Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.
Today's analysis will be relatively brief, as the situation in the precious metals market developed more or less how we described it yesterday. Consequently, practically everything that we wrote in yesterday's extensive analysis, remains up-to-date.
The situation in the USD Index is just as it was yesterday.
Shortly after invalidating its breakdown below the late-July lows, the USD Index broke above its declining short-term resistance line. It then consolidated and paused below the declining medium-term resistance line.
The above happened shortly after Fed announced a more dovish approach, which theoretically should have made the USD Index decline. This resilience is bullish, and it's something that suggests that the USD Index is about to break above the declining resistance line rather sooner than later.
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. It's generally a good gold trading tip to monitor the USD Index's performance.
As far as gold is concerned, we previously wrote the following - and it remains up-to-date:
After topping at its triangle-vertex-based reversal, gold declined and is now trading at its declining resistance line, which turned into support. This could generate a rebound, especially that at the same time gold finally broke below the rising medium-term support line. This breakdown is a big deal, as all previous attempts were invalidated.
Since this support is so strong, we expect a rebound, quite possibly back to it. Such a verification (if gold doesn't invalidate the breakdown that is) would be very bearish for the short term.
Once again, we saw just that. Gold rallied one more time, but it managed to rally back above the previously broken resistance. The breakdown was therefore confirmed, and the outlook remains very bearish, especially given the indications from gold's long-term chart and its self-similar pattern.
The next support is at $1,700, which is where - approximately - gold topped and bottomed multiple times earlier this year. That's also the 61.8% Fibonacci retracement based on this year's upswing.
At this point, you might be wondering why gold moved higher yesterday despite the above.
Two points follow.
First of all, this move higher was not a big deal - gold moved barely above the most recent high, and it didn't move close to gold's early-September high. It doesn't invalidate the self-similar pattern in gold that we've been featuring in the previous weeks.
Second, this small move higher is in perfect tune with what we wrote about the mining stocks.
Namely: Based on the triangle (marked with red, dashed lines), we get a vertex. This means that it wouldn't be surprising to see an intraday rally that is followed by a decline later today or tomorrow.
That's exactly what happened in the miners yesterday. They moved higher. They didn't move above their September highs, so this move was not a big deal (just as the one in gold), but it was enough to make the current triangle-vertex-based reversal point bearish. Based on this point, it seems that miners are ready to decline. Perhaps this is the way in which - very indirectly - the markets "are saying" that the USD Index is about to break above its declining resistance line.
The outlook remains bearish and our comments from three weeks ago 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.
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 declines.
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
