loss: $11.68
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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China and the U.S. have reached a preliminary agreement, which softens their trade war, while the landslide victory of Conservative Party in the UK parliamentary elections clears the path to Brexit. Given that downside risks for the global economy are now significantly lower, how much do investors still need gold?
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager