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Since There is a War, Gold Will Rise, Right? Wrong.

February 28, 2022, 9:27 AM Przemysław Radomski , CFA

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

Quite a lot happened over the weekend on the fundamental side of things, while there was no trading, so let’s start today’s discussion with the fundamentals.

More Than Meets the Eye

As the Russia-Ukraine conflict continues to escalate, responses from NATO allies intensified over the weekend. For example, select Russian commercial banks were sanctioned and cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). In addition, the Russian central bank has been isolated from the global monetary system. 

Thus, while volatility may be the name of the game this week as investors struggle to digest the implications, the geopolitical risk premium that often supports gold may prove counterintuitive this time around.

For example, gold rallied hard as the Russia-Ukraine conflict escalated. However, after a ‘buy the rumor, sell the news’ event unfolded on Feb. 25, gold declined by 2.01%. Moreover, even if the recent escalation uplifts gold in the short term, the fundamental implications of Russia’s financial plight don’t support higher gold prices over the medium term. And there are strong technical and other forces (rising long-term rates, rising USD Index) that support gold price’s decline over the medium term.

Please see below:

To explain, with Russia essentially blacklisted from many influential FX counterparties, the Russian ruble relative to the U.S. dollar was exchanged for a roughly 50% discount on Feb. 27. As a result, Russia's purchasing power is nearly half of what it was before Sunday's developments.

Furthermore, if you analyze the chart above, you can see that euros and U.S. dollars made up a large portion of Russia's monetary base in 2013 (the green bars on the left). Conversely, those holdings dropped dramatically in 2021 (the blue bars on the left). 

In addition, if you focus your attention on the column labeled "Gold," you can see that FX has been swapped for gold, and the yellow metal accounts for roughly 23% of Russia's monetary base. Now, with the impaired state of the ruble offering little financial reprieve, Russia may have to sell its gold reserves to alleviate the pressure from NATO's economic sanctions. 

As a result, while war is often bullish for gold, the fundamental implications of currency devaluation mean that gold is Russia's only worthwhile asset outside of oil. Thus, with bank runs already unfolding in the region, the yellow metal could be collateral damage.

As further evidence, it's important to remember that Russia has plenty of gold stored at foreign central banks. In fact, the aggregate amounts outstrip its foreign FX deposits.

Please see below:

To explain, the chart on the left tracks Russian gold stored at foreign central banks, while the chart on the right tracks deposits other than the yellow metal. If you analyze the trends, the former has remained uplifted, while the latter has declined recently. 

However, if NATO countries’ central banks seize these holdings as part of their financial crackdown, it could put more pressure on Russia to liquidate its domestic bullion. As a result, while volatility will likely lead to sharp moves in both directions this week, the often-bullish impact of geopolitical tensions has less fundamental merit this time around. 

If that wasn’t enough, you know that I’ve been bearish on the EUR/USD for many months. And since the currency pair accounts for nearly 58% of the USD Index’s movement, its impact is material. To that point, since Eurozone banks have more exposure to Russian debt than their U.S. counterparts, the recent developments are fundamentally bearish for the EUR/USD.  

Please see below:

To explain, the light blue bars above depict various countries’ domestic bank exposure to Russian debt in Q1 2014 and the dark blue bars above depict the situation as of Q3 2021. If you analyze the left side of the chart, you can see that Italy, France and Austria are the most exposed to a Russian financial crisis. Moreover, Italy and Austria are much more levered to Russia than in 2014 (compare the light and dark blue bars). 

Conversely, while U.S. exposure to Russian debt is material, the share is still lower than its Eurozone counterparts. Furthermore, with Italy’s fiscal health already quite precarious, the impact of potential defaults is much worse than in the U.S. As a result, more pain should confront the euro, which should help uplift the USD Index. 

To that point, potential Russian delinquencies aren’t the only problem confronting the Eurozone. For example, Russian imports accounted for 2.8% of the Eurozone’s consolidated average monthly total since December 2020. In contrast, Russian imports only accounted for 1% of the U.S.’ consolidated average monthly total since December 2020.

Thus, while the percentages may seem immaterial, it’s important to remember that it’s all relative. And with the Eurozone under more relative pressure than the U.S., the FX implications support a stronger greenback.

Please see below:

To explain, if you analyze the second column from the right, you can see that Eurozone average monthly imports of Russian goods and services since December 2020 are $14.433 billion. Conversely, the U.S. monthly average stands at $2.406 billion. As a result, the Eurozone economy faces much steeper conflict risks, and the U.S. dollar is a relative beneficiary from the Russia-Ukraine upheaval.

The bottom line? While concerns over World War 3 and anxiety over Russian President Vladimir Putin's nuclear arsenal may elicit a short-term bid for gold, the prospect of a global crisis remains remote at this point. Moreover, with the U.S. dollar a winner, the euro a loser, and Russian isolation likely to result in the selling of its gold reserves, the fundamental implications support lower precious metals prices over the next few months.

To that point, the Fed's stance also remains unchanged, and the Russia-Ukraine drama is unlikely to derail a rate hike in March. Moreover, if the conflict unfolds like 2014, the market impact of each new headline will likely diminish over time. As a result, plenty of bearish fundamental developments should confront the PMs in the coming months.

What if we see these events develop into World War 3? Then gold in the insurance part of one’s portfolio would likely soar, more than making up for any profits not realized in case of short-term trades. That’s unlikely though. What is likely is that we’re already past the peak concern and that gold can now decline along with its medium-term trend. And that junior mining stocks would be affected to the highest degree.

In conclusion, the PMs were mixed on Feb. 25, as the general stock market's risk-on, risk-off behavior continues to pull them in competing directions. However, while the news flow, and investors' reaction to it, remain extremely uncertain in the short term, the bearish medium-term thesis remains intact: technicals, fundamentals and often misguided war premiums support sharp reversals for gold, silver, and mining stocks in the coming months. As a result, while it may be a wild ride this week, ignoring the noise and remaining level-headed is the most prudent course of action.

Having said that, let’s take a look at what charts are suggesting.

There’s no doubt the situation in Ukraine got worse over the weekend, and the same goes for the sanctions and other reactions to Russia’s aggression. And yet, despite gold’s very initial rally, it then moved back down and is currently (at the moment of writing these words) trading back below $1,900.

Gold was trading above $1,970 last week when the concern and uncertainty were at the maximum. That’s when I wrote that even if things get worse, the peak concern might be behind us, and the same was likely for gold prices. That was based on the analogy to previous times when troops of one country entered into another country. And the history appears to be rhyming once again.

Even though the conflict escalates, gold is not rallying, but rather topping. Today’s inability for gold to soar decisively above $1,900 and stay there is a meaningful confirmation of the bearish case.

Gold miners moved a bit (less than 1%) higher on Friday, but this was not a game-changer. That was very much in tune with how GDX topped in the previous cases. For instance, the mid-2021 top was not a one-day event, but rather a several-day-long back-and-forth trading that then resulted in a big price decline, anyway.

On Friday, the GDX ETF closed the day below the declining black resistance line, which means that technically not much changed since the invalidation of the previous attempt to break higher. In other words, gold miners are still likely to fall significantly due to the huge-volume invalidation.

In today’s early London trading, the GDXJ ETF (proxy for junior miners) is reacting to final hours of the Friday’s U.S. session and to weekend’s / today’s news. And what’s happening to the price?

Well, almost nothing. The small rally didn’t manage to take junior miners even above January 2022 high.

This is in perfect tune with how mining stocks performed after the military action started in 2014, before Crimea was annexed.

Consequently, what I wrote about those analogies previously (Feb. 24) remains up-to-date: (please note that I wrote the above when gold was after a huge overnight rally, at that time it was still before the reversal; the quote below is exactly what I wrote on Feb. 24, so if you’ve read that analysis, feel free to skip the part in italics.)

Third, mining stocks, especially junior mining stocks, don’t have to react just as gold does. In fact, they are not likely to, based on the analogy to what happened when Russia took over Crimea in 2014. I already wrote about that previously, and it’s worth quoting it once again:

What would happen then is that PMs would be likely to rally until the conflict actually starts, then a bit more, and then they would likely continue their medium-term decline. It already happened in 2014, when Russia took over Crimea. Interestingly, it was more or less at the same time of year. By mid-Feb, the majority of the rally was over. The entire rally in gold was about $200, and the part that continued after mid-Feb. was about $50.

Thus, considering December 2021 as the starting point of this rally, gold is up by about $150 now – so the history rhymes here.

Consequently, IF (and that’s a big if) the tensions escalate and Russia takes over a part of Ukraine once again, we might be looking at “only” an extra $50 rally in gold or so and a top in mid-March – and then the medium-term slide would be likely to continue.

When I wrote the above, gold was trading at about $1,900. It’s trading just below $1,950 at the moment of writing these words, so we now have a to-the-letter analogy to 2014. And in this analogy, the “peak concern” and “peak gold” have likely already materialized.

Oh, and by the way, GDXJ actually topped in mid-Feb 2014, and then it just moved back and forth until gold topped in mid-March 2014. OK, to be precise, the GDXJ’s intraday high in March was about 3% above its mid-Feb high, and it was then followed by an immediate decline.

It seems like the worst time to be exiting short positions in junior mining stocks. Instead, it might be a perfect time to be entering or adding to them (if one doesn’t have the desired exposure yet).

Well, since gold is about $200 above its late-2021 low, thus completing the analogy to 2014, let’s check if junior miners are also behaving similarly.

In today’s London trading, the GDXJ is up, but not very significantly so. Today’s intraday high (so far) is 38.86. The recent intraday high was 37.79. This means that today’s intraday high is 2.83% higher, which is in perfect tune with what happened in 2014.

Please note that we already saw an intraday decline, despite the higher open, which is also what accompanied the early-2014 top in the GDXJ. Of course, the session is far from being over, so this could change. It’s a weak (but present) indication, while the near-3% size of the rally above the previous highs is a strong indication that the situation is similar to what we saw in 2014. And this has bearish implications for the following weeks in case of the junior mining stocks.

And speaking of analogies to the past, let’s check what gold did when troops crossed borders in case of other relatively recent wars.

The arrow on the above chart shows what happened on the day when the U.S. – Iraq war started.

There was an intraday rally, but ultimately the start of the war itself was not a bullish factor for gold.

The above chart features the same thing with regard to the U.S. – Afghanistan war. Gold moved higher in the immediate aftermath, but then declined profoundly, as the tensions subsided.

You already saw the analogy to the invasion on Crimea in 2014, so you saw that there was only a short-term rally after the military action took place (in 2014, it took the following form: On 27 February, masked Russian troops without insignia took over the Supreme Council (parliament) of Crimea and captured strategic sites across Crimea.

So, while it might be contrary to one’s intuition about such events, based on the most recent historical analogies, it seems that the Ukraine-war-based rally in the precious metals sector is either over or very close to being over.

And this is even more likely to be the case with junior mining stocks. In case of the latter, it seems that we are witnessing a top in the making at this very moment.

It might be hard to view the above statement as justified in light of the huge rally in gold that we just saw, but the facts and analogies are in place nonetheless.

Technically, gold just encountered very strong resistance provided by its 2021 and late-2020 highs, and the breakout above the mid-2021 highs is not confirmed.

Let’s keep in mind that for gold to decline, the war doesn’t have to end, it doesn’t have to be won by either side. The only thing that matters with regard to it, is how big the uncertainty and concern is. And the peak uncertainty/concern might be today, as everything is new, and the situation is dramatically changing the geopolitical environment in Europe.

For comparison, remember Covid-19 cases, deaths in early 2020? That was just a tiny fraction of what we saw later. However, it was new and unknown. People were particularly scared then, and the markets moved particularly significantly then – not based on additional millions of cases and thousands of deaths next year.

Investing and trading are difficult. If it was easy, most people would be making money – and they’re not. Right now, it’s most difficult to ignore the urge to “run for cover” if you physically don’t have to. The markets move on rumor and sell the fact. This repeats over and over again in many (all?) markets, and we have direct analogies to similar situations in gold itself. And junior miners are likely to decline the most, also based on the massive declines that are likely to take place (in fact, it already started) in the stock markets.

Overview of the Upcoming Part of the Decline

  1. It seems to me that the corrective upswing is now over or very close to being over , and that gold, silver, and mining stocks are now likely to continue their medium-term decline.
  2. It seems that the first (bigger) stop for gold will be close to its previous 2021 lows, slightly below $1,700. Then it will likely correct a bit, but it’s unclear if I want to exit or reverse the current short position based on that – it depends on the number and the nature of the bullish indications that we get at that time.
  3. After the above-mentioned correction, we’re likely to see a powerful slide, perhaps close to the 2020 low ($1,450 - $1,500).
  4. If we see a situation where miners slide in a meaningful and volatile way while silver doesn’t (it just declines moderately), I plan to – once again – switch from short positions in miners to short positions in silver. At this time, it’s too early to say at what price levels this could take place, and if we get this kind of opportunity at all – perhaps with gold close to $1,600.
  5. I plan to exit all remaining short positions once gold shows substantial strength relative to the USD Index while the latter is still rallying. This may be the case with gold close to $1,350 - $1,400. I expect silver to fall the hardest in the final part of the move. This moment (when gold performs very strongly against the rallying USD and miners are strong relative to gold after its substantial decline) is likely to be the best entry point for long-term investments, in my view. This can also happen with gold close to $1,375, but at the moment it’s too early to say with certainty.
  6. As a confirmation for the above, I will use the (upcoming or perhaps we have already seen it?) top in the general stock market as the starting point for the three-month countdown. The reason is that after the 1929 top, gold miners declined for about three months after the general stock market started to slide. We also saw some confirmations of this theory based on the analogy to 2008. All in all, the precious metals sector is likely to bottom about three months after the general stock market tops.
  7. The above is based on the information available today, and it might change in the following days/weeks.

You will find my general overview of the outlook for gold on the chart below:

Please note that the above timing details are relatively broad and “for general overview only” – so that you know more or less what I think and how volatile I think the moves are likely to be – on an approximate basis. These time targets are not binding or clear enough for me to think that they should be used for purchasing options, warrants or similar instruments.

Letters to the Editor

Q: Thank you. Where do you think this rally in the SP 500 and Naz will end? What levels should we be looking at. Thanks PR.

A: Well, if by “Naz” you meant the NASDAQ, then I think that the rally (or, should I say, rebound) might already be over. The S&P 500 futures are down about 1.5% at the moment of writing these words. If the top is not yet in, then I still doubt that stocks would be able to get above their February top before declining profoundly. You can read more about stocks in Paul Rejczak’s Stock Trading Alerts.

Q: While your gold chart bears a very similar pattern to the events of 2013, I am sure you are aware of those who interpret the same exact chart as a massive cup and handle which will break big to the upside. How do you respond to those pushing that narrative?

Thank you,

A: Well, I remember the same narrative being pushed in 2013 before the slide, so I’d view it as yet another analogy between those periods.

Don’t get me wrong – my intention is not to be arrogant and/or dismiss alternative chart interpretations. My point is that a near 1-to-1 analogy in the same market that is confirmed by similar situations in other markets and ratios, and that is supported by the situation in the USD Index, general stock market, and mining stocks near-ridiculous weakness over the long term, is much more important than a generic formation that one can notice virtually on any market and lacks the above-mentioned confirmations.


Summing up, despite last week’s rally in gold, the outlook for junior mining stocks remains exactly as I described previously.

Gold was up about $200 from its late-2021 low, just like how much it rallied in 2014 when Russia took over Crimea. When that happened, junior miners moved about 3% above their previous highs, and we saw something very similar in last week’s GDXJ’s trading. And then both gold and junior miners declined, despite the obvious fundamental reasons for them to rally.

It looks like “peak uncertainty” and “peak gold” are already here or very, very close. It’s even more likely that the top in junior mining stocks is in.

Investing and trading are difficult. If it was easy, most people would be making money – and they’re not. Right now, it’s most difficult to ignore the urge to “run for cover” if you physically don’t have to. The markets move on “buy the rumor and sell the fact”. This repeats over and over again in many (all?) markets, and we have direct analogies to similar situations in gold itself. Junior miners are likely to decline the most, also based on the massive declines that are likely to take place (in fact, they have already started) in the stock markets.

From the medium-term point of view, the two key long-term factors remain the analogy to 2013 in gold and the broad head and shoulders pattern in the HUI Index. They both suggest much lower prices ahead.

It seems that our profits from the short positions are going to become truly epic in the coming months.

After the sell-off (that takes gold to about $1,350 - $1,500), I expect the precious metals to rally significantly. The final part of the decline might take as little as 1-5 weeks, so it's important to stay alert to any changes.

Most importantly, please stay healthy and safe. We made a lot of money last March and this March, and it seems that we’re about to make much more on the upcoming decline, 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 junior mining stocks are justified from the risk to reward point of view with the following binding exit profit-take price levels:

Mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $34.63; stop-loss: none (the volatility is too big to justify a stop-loss order in case of this particular trade)

Alternatively, if one seeks leverage, we’re providing the binding profit-take levels for the JDST (2x leveraged) and GDXD (3x leveraged – which is not suggested for most traders/investors due to the significant leverage). The binding profit-take level for the JDST: $14.98; stop-loss for the JDST: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the GDXD: $25.48; stop-loss for the GDXD: 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.):

Silver futures downside profit-take exit price: $19.12

SLV profit-take exit price: $17.72

ZSL profit-take exit price: $38.28

Gold futures downside profit-take exit price: $1,683

HGD.TO – alternative (Canadian) inverse 2x leveraged gold stocks ETF – the upside profit-take exit price: $11.79

HZD.TO – alternative (Canadian) inverse 2x leveraged silver ETF – the upside profit-take exit price: $29.48

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: UGL, GLL, AGQ, ZSL, 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" (GLL for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and GLL as still open and the stop-loss for GLL would have to be moved lower. On the other hand, if gold moves to a stop-loss level but GLL doesn't, then we will view both positions (in gold and GLL) 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.

Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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