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.
The two key short-term factors for the outlook in the precious metals market, remain up-to-date. Namely, miners appear to have reversed, and the USD Index is still gathering strength for its breakout and subsequent rally.
Let's start today's analysis with the latter. In short, if the outlook for the USD Index remains bullish despite the recent pause, then the odds are that the short-term outlook for the precious metals market remains bearish.
So, is the USD Index is simply taking a breather? Yes, this seems to be the most likely outcome. That's exactly what the USD Index has been doing for the last several days. It's been moving lower, at approximately the same pace at which the declining medium-term resistance line is descending.
This means that once the USDX finally does rally - even just a little - it's likely to break above this important resistance, and rally much higher as a result. After all, that's what tends to happen after major breakouts.
Would this be indeed a major breakout? Of course. This line stopped the USD rally in early July, so it was already verified as something that should be taken into account. The fact that the USDX was unable to rally above it earlier this month, is yet another proof.
The above happened shortly after the Fed announced a more dovish approach, which theoretically should have made the USD Index decline. This resilience is bullish, and it's suggesting that the USD Index is about to break above the declining resistance line sooner rather than later. Especially given the USD's long-term picture that I discussed on Monday.
Back in March, the short-term breakout in the USD Index was the thing that triggered the powerful rally in it, as well as a powerful plunge in the precious metals market, and it seems likely that this would happen again.
Now, the second thing that we previously wrote about, was the triangle-vertex-based reversal in the mining stocks. Based on the daily chart, it seemed that the reversal should have already taken place, but if we zoom in and look at the GDX ETF in terms of the 4-hour candlesticks, it becomes obvious that the reversal point based on this technique wasn't really scheduled for Monday, but - actually - for yesterday.
And indeed, that's when the GDX ETF formed the intraday high. The implications are bearish, and the same goes for the fact that miners moved back below the early-September high shortly after trying to rally above it.
Consequently, our comments dating back three weeks, remain up-to-date:
Now, since the general stock market moved above the previous highs and continues to rally, we might or might not see a sizable decline early this week. Back in March, the slide in miners corresponded to the decline in the general stock market, and this could be repeated, or we could see some sideways trading after the slide resumes, once stocks finally decline.
That's exactly what happened. The general stock market continued to move higher, and mining stocks have been trading sideways instead of declining - or rallying. Before miners' pause (and S&P's breakout) miners were repeating their late-February and early-March performance. The implications of the self-similar pattern were bearish, and they continue to be bearish, only the timing changed.
The action in silver or gold was not particularly notable yesterday, and just as the outlook for the USD Index and miners remains up-to-date, the same goes for the outlook for both the above-mentioned precious metals.
Before summarizing, we would like to reply to a few questions that we received recently.
Letters to the Editor
Q: Sir, are you saying the next buying opportunity is in a few years according to BPGDM analysis?
I have been waiting for gold decline like you suggested but it seems like gold is acting strong and refuses to decline and at the same time refuses to advance.
A: Gold seems to be consolidating somewhat similar to how it consolidated in 2013 before the big slide - only on a smaller scale. We wrote about it in Monday's flagship Gold & Silver Trading Alert - that's what the self-similar pattern in gold implies.
As far as the Gold Miners Bullish Percent Index (BPGDM) is concerned, we think that the next major buying opportunity will take place when this index visits much lower levels - likely below 10. However, we don't think that it will take several years for this index to get there. Several weeks - several months seem to be a much more likely scenario in our view. This would be in tune with how quickly this index declined in 2016 - after it had been similarly extremely overbought as it was recently.
Q: What is the trading period for your view.
A: Our estimate is that gold should start its sizable slide within the next 0 - 6 weeks. The decline might end within this period, or it might take longer and perhaps end close to the end of the year - similarly to what it did in 2015.
Overview of the Upcoming Decline
As far as the current overview of the upcoming decline is concerned, I think that it has already begun, at least in case of the mining stocks. It's still relatively unclear if gold makes another attempt to move to new highs before plunging below $1,800, but it now appears more likely that it won't.
During the final part of the slide, we expect silver to decline more than miners. That would be in tune 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 very positive in the long run, but it doesn't make the short-term decline unlikely. In the very near term, markets can and do get ahead of themselves and then need to decline - sometimes very profoundly - before continuing their upward march.
The plan is to exit the current positions in miners after they decline far and fast, but at the same time when silver declines just "significantly". 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. This is a very soft and 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 very difficult to execute such strategy successfully.
Summary
Summing up, it seems that after reversing $4 above our upside target, gold has finally topped, and that it formed the second top from the double-top pattern in mid-August. The USD Index appears to be forming a broad bottom, just like it did in 2008, 2011, and 2018. It's worth keeping in mind that while the USDX just moved slightly below its recent lows, gold didn't move to its recent highs. This relative underperformance, along with the specific juncture at which the USD Index currently is, creates a very bearish environment for the precious metals market, especially for the mining stocks. The decline in the latter is likely to accelerate once the general stock market finally moves down.
The self-similar pattern in gold makes the outlook even more bearish and it adds to the already bearish outlook for the next several weeks.
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 to increase its size if it wasn't already sizable, it's now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it's a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.
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 - 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 make much more in the following weeks and months), but you have to be healthy to really 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
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Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
Please note that a full position doesn't mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder - "initial target price" means exactly that - an "initial" one, it's not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we've done previously). Stop-loss levels, however, are naturally not "initial", but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks - the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as "final". This means that if a stop-loss or a target level is reached for any of the "additional instruments" (DGLD for instance), but not for the "main instrument" (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn't, then we will view both positions (in gold and DGLD) as closed. In other words, since it's not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can't provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the signs pointing to closing a given position or keeping it open. We might adjust the levels in the "additional instruments" without adjusting the levels in the "main instruments", which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager
