Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert. We are moving the stop-loss for silver 20 cents higher.
In yesterday's analysis, we wrote that based on the short-term zigzag, we could see some more upside in gold in the short run. And we did. Gold just moved higher and it even managed to break above the previous highs. But the other thing - the more important one - that we also wrote yesterday, remains up-to-date as well. In addition to the above, we have prepared more details giving additional guidance. The key detail is how high gold is likely to go and what's likely to happen next in silver, and mining stocks.
Let's start with two long-term gold charts.
Gold's Hurdles - Just Ahead
In yesterday's analysis, we commented on it, in the following way:
Another way to draw zigzag patterns is to check the size of one price move and copy it to the starting point of a different move. The moves that are similar in terms of size, can be viewed as a zigzag.
The move that we saw in 2016 was big and it was followed by a decline that was almost just as big. The late-2016 bottom was the start of another rally. In a way, this rally ended in 2017, but taking a broader point of view shows that one might view the most recent upswing in gold as the (likely final) part of the move that started back then.
The 2016 rally and the late-2016 - August 2019 upswings are almost identical in terms of size. This means that they create a very long-term zigzag and this has important consequences since zigzags are a form of consolidation and are likely to be followed by the price moves that are similar to the ones that preceded them. And what preceded the late-2015 - now zigzag? The approximately $900 decline in gold. While we don't expect gold to decline by $900, a massive decline in gold's price does appear to be in the cards.
There's one more thing that we would like to discuss - the weekly volume that we just saw. It was the highest weekly volume ever recorded in gold. This shows how red-hot the gold market has just become. That may seem bullish, but it's very far from it.
The above shows great excitement about the gold price moves and it is exactly when the excitement reaches the zenith that that major price tops are formed. That's the theory. And what about practice? The red vertical lines show cases when we saw massive spikes in gold's volume. In almost all cases gold formed major tops and declined in the following weeks and months.
The volume increases over time and that's what the rising blue line shows. We created it based on the 2008 volume high and the 2011 volume high. This line was broken to the upside only in early 2018 and right now. The previous case marked a major top in gold and we can expect the same thing right now.
Of course, with conflicting zigzag implications it's easy to get lost. Which signs should one trust and which should one view as temporary? In general, the more long-term signal is, the more important it is and the more profound its implications are. However, the very short-term indications may drive the price in the very short- term (in the matter of hours, for instance). This means that while the shape of today's session is not clear, we should expect to see much lower gold, silver, and mining stocks prices in the following weeks.
Now, the thing that we would like to add today is the fact that the strong resistance is provided by the 2011 and 2012 lows. Gold stopped after moving approximately to the lowest of these lows, but it doesn't mean that it can't move to the higher, or the highest one. This highest resistance is based on the September 2011 low and it's precisely $1,535.
Keeping the above in mind, let's take a look at another long-term gold chart. The chart below is based on the daily price changes.
It is rare that long-term charts are created using daily price moves, as they make the chart relatively less clear than when the weekly or monthly price changes are used. However, there is a very good reason to do it. This reason is the price gap that we saw in April 2013, when gold was plunging. Price gap means that there was no trading at a given price as there were no price takers. This means that since nobody bought or sold at these prices, it's unlikely that there will be any resistance until the price reaches the gap's upper border.
The upper border of the price gap is at $1,539.40.
So, we have two very strong upside targets based on long-term resistance levels: $1,535, and $1,539.40.
And what is gold doing in today's pre-market trading?
Gold futures just moved to $1,543.10 in today's pre-market trading, which means that they moved insignificantly above the price-gap-based resistance.
This is remarkable, because these resistance levels are extremely strong, the RSI indicator shows extremely overbought conditions, while we have bullish set-up in the USD Index, and topping confirmations from silver and mining stocks.
Indications of a Top at Hand
How did silver indicate it? By outperforming on a very short-term basis. The white metal moved even higher on a relative basis than gold did (gold is up by 1.3% while silver is up by about 2%). Silver tends to outperform very close to the top and right before the biggest declines.
How did mining stocks indicate the top? By underperforming yesterday. Both: gold, and silver, ended yesterday's session higher, but gold miners didn't.
After forming the bearish shooting star reversal, mining stocks started to underperform on a short-term basis, and yesterday's session made this tendency crystal clear. Gold was up by about 0.6%, and yet the HUI Index, proxy for gold stocks was down by 1.21%. And that was the lowest daily close in several days - it was lower than the August 5 close and it was the third lowest close in August.
Summing up, gold moved higher as we wrote about opening the short positions in gold, silver, and mining stocks based on gold reaching $1,519 without any other conditions, but based on silver's and miners' movement, we see that this was most likely a good decision. From the long-term point of view, it appears that the recent gold upswing was fake and that the next big move will be to the downside, just as other parts of the precious metals market suggest. The big picture of silver and mining stocks, key precious metals ratios that we covered last week, and the USD Index all point to much lower precious metals prices in the following months. Based on how silver and mining stocks moved yesterday and in today's pre-market trading, we also have the very short-term confirmation of the bearish scenario.
On a trading note, we are moving the stop-loss for silver 20 cents higher, so that it corresponds to the analogous level for gold that's set about $10 above the upper border of the price gap that we described in today's Alert.
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 exit profit-take price levels:
- Gold: profit-take exit price: $1,241; stop-loss: $1,552; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $25.37
- Silver: profit-take exit price: $13.81; stop-loss: $17.73; initial target price for the DSLV ETN: $39.08; stop-loss for the DSLV ETN $18.27
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $17.61; stop-loss: $33.37; initial target price for the DUST ETF: $32.28; stop-loss for the DUST ETF $5.78
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: $23.71; stop-loss: $48.42
- JDST ETF: profit-take exit price: $73.32 stop-loss: $9.67
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 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.
Latest Free Trading Alerts:
It appears that the two steps forward, one step backwards approach of mainland China isn't working as Hong Kong citizens are protesting again. The increasingly violent protests have plunged Chinese-ruled Hong Kong into its most serious crisis in decades, and the situation appears to be getting worse every week. What does it imply for the gold market?
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager