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przemyslaw-radomski

Precious Metals: All It Takes Is a Bearish Spark

November 20, 2020, 9:18 AM Przemysław Radomski , CFA

Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

Today’s analysis is going to be very brief, since during yesterday’s session we simply saw a repeat of the same bearish indications, on which I had already commented a few times. Practically everything that I have written yesterday (Nov 19th) remains up-to-date.

Despite its early gains, the U.S. Dollar Index ended yesterday’s session slightly lower. If gold wanted to rally from here, it would have done exactly that. What did it do? It declined, and the same went for silver and mining stocks.

The miners could have rallied based on the small daily upswing in the general stock market, but they didn’t.

The above, plus multiple other reasons that I outlined throughout the week suggest that the precious metals sector is about to slide. All it takes is a bearish spark. And based on the broad bottom in the USD Index (and the fact that the sentiment for it is extremely bearish right now), it seems that the PMs are going to get it sooner or later.

Based on the analysis of the current seasonal tendencies, it seems that we won’t have to wait for long either. Gold tends to slide around Thanksgiving, and while a decline usually takes place shortly thereafter, we can’t rule one out beforehand.

If we were to pick one specific scenario, we’d say that the big slide will start immediately after or shortly after Thanksgiving, but given the likely prospect of that happening earlier, we don’t suggest adjusting the current short positions anyway.

As always, we’ll keep our subscribers updated.

Letters to the Editor

Q: In your summary of your Gold alert you state that when the price of Gold falls below $1700 it will rebound. It’s not clear to me if that should be the final bottom or after a rebound the final bottom will follow in 1-6 weeks?

Also, do you see an approximate bottom for silver?

A: It seems most likely that this would be the final bottom. I wouldn’t rule out a bigger slide, say to $1,600 or even $1,500 during the volatile decline (remember, gold just declined about $100 on Nov 9, so it’s definitely capable of moving in a volatile manner), but I think that once this bottom is in, a new powerful bull market will start.

Again, it is not the price level per se that will be most important. The key thing will be to see gold being able to recover (and perhaps rally) despite a continuation of the rally in the USD Index – just like what we saw during the March 2020 bottom.

As far as silver is concerned, the downside target is even less clear. It could bottom between $11 and $19, which is an extremely wide target area. If the general stock market plunges, the $15 and below becomes likely. If the general stock market holds up strongly, the $19 and its proximity become the more likely target. Either way, once miners show strength relative to gold and gold shows strength relative to the USD Index, we’ll likely have a tremendous buying opportunity in gold, silver, and mining stocks, regardless of where silver is going to trade. For now, we see exactly the opposite, and – in my opinion – the great trading opportunity is on the short side.

The price targets for silver should become clearer once we move closer to them and we’ll keep our subscribers updated.

Overview of the Upcoming Decline

As far as the current overview of the upcoming decline is concerned, I think it has already begun.

During the final part of the slide (which could end later than in 6 weeks, perhaps near the end of the year – just like it happened in 2015), we expect silver to decline more than miners. That would align with how the markets initially reacted to the Covid-19 threat.

The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is incredibly positive in the long run, which does not make the short-term decline improbable. Markets can and will get ahead of themselves and decline afterward – sometimes very profoundly – before continuing with their upward climb.

The plan is to exit the current short positions in miners after they decline far and fast, but at the same time, silver drops just “significantly” (we expect this to happen in 0 – 5 weeks). In other words, the decline in silver should be severe, but the decline in the miners should look “ridiculous”. That’s what we did in March when we bought practically right at the bottom. It is a soft, but at the same time, a broad instruction, so additional confirmations are necessary.

I expect this confirmation to come from gold, reaching about $1,800. If – at the same time – gold moves to about $1,800 and miners are already after a ridiculously big drop (say, to $31 - $32 in the GDX ETF – or lower), we will probably exit the short positions in the miners and at the same time enter short positions in silver. It will be tempting to wait with opening the short position in silver until the entire sector rebounds, but such a rebound could last only a couple of hours, so it would be challenging to successfully execute such a strategy.

The precious metals market's final bottom is likely to take shape when gold shows significant strength relative to the USD Index. It could take the form of a gold’s rally or a bullish reversal, despite the ongoing USD Index rally.

Summary

Summing up, the next big move in the precious metals market is likely to be to the downside and – given the decrease in political uncertainty as well as previous Monday’s slide in gold, silver, and mining stocks – it seems that this move lower has already begun. The very weak performance of mining stocks in recent days confirms it.

As the USD Index appears to have ended forming its broad bottom pattern, it’s likely to rally, causing gold to slide. At some point gold is likely to stop responding to dollar’s bearish indications, and based on the above analysis, it seems that we might expect this to take place in December.

Naturally, everyone's trading is their responsibility. But in our opinion, if there ever was a time to either enter a short position in the miners or increase its size if it was not already sizable, it's now. We made money on the March decline, and on the March rebound, with another massive slide already underway. 

After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-6 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely earn much more in the following weeks and months), but you have to be healthy to enjoy the results.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:

Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $32.02; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $28.73; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $42.72; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $21.22; stop-loss for the JDST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway. In our view, silver has greater potential than gold does):

Silver futures downside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.

Gold futures downside profit-take exit price: $1,703

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

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 we describe the situation for the day that the alert is posted in the trading section. In other words, if 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 to decide whether keeping a position on a given day is in tune with your approach (some moves are too small for medium-term traders, and some might appear too big for day-traders).

Additionally, 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 daily 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. Furthermore, 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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