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przemyslaw-radomski

Silver and Gold Fireworks to Come - Or Already Here?

January 27, 2020, 9:32 AM Przemysław Radomski , CFA

Briefly: in our opinion, full speculative long position in silver is justified from the risk/reward point of view at the moment of publishing this Alert.

Welcome to this week's flagship Gold & Silver Trading Alert. As we promised you previously, in our flagship Alerts, we will be providing you with bigger, more complex analyses (approximately once per week) and it will usually take place on Monday.

The most important analogies and long-term trends didn't change during the previous week and most of our previous extensive comments remain up-to-date. Of course, in today's analysis, we will update whatever needs to be updated or added. The thing that we will expand in today's analysis will be the analysis of platinum and palladium. Both caught the spotlight with their recent upswings, and we received a request from one of our subscribers to cover them. We will not only discuss their price moves per se, but also their ratios with gold as they have some interesting implications. We'll analyze these issues and many more.

Let's start with a quote: Legendary investor Paul Tudor Jones says market today is like early '99, driven by 'insane monetary policy'. 'We're just in the craziest monetary-fiscal [policy] mix in history. It's so explosive, it defies imagination. It reminds me a lot of early '99 [when inflation was low and stock markets were soaring]. The difference is the fed funds rate was 4.75% -- today it's 1.62%. Then we had a budget surplus, today we have a 5% deficit -- you can't make it up. ... It's crazy times.'

You can read the full text over here, but the key message is featured above. The situation is somewhat similar to early 1999. Does this ring any bells? It definitely should, because that's when the precious metals market was about to form THE bottom. Gold bottomed in late 1999 and then again in early 2001. Gold miners bottomed in late 2000, and silver bottomed in late 2001. No matter which of precious metals sector's key parts one decides to look at, the early 1999 was the calm before the bearish storm.

Also, the early 1999 was the time when the USD Index bottomed at about 94 and then soared to above 120 just a 2.5 years later. By the mid-1999, the USDX was already above 104. The ten index point rally from here would be huge and devastating for the precious metals.

We've been writing for a long time that the USD Index's upside potential remains to be the key thing that the vast majority of analysts and investors are overlooking. People are quite often up-to-date with technical factors that relate the recent days and weeks, but are quite often ignorant with regard to the really massive, long-term moves. It's like looking at the nice small waves that gently touch the shells on the beach, while missing the huge tsunami wave in the background. That's why we're going over the same very long-term factors each week - to make sure that everyone is up-to-date and has these key factors in mind while making investment decisions. Let's look into the key long-term factors once again.

Before moving to technical price charts, we would like to remind you that this year is the final year of the U.S. Presidential cycle and that's the weakest year for silver and mining stocks. This doesn't change anything regarding the short-term price moves, but it is something that will likely have an impact throughout the year.

Assets' Returns and Presidential Cycle

Average annual return of S&P (1948-2015, green line), gold (London P.M. Fix, 1972-2015, yellow line), silver (London Fix, 1972-2015, blue line), XAU Index (1984-2015, purple line) and HUI Index (1997-2015, red line) in presidential election cycles.

Gold's performance is more or less average in the election year, but in case of silver and mining stocks we see something very different. Namely, the election year is the only year when - on average - they all decline.

So, does it mean that gold won't be affected by this specific cyclicality, but silver and miners will be? Not really. It seems that the above chart shows that silver and miners - on average - lead gold lower. They perform worst in the election year and the yellow metal is the worst choice in the following year - the first year of presidency.

Silver and miners have already been performing very poorly relative to gold if we look at the long-term charts. Did silver or miners exceed their 2016 highs? They are not even close, especially silver. So, it seems that the pattern that we should be seeing at this time of the U.S. Presidential cycle, is already here and it started a bit earlier.

This means two things: even more weakness in silver and miners that we saw, and gold catching up with the decline.

The fundamental background is one thing, but the technical details are another. They provide details and insights that are impossible to get by just analyzing the news. Let's see how much the recent strength in gold changed the technical picture, and what's going on in the most important - long-term - charts featuring gold and the related markets.

The most important point that remains intact (and unaffected by what happened in the past week) is that the USD Index is after a massive breakout that was already verified more than once. The connection with the gold market remains intact as well.

The Big Picture View of the USD Index

(please click on the charts to enlarge them)

The 2014-2015 rally caused the USD Index to break above the declining very-long-term resistance line, which was verified as support three times. This is a textbook example of a breakout and we can't stress enough how important it is.

The most notable verification was the final one that we saw in 2018. Since the 2018 bottom, the USD Index is moving higher and the consolidation that it's been in for about a year now is just a pause after the very initial part of the likely massive rally that's coming.

If even the Fed and the U.S. President can't make the USD Index decline for long, just imagine how powerful the bulls really are here. The rally is likely to be huge and the short-term (here: several-month long) consolidation may already be over.

There are two cases on the above chart when the USD Index was just starting its massive rallies: in the early 1980s and in mid-90s. What happened in gold at that time?

Gold Performance When the USD Index Soars

These were the starting points of gold's most important declines of the past decades. The second example is much more in tune with the current situation as that's when gold was after years of prolonged consolidation. The early 1980s better compare to what happened after the 2011 top.

Please note that just as what we saw earlier this year, gold initially showed some strength - in February 1996 - by rallying a bit above the previous highs. The USD Index bottomed in April 1995, so there was almost a yearly delay in gold's reaction. But in the end, the USD - gold relationship worked as expected anyway.

The USD's most recent long-term bottom formed in February 2018 and gold seems to have topped right now. This time, it's a bit more than a year of delay, but it's unreasonable to expect just one situation to be repeated to the letter given different economic and geopolitical environments. The situations are not likely to be identical, but they are likely to be similar - and they indeed are.

What happened after the February 1995 top? Gold declined and kept on declining until reaching the final bottom. Only after this bottom was reached, a new powerful bull market started.

Please note that the pace at which gold declined initially after the top - in the first few months - was nothing to call home about. However, after the initial few months, gold's decline visibly accelerated.

Let's compare the sizes of the rallies in the USDX and declines in gold. In the early 80s, the USDX has almost doubled in value, while gold's value was divided by the factor of 3. In the mid-90s, the USDX rallied by about 50% from its lows, while gold's value was divided by almost 1.7. Gold magnified what happened in the USD Index in both cases, if we take into account the starting and ending points of the price moves.

However, one can't forget that the price moves in USD and in gold started at different times - especially in the mid-90s! The USDX bottomed sooner, which means that when gold was topping, the USDX was already after a part of its rally. Consequently, when gold actually declined, it declined based on only part of the slide in the USDX.

So, in order to estimate the real leverage, it would be more appropriate to calculate it in the following way:

  • Gold's weekly close at the first week of February 1996: $417.70
  • USDX's weekly close at the first week of February 1996: 86.97
  • Gold's weekly close at the third week of July 1999: $254.50
  • USDX's weekly close at the third week of July 1999: 103.88

The USD Index gained 19.44%

Gold lost 39.07% (which means that it would need to gain 64.13% to get back to the $417.70).

Depending on how one looks at it, gold actually multiplied USD's moves 2-3 times during the mid-90 decline.

And in the early 1980s?

  • Gold's weekly close at the third week of January 1980: $845
  • USDX's weekly close at the third week of January 1980: 85.45
  • Gold's weekly close at the third week of June 1982: $308.50
  • USDX's weekly close at the third week of June 1982: 119.01

The USD Index gained 39.27%

Gold lost 63.49% (which means that it would need to gain 173.91% to get back to $845).

Depending on how one looks at it, gold actually multiplied USD's moves by 1.6 - 4.4 times during the early-80 decline.

This means that just because one is not using U.S. dollars as their primary currency, it doesn't result in being safe from gold's declines that are accompanied by USD's big upswings.

In other words, the USD Index is likely to soar, but - during its decline - gold is likely to drop even more than the USD is going to rally, thus falling in terms of many currencies, not just the U.S. dollar.

Please note that there were wars, conflicts and tensions between 1980 and 2000. And the key rule still applied. Huge rallies in the USD Index mean huge declines in gold. If not immediately, then eventually.

Having covered the most important factor for the USD Index and gold, let's take a look at the other - also important - factors influencing both of these markets.

More on the USD Index and Gold

The USD Index is moving up in a rising trend channel (all medium-term highs are higher than the preceding ones) that formed after the index ended a very sharp rally. This means that the price movement within the rising trend channel is actually a running correction, which is the most bullish type of correction out there. If a market declines a lot after rallying, it means that the bears are strong. If it declines a little, it means that bears are only moderately strong. If the price moves sideways instead of declining, it means that the bears are weak. And the USD Index didn't even manage to move sideways. The bears are so weak, and the bulls are so strong that the only thing that the USD Index managed to do despite Fed's very dovish turn and Trump's calls for lower USD, is to still rally, but at a slower pace.

The temporary breakdown below the rising blue support line was invalidated. That's a technical sign that a medium-term bottom is already in.

Now, as far as the short-term outlook for the USD Index is concerned, the situation is still relatively unclear. We previously wrote that it was about "time" for the USD Index to correct based on the lengths of the previous post-bottom rallies. Before taking its first breather, the USDX used to rally for about 2 weeks and applying the same to the recent bottom implied some sort of pullback.

What makes the situation unclear is the fact that we already saw "some sort of pullback". It was not as big as the previous pullbacks, but it was definitely present. So, at this time it's not clear if the bigger pullback is still just around the corner, or if it had already taken place.

Of course, there's more to the precious metals market than just the USD Index, and the PMs did move higher as we had indicated based on their own signals - short-term strength in the miners and gold's daily reversal.

What can we tell about the following days in the PMs based on what the USDX is doing? If the USD Index does correct, the PMs are likely to rally once again for a few days. If the USD Index continues to rally, the PMs are likely to decline, but not necessarily right away. After all, gold was able to hold up relatively well despite USD's comeback to the mid-December high and the PMs were able to rally in the recent days despite USD's short-term strength.

This means that even if the USDX's pullback is already over, we are still likely a day or a few days away from the PMs short-term outlook becoming very bearish. Depending on what the USDX does and how gold reacts to it, we'll most likely get either confirmations that the local top in the PMs is already in (but without a major decline initially) or that several days of higher prices are still ahead.

On one hand, based on the gold-USD link, it seems that we should wait for the USD Index to correct before exiting the long position in silver. After all, the PMs were able to rally without USD's help, which means that when they finally receive this help, they are likely to spike even higher.

On the other hand, if the positive USD-PMs link persists, perhaps they could both top at the same time. This could take place if the reason behind the current simultaneous rally in USD and PMs are the worries regarding the coronavirus spreading in China. Once the situation is under control, the safe-haven demand for both: USD and PMs is likely to decline.

All in all, it seems best to focus on the technical factors present in the PMs rather than on their link with the USDX. Of course, this relates to the next several days - few weeks only. In the medium- and long term, PMs are still likely to move in the opposite direction to the USD Index.

Gold Seasonality Lessons

Having said that, let's take a look at the current seasonality in gold. In short, it's positive at its face value, and it's neutral once one considers the likelihood of USD Index's upswing.

As a reminder, our True Seasonal gold charts are an improved version of the regular seasonality, as they additionally estimate also the Accuracy and they are based not only on the plain seasonality, but also on the way gold price tends to move around the options expiration dates (they don't take place at exactly the same day each month, so the regular seasonality ignores this effect).

The option expiration effect is not huge in case of the yellow metal; it's more significant in case of silver. Also, this effect is not very visible in case of yearly charts, such as the one that we present below, but it becomes more useful in case of the quarterly charts that we also feature from time to time (and which you can access on your own over here). You can read more details about this effect in this report (note: the pdf file is quite heavy, so it may take a while to load).

At the beginning of the year, gold tends to rally while the USD's performance varies in January (while the USDX soars in early February).

This year gold corrected after moving higher, but so far the month is still up. If the USD Index rallies sharply at the beginning of February, gold would likely react with a decline unless it proves that it's able to withstand USD's impact like it did last week.

Last week's move higher in gold despite the lack of big decline in the USDX is bullish for the very short term, but it doesn't tell us much with regard to the next few weeks. Whatever bullish action is likely to happen in gold, could simply happen before the end of January, and then gold could once again react to USD's strength in a regular way - by declining.

Still, based on the worries regarding the coronavirus, the strength of the above seasonal gold-USD analysis is currently limited and should be treated as background info only. The following sections will provide more accurate short-term indications.

Retracements, Reversals and Gold

Naturally, there are many other things that need to be taken into account while analyzing the market other than just the USD Index and gold's seasonality. For instance, the analogy in terms of the previous long-term retracements within big declines. In particular, the declines that we saw in 2008 and between 2011 and 2015.

The markets have fractal nature, meaning that the price patterns that we see in one timeframe, can also apply on a different scale, with proportionate implications. For instance, silver's tendency to outperform gold at the end of a bigger move higher - it takes place on a small scale in case of local rallies, and it's more visible in case of more medium-term moves.

In case of gold's long-term chart, the Fibonacci retracements are the thing that likely applies on a different scale right now. In today's second fundamental point, we explained why certain patterns repeat themselves despite taking place at entirely different times and under different circumstances. The Fibonacci retracements are one of the patterns that keeps on emerging in many markets, including gold. The 61.8% Fibonacci retracement is the most classic one.

In both previous cases (the 2011-2015 and 2008 declines), gold declined initially after the top (March 17, 2008, September 6, 2011) and then corrected a bit more than 61.8% of the decline before forming the final short-term top (July 15, 2008, October 5, 2012) from which the biggest declines started. The 2016 decline was also preceded by a sharp rally and it was also characterized by a temporary move back up - slightly above the 61.8% Fibonacci retracement - before the main part of the slide.

Now gold also moved to the 61.8% Fibonacci retracement level (precisely, it tried to move above it and managed to do so only very temporarily), but to one of much bigger meaning.

The 61.8% Fibonacci retracement that's based on the entire 2011 - 2015 decline is $1,588. That was the initial high in gold. It was the high that gold failed to break above.

Many people - especially those selling gold - will want to tell you that gold has been in a huge rally since late 2015. In reality, however, gold remains in a corrective mode after declining from 2011. And if you don't want to trust gold's classic retracement tool, maybe you'll trust silver or gold stocks.

Silver is mere $4 above its 2015 bottom. That's about $32 below the 2011 high. Big rally in the precious metals sector? What big rally? It's only gold that's been showing significant strength and taking a closer look reveals that it just corrected (!) 61.8% of the previous decline. It's relatively common for markets to retrace this amount before the previous trend resumes.

And gold miners? The HUI Index is about 400 index points below its 2011 high and only about 140 index points above the 2016 low.

That's a correction, not a new powerful rally. We will see one, but this is not the real deal just yet.

And speaking of major gold moves, please note how perfectly the long-term triangle-vertex-based reversals in gold worked.

Gold was very likely to reverse, and it did exactly that, just like we had written earlier.

Reversals should be confirmed by big volume and the volume on which gold reversed was truly epic, which is a perfect bearish confirmation. It was the biggest weekly gold volume EVER.

We already wrote a lot today about gold and we will write even more, also about silver and miners. We will cover multiple signs that point to lower precious metals prices in the following weeks and months (not days, though). But, the record-breaking-volume reversal is alone enough to make the outlook bearish. That's how significant this reversal-volume combination is.

In addition to the above, the above chart shows the next medium-term target for gold - at about $1,400 level. This target is based on the mid-2013 high in weekly closing prices, the 38.2% Fibonacci retracement based on the 2015 - 2019 upswing, and the rising medium-term support line. Of course, that's just the initial target, gold is likely to decline more after pausing close to $1,400.

Since the triangle-vertex-based reversal technique worked so well recently, let's check what else it can tell us. The below charts feature the reversal points based on the very long-term triangles.

Gold seems to have reversed (a short-term bottom) close to its reversal date and the next one is at the beginning of March.

In case of gold stocks, we also saw a short-term bottom at the reversal date and the next one is due early February.

Please note that the lack of the reversal points doesn't mean that there will be no reversals - this technique is neutral in this case.

The implications are that the beginning of February and the beginning of March are likely to include some kind of reversal. If gold moves higher from here and the USD Index corrects lower, the PMs would be likely to top in the first days of February.

Before moving to silver, we would like to bring your attention to the key technical development of this year - the record-breaking volume in gold. In particular, we would like to tell you what gold did after it topped on extreme volume in the previous cases. The three very similar cases volume-wise and volatility-wise are the September 2008 top, the 2011 top, and the early 2018 top. How did gold perform immediately after the tops?

In all three cases, gold topped on huge volume, but the decline didn't proceed immediately. There was a delay in all cases and a re-test of the previous high. The delay took between several days and a few months.

Since a similar pattern followed the huge-volume tops, it seems that we might see a re-test of the recent high in the near future. Don't get us wrong - the true rally has most likely ended, but we might see a move close to the January high, a move to it, or even a move that gets gold very insignificantly above it. That's when people bought gold at the top in 2008, 2011, and 2018, and we don't want you to fall for this market trick. Knowing what happened then - huge declines in the price of gold - should prevent you from buying on hope for a breakout to new highs. Oh, and by huge declines, we mean the ones where gold declined by hundreds of dollars.

Based on the triangle-vertex-based reversals, it seems that we won't have to wait as long as a few months, but a rally until the end of the month is quite possible.

Let's take a look at gold's sister metal - silver. There are no upcoming long-term reversals for silver based on the triangle-vertex technique for silver, but there are other points worth keeping on one's mind.

Silver Shares Its Two Cents

The key analogy in silver (in addition to the situation being similar to mid-90s) continues to be the one between 2008 and the 2016 - now periods.

There is no meaningful link in case of time, or shape of the price moves, but if we consider the starting and ending points of the price moves that we saw in both cases, the link becomes obvious and very important. And as we explained in the opening part of today's analysis, price patterns tend to repeat themselves to a considerable extent. Sometimes directly, and sometimes proportionately.

The rallies that led to the 2008 and 2016 tops started at about $14 and we marked them both with orange ellipses. Then both rallies ended at about $21. Then they both declined to about $16. Then they both rallied by about $3. The 2008 top was a bit higher as it started from a bit higher level. And it was from these tops (the mid-2008 top and the early 2017 top) that silver started its final decline.

In 2008, silver kept on declining until it moved below $9. Right now, silver's medium-term downtrend is still underway. If it's not clear that silver remains in a downtrend, please note that the bottoms that are analogous to bottoms that gold recently reached, are the ones from late 2011 - at about $27. Silver topped close to $20.

The white metal hasn't completed the decline below $9 yet, and at the same time it didn't move above $19 - $21, which would invalidate the analogy. This means that the decline below $10, perhaps even below $9 is still underway.

Naturally, the implications for the following months are bearish.

Let's consider one more similarity in the case of silver. The 2012 and the 2018 - today performance are relatively similar, and we marked them with red rectangles. They both started with a clear reversal and a steady decline. Then silver bottomed in a multi-bottom fashion, and rallied. This time, silver moved above its initial high, but the size of the rally that took it to the local top (green line) was practically identical as the one that we saw in the second half of 2012.

The decline that silver started in late 2012 was the biggest decline in many years, but in its early part it was not clear that it's a decline at all. Similarly to what we see now, silver moved back and forth with lower highs and lower lows, but people were quite optimistic overall, especially that they had previously seen silver at much higher prices (at about $50 and at about $20, respectively).

The 2012 corrective upswings were actually the final chances to exit long positions and enter short ones. It wasn't easy to do it back then just as it's not easy to do so right now. But the size of the decline that followed speaks for itself. In investing and trading, what's pleasant and what's profitable is rarely the same thing.

Silver's recent huge reversal confirms gold's reversal. Silver's volume didn't set a new record, but it was huge nonetheless. Definitely more than enough to make silver's reversal important and reliable. It's very bearish on its own and extremely bearish when examined together with gold's reversal.

On a short-term basis, we see that silver rallied shortly after we decided to go long (on January 22nd). As it is usually the case, silver is catching up in a profound way in the second half of the rally. This is not only profitable, it's also meaningful with regard to the change in positions. It seems that we should prepare for one... But we already are prepared. We have a binding exit profit-take order in place and once silver hits $18.49, the profits should be automatically taken off the table.

Why $18.49? Because while silver might briefly soar (almost) to its January high close to $19, it is much more likely to at least touch the very early January high that is just above $18.50. Since round numbers also tend to provide some resistance and support, we strategically place the profit-take level slightly below it - at $18.49. This way we are not trying to get out at the exact top, which is rarely possible. Instead, we are aiming to optimize the risk to reward ratio for this trade.

The saying goes that the last few cents of the trade are often most costly. Our goal here is to exit relatively close to the top, but when it's still very likely that the trade will be indeed realized.

Meanwhile, silver's relationship with gold continues to support medium-term downtrend in the precious metals sector.

In early July 2019, the gold to silver ratio topped after breaking above the previous highs and now it's after the verification of this breakout. Despite the sharp pullback, the ratio moved back below the 2008 high only very briefly. It stabilized above the 2008 high shortly thereafter and now it's moving slowly up once again. Well, slowly if you take the day-to-day price movement into account. In case of the long-term point of view, the strong uptrend simply resumed after a quick breather.

Anything after a breakout is vulnerable to a quick correction to the previously broken levels. On the other hand, anything after a breakout that was already confirmed, is ready to move higher and the risk of another corrective decline is much lower.

The most important thing about the gold and silver ratio chart to keep in mind is that it's after a breakout above the 2008 high and this breakout was already verified. This means that the ratio is likely to rally further. It's not likely to decline based on being "high" relative to its historical average. That's not how breakouts work.

Besides, the true, long-term resistance in the gold to silver ratio is at about 100 level. This level was not yet reached, which means that as long as the trend remains intact (and it does remain intact), the 100 level will continue to be the likely target.

Before moving to mining stocks, let's take a look at the little metals (the market sizes are really tiny) that made many headlines recently - platinum and palladium.

Palladium and Platinum - Fundamentally Speaking...

Let's start with the fundamental point of view and then we'll move to technical charts.

And fundamentally... If you thought gold had a good year, you were wrong. OK, maybe not wrong, but palladium enjoyed larger gains. Just look at the chart below, which shows the price of palladium. As you can see on the chart below, this metal gained almost 50 percent in 2019, rising from $1,270 to $1,900!

And if you thought gold started 2020 well, you were also wrong. OK, maybe not wrong, but palladium was the real star (although not as great a start as rhodium which has gone really supersonic recently). Let's look at the chart below once again - the white metal skyrocketed from $1,900 to almost $2,500 in January!

Actually, palladium has reached its record high, as the chart below shows. Compared with April 1990, when our data series starts, the price of palladium increased almost twenty times, from around $130 to almost $,2,500. It means that palladium is currently more expensive than gold or platinum!

Surprised? You shouldn't be! After all, we wrote as early as in July 2017 edition of the Market Overview that

the price of palladium should be supported in the near future. We know that the above-ground stocks of palladium are relatively plentiful (and may be greater than the market expects), but market deficits at such heights cannot last indefinitely - and when the market eventually tightens, prices will need to rise.

And in March 2019, we again commented on palladium, writing that it had better prospects than platinum:

the underlying structural deficit grew last year and, what is more important, is expected to widen in 2019, which will not be without significance for the price of palladium (...)

And given that the latter metal [palladium] has better fundamentals (platinum market is in structural surplus, while palladium market is in deficit), it still seems to be a better investment choice. Although it is true that the automotive demand for platinum should stabilize in the near future, and the rising price discrepancy should make platinum more attractive as catalyst, the autocatalyst producers say that they are not seeing broad-based substitution from palladium to platinum. Hence, the outlook for platinum improved, but the path for the palladium is still better.

It turned out that we were fundamentally right again. As we explained in the past, the underlying cause of the spectacular rise in the price of palladium boils down to the fact that demand has been greatly outpacing supply. And why have we seen structural deficits?

The first reason is the rise in the automotive demand for palladium due to the tighter emission legislation and stricter vehicle testing regimes. The key here is that palladium - in contrast to platinum used mainly in diesel engines which are out of favor - is used predominantly in in gasoline vehicles (and in hybrid electric vehicles, which tend to be partly gasoline-powered). Second, theSouth Africa's output of palladium has recently decreased due to power outages at local mines and tense political situation in this major producer of palladium.

Implications for the Future

What's next for the palladium market? Well, given that the palladium market is likely to remain in structural deficit, its price may go further north. However, the price chart of palladium looks parabolic, so - if history of parabolic price movements teaches us anything - it appears unsustainable. So, the correction is likely - actually, the price of palladium has already declined to $2,265 and the decline does not end at this level.

More generally, our intuition is that, at current prices, platinum might now be the better choice than palladium. This is because the big hit from the Volkswagen diesel scandal has been already absorbed in the platinum prices. And with palladium trading twice as more than platinum, the substitution should kick in, supporting platinum relative to palladium.

Let's look more into palladium's and platinum's technical situation.

Palladium Technical Examination

Palladium soared recently and last week's volume was - once again - exceptional. While the price move itself might or might not indicate anything special for the major parts of the precious metals market: gold, silver, and mining stocks, the volume reading does.

In 10 out of 12 previous cases when palladium rallied on a weekly basis and it happened on big volume, the implications were bearish for gold in the short run (not necessarily in the immediate term).

Given the pace at which palladium has been moving higher, RSI well above 70 and the big volume, the current situation is similar to what we saw in early 2019. Gold, silver, and mining stocks declined after the huge-volume week in palladium. After the daily volume spike in palladium, gold moved higher on the next day and then it started a short-term decline.

The problem here is that the volume was really "once again" huge. The problem stems from the sharpness of the recent rally and its parabolic nature. In these movements, it's easy to tell that the situation is extreme, but it's hard to tell when the move is really ending. The valuations are already ridiculous from the very short-term point of view and the volume was already extreme. However, how can one know that the valuations won't get more extreme in the next few days, or the volume doesn't become even bigger? That's what happened last week. We previously reported that the volume was huge - it was - but compared to what we saw previous week, it was nothing special. We can't rule out a situation in which the volume on which palladium moves this week, is even bigger.

So, while palladium seems to be topping here, it's unclear if it has indeed topped or that it will soar some more before finally sliding. The top is very likely close in terms of time, but it's not that clear in terms of price.

The implications here are bearish for the next week or two, but they are rather neutral for today and tomorrow.

And what can palladium's performance tell us if we compare it to the one of gold?

There was only one situation when palladium became more expensive than gold and the gold to palladium ratio fell below 1. Once that happened, the ratio then corrected for a few months and then declined to new lows. The same thing happened in the past months. The previous time when we saw that was... early 1999. Sounds like the quote from the initial part of today's Alert just got a confirmation.

The oversold status of the ratio - with RSI below 30 - suggests weakness in gold in the medium term. We marked similar cases on the above chart. And yes - the late-2012 top was also confirmed by this indication.

Having said that, let's move to platinum.

Checking on Platinum

On a short-term basis, we see that platinum is consolidating around the $1,000 level in a triangle fashion. The vertex of the triangle is likely to mark some kind of reversal and since platinum and palladium are relatively connected, perhaps that's when palladium is going to top - today or tomorrow.

This could imply a top in gold, silver and mining stocks as well, especially that it confirms the signals from the long-term based triangle reversals that we featured earlier today.

Platinum outperformed gold recently, which is usually a sign that a top is either in or just around the corner. As we already know, it wasn't in, and the "just around the corner" could be right now - today or tomorrow.

Why would palladium top at all? For instance, because of its unfavorable fundamental situation combined with the long-term downtrend in the platinum to gold ratio.

The have been a few unsuccessful attempts to break above the long-term downtrend, and since they all failed, it doesn't seem that this year's attempt would be any different. This is especially the case given the parabolic nature of palladium's rally. Once the parabola bursts, both: palladium and platinum are likely to decline.

Palladium would be likely to fall more than platinum as it seems very overvalued on a short-term basis.

Having said that, let's take a look at the situation in the mining stocks, starting with miners' flagship analogy.

Turning to Gold Miners

In case of gold stocks, we see that the history is repeating with an almost exact 20-year delay. This might sound crazy... Until you see the chart revealing how precise it is, and how well it fits to what happened now and in 2012 as well.

(as a reminder, clicking on the chart will expand it)

Let's start with something relatively more familiar - the Fibonacci retracements. Back in 2012, the HUI Index retraced almost 61.8% of the preceding rally before the decline continued. That was one of the reasons that we thought that the 2019 rally won't get much above this retracement, if at all. Indeed, the August breakout above this retracement was very short-lived. The current move higher took the HUI just a little above the August high and this move was already invalidated as gold miners declined this year. Right now miners are trying to stay above the 61.8% Fibonacci retracement once again, but given that silver is already outperforming, the odds are that the PM rally is ending. This means that miners are likely to decline below their 61.8% Fibonacci retracement relatively soon.

The important thing is that this is not the only time when this retracement stopped a sizable, yet counter-trend rally before a big decline.

The 1999 top formed almost exactly at the 61.8% Fibonacci retracement. That's one similarity between what happened recently and in 2012.

The second similarity is what's so exciting about this discovery. The length of the rally. All yellow rectangles on the above chart are identical. The 1998 - 1999, 2015 - 2016, and 2018 - 2019 rallies are identical in terms of time. Most importantly, the 1998 - 1999 and the 2018 - August 2019 upswings were almost identical in terms of both: time and price. And that's in addition to both rallies ending at the same Fibonacci retracement.

Let's re-state it again. Both rallies took practically the same amount of time, and the rallies were almost alike in terms of size - percentagewise.

The current move up is just a little above the August high and the breakout is not confirmed, which is why we don't yet view the current prices as the end of the rally. It's more of a double-top at this time. The rally seems to have ended in August and the only thing we see right now is a re-test of the same Fibonacci retracement.

The times of the year when the rally started and ended about 20 years ago are almost identical as well. The 1998 rally started right after the middle of the year and the same thing happened in 2018. The rally ended in the second part of 1999 and the same was / is the case right now. The month is not the same, but it's close nonetheless.

Based on the way in which the previous bear market in gold stocks ended, it seems that we have about a year of lower prices ahead of us and the HUI Index will decline at or a bit below the 80 level. That's in perfect tune with the upper one of the price target areas that we've been featuring on the above chart for some time now. The key of the additional trading techniques pointing to the 80 level or its proximity as the downside target are the early 1999, and 2011 tops as well as the early 2002 bottom, and the long-term declining support line based on the 2008 and 2016 lows.

The implications extend beyond just the final target - the analogy can tell us something important about the likely corrective upswings that we'll see along the way. Some of them will be relatively small, but there will also be those that are visible even from the long-term point of view, such as the one that we saw in early 2000.

How to detect them? Let's get back to the basics. When does a price rally, even though it remains in a downtrend? When it gets too low, too soon - at least in many cases. The key follow-up question is "too low compared to what?". And that's where the analogy to the 1999 - 2000 decline comes into play.

The purple line is the line that connects the start and the end of the 1999 - 2000 decline. The green line marks the start and the end of the 2012 - 2013 decline and the black one is based on the 2008 decline. There are two rules that we can detect based on these analogies.

First, the time after which we saw corrections during longer declines is similar to the times when the quicker decline ended. The end of the black line (early 2000) is also when we - approximately - saw the first big corrective upswing during the decline. Applying the same technique to the current top (of course, assuming that the top is being formed right now) provides us with early April 2020 as the likely bottoming target date. Naturally, it's likely to be just a short-term bottom that would be followed by a corrective upswing and then even lower prices.

Second, the chance of a corrective upswing and the chance that such upswing would be significant increases dramatically when price moves visibly below the dashed line. There are 3 dashed lines to choose from - each based on a different decline - so the question is which one should be used. It seems that the middle one is appropriate as it was most useful in 2000. The 2012-2013 decline took place mostly above the dashed line that connected its starting and ending point and it didn't have profound corrective upswings until it ended. What we saw 20 years ago, however, was very different. The price declined sharply initially, but then corrected a few times and the more price moved below the declining green dashed line, the bigger the corrective upswing was.

So, if the HUI moves visibly below the declining green dashed line, it will suggest that the miners got too low too fast and are likely to bounce back up sooner rather than later.

As far as the short term is concerned, we see that the HUI Index continues to move higher, but it does so below the rising support line that it had broken earlier this month.

Gold miners move higher in tune with gold, and they are not underperforming it in any meaningful way, but they are no longer magnifying gold's gains either. Silver is catching up in a meaningful way but it's outperforming gold only subtly. It seems that we are close to the end of this corrective upswing, but that it has not yet ended.

Once miners lag and silver laps gold in a clear way, we'll get the clear sell-and-short sign. For now, it seems that the next move in the very short term is going to be up.

We wrote that the extremely low volume in the GDX ETF - another proxy for the mining stocks - was likely to be followed by higher prices and that's exactly what we saw. The next resistance for the GDX ETF is at the declining resistance line, approximately at $29.7

Meanwhile, the overall performance of silver stocks continues to point to lower precious metals prices in the following months.

Silver Stocks in Focus

"Silver stocks reached their new yearly high on relatively strong volume" sounded very bullish, didn't it?

The problem was - as we had explained in the previous Alerts - that reaching the new yearly high meant that silver miners were barely able to correct 38.2% of the decline from the 2016 high. And that's compared to the decline alone. Comparing the recent rally to the one that we saw in 2016, we see that this year's upswing is barely one fifth of the previous upswing (about 50% vs about 250%). That's very weak performance - silver miners don't really want to move higher, they are forced to move higher as gold and silver are increasing, but the size of the move emphasizes that it's not the "true" direction in which the market is really moving.

The volume is also not as bullish as it seems to be at the first sight. Conversely, huge volume during SIL's (ETF for silver stocks) daily upswing that is clear on a stand-alone basis (not a part of a series of big-volume days) is a very bearish and quite precise indication for the short term. Ever since this ETF started trading, we saw this signal 15 times and only 3 cases were followed by upswings.

Yes, the silver stocks moved sharply higher on a very short-term basis, but please note that they had moved sharply lower on a very short-term basis in early 2016. The opposite of the recent price action was what preceded the biggest and most volatile rally of the recent years. If we see a reversal and invalidation of the breakout to new 2019 highs, we'll have almost exactly the opposite situation and the implications will be even more bearish.

While silver stocks don't provide any meaningful indications with regard to the short term, they point to a very bearish outlook for the following months.

Summary

Summing up, with silver starting to outperform, the precious metals sector appears to be in the final stage of the short-term upswing. It seems that this week might include the top in the precious metals market and the end of the short-term rally. The medium-term outlook is very bearish and once the short-term correction is over, the declines are likely to resume.

Once silver hits $18.49, your profits from the long position will be automatically taken off the table, but we will let you know manually if we want to automatically open short positions at that time.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative long position (100% of the full position) in silver is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

  • Silver futures: profit-take exit price: $18.49; stop-loss: $17.46; initial target price for the USLV ETN: $99.97; stop-loss for the USLV ETN: $84.49

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.

Thank you.

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

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