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.
In yesterday’s analysis, I wrote the following about the 4-hour GDX ETF chart:
After verifying the breakdown below its rising support line, the GDX moved lower, just as I expected it to. Now it’s after a breakdown below its previous (November) lows, and it seems to be verifying that breakdown just as it verified the breakdown below the rising support line in late November.
The black dashed line in the above chart shows the resistance provided by the previous lows. It wasn’t invalidated. At the same time, the GDX is well below its declining red resistance line, and even if it moves close to this line but then declines, it will not be viewed as something bullish.
What happened yesterday is exactly what I put in bold.
Gold miners moved to their declining red resistance lined and then they moved back down.
As far as the November lows are concerned, while it might not be 100% clear based on the above chart, it is the case that the lowest close of a 4-hour candlestick in November was $31.35, and yesterday, the GDX ETF closed the day at $31.34. As the daily closes are more important than the mid-session candlestick closes, I don’t view the breakdown below the November lows as invalidated.
And what about junior mining stocks?
The situation is quite similar. The difference is that while the GDX closed below its November lows in terms of closing prices, the GDXJ bounced off the November lows in intraday terms.
So – no invalidation of the downtrend = the downtrend remains intact, and so does the bearish outlook.
There’s also an interesting similarity visible in the GDXJ ETF. Namely, the early July correction and a top appear to be just like what we saw recently. I marked both cases with blue rectangles and I also marked the similarity in the RSI indicator. The latter was just below 30 and now it moved to almost 50. Back in July, junior miners were verifying the breakdown below the late-April lows, just like now they are verifying the move below the November lows.
Just as the declines continued in July and in the following months, the same is likely to take place also in the near future.
Also, please note that the volume reading during yesterday’s session for both: GDX and GDXJ was rather small – and if this was the beginning of a major rally, it should have been significant.
Finally, while some people may say that the recent decline in mining stocks was only due to the decline in the general stock market, please note that the general stock market – the S&P 500 index – moved back up. The S&P 500 rallied by over 2% yesterday and it moved almost to its previous highs. Did GDX or GDXJ move even near their recent (November) highs? No. They are verifying the breakdown below the November lows, instead. Consequently, the outlook for the mining stocks is very bearish.
Having said that, let’s take a look at the markets from a more fundamental point of view.
Enjoy It While It Lasts
With investors betting on a Santa Clause rally despite the deteriorating fundamentals, the S&P 500 helped the GDXJ ETF (proxy for junior mining stocks) outperform on Dec. 7. However, with short-covering and corporate buybacks primarily responsible for the daily spike, another ‘Minsky Moment’ could be on the horizon.
To explain, I wrote on Nov. 19:
While European markets have largely ignored the recent coronavirus spikes, a sharp sell-off could be the spark that lights the S&P 500’s correction. To explain, the DAX 30 Index (Germany) and the CAC 40 Index (France) both closed slightly lower on Nov. 18. However, prior to Nov. 18, the DAX 30 had closed in the green for 13 of the last 15 trading days, and one-upping its European counterpart, the CAC 40 had closed in the green for 15 of the last 16 trading days.
On top of that, the CAC 40 had an RSI (Relative Strength Index) north of 80, while the DAX 30 had an RSI north of 75. As a result, both indices are materially overbought at a time when Germany is implementing new restrictions. Thus, if a Minsky Moment strikes in Europe, don’t be surprised if the negativity cascades across the Atlantic.
To that point, after volatility erupted on cue, the DAX 30 suffered an intraday peak-to-trough decline of 7.8%, the CAC 40 dropped by 7.3%, and the S&P 500 dropped by 5.2%.
Please see below:
However, with overzealous equity bulls back at it again on Dec. 7, the PMs benefited from the risk-on sentiment. However, with the fundamental problems still present, investors may have set themselves up for more disappointment.
To explain, with hedge funds increasing their short bets a little too late, Goldman Sachs Prime Brokerage reported that last week, “US equities on the GS Prime book made up more than 85% of the global $ net selling (-1.4 SDs), driven by short sales and to a lesser extent long sales (9 to 1).”
In a nutshell: hedge funds increased their short bets at the worst possible time.
Please see below:
Thus, with the Dec. 7 rally driven mainly by a reversal of these positions, the profound short squeeze helped uplift the PMs. For example, Bank of America data shows that last week’s corporate buybacks were the highest weekly total since March. And by repurchasing nearly $3.4 billion of their own stock (focus on the first blue column from the left), their bids helped calm the S&P 500’s selling pressure.
Please see below:
What’s more, while Bank of America said that hedge funds and retail investors somewhat bought the dip last week (though, they’re still net-sellers over the last four weeks), corporations did much of the heavy lifting.
As a result, with retail investors running out of gas and hedge funds mainly closing out their shorts on Dec. 7, the S&P 500 should resume its correction. More importantly, though, mining stocks’ recent strength should wilt away as the drama unfolds.
Please see below:
And now for the grand reveal: corporations' buyback blackout period begins on Dec. 10. And since they can't repurchase more shares until the New Year, the elephant in the room won't be able to support the S&P 500. Likewise, after hedge funds covered their shorts on Dec. 7, short-covering won't be able to support the S&P 500 either. As a result, mining stocks should suffer if the negativity resurfaces over the next few weeks.
Please see below:
To explain, the red line above tracks the hourly movement of the S&P 500, while the gold line above tracks the hourly movement of the GDXJ ETF. As you can see, the junior miners often follow in the S&P 500’s footsteps. And with the S&P 500 setting itself up for another drop, the GDXJ ETF likely won’t be far behind.
To that point, with the headline Consumer Price Index (CPI) scheduled for release on Dec. 10 and the Fed’s next monetary policy meeting scheduled for Dec. 14/15, sources of volatility will arrive at a time when corporations are stuck on the sidelines.
For context, I wrote on Nov. 12:
I’ve highlighted on several occasions how the Commodity Producer Price Index (PPI) often leads the following month’s headline CPI. And after the former increased by 2% month-over-month (MoM) on Nov. 9 – which is a material MoM increase – and by 22.2% YoY (a new 2021 high), it implies a headline CPI print of roughly 5.75% to 6.25% when the data is released on Dec. 10.
Please see below:
To explain, the green line above tracks the YoY percentage change in the commodity PPI, while the red line above tracks the YoY percentage change in the headline CPI. If you analyze the relationship, you can see that the pair have a close connection.
In addition, after expectations for September were pulled forward to July, and then expectations for July were pulled forward to June, now, the probability of a Fed rate hike in May 2022 has reached ~69%.
Please see below:
Also noteworthy, St. Louis Fed President James Bullard said on Dec. 3 that “the danger now is that we get too much inflation.... It's time for the [Fed] to react at upcoming meetings.”
He added: “the inflation numbers are high enough that I think [ending the taper by March] would really help us to create the optionality to do more if we had to, if inflation doesn't dissipate as expected in the next couple of months.”
For context, Bullard reiterated that he expects two Fed rate hikes in 2022.
The bottom line? While the bulls stampeded through Wall Street on Dec. 7, things aren’t as rosy as they appear. And while the PMs benefited from the renewed optimism, their tepid rallies are even more fragile. Moreover, with another inflation print on the horizon and the FOMC’s Dec. 15 decision including its Summary of Economic Projections, the hawkish revelations could rattle the financial markets. And with corporate buybacks starting their holiday vacation on Dec. 10, stock market investors are on their own to navigate what comes next.
In conclusion, the PMs rallied on Dec. 7, as risk-on sentiment reigned supreme. However, with the S&P 500 rallying by more than 2% and WTI rallying by nearly 4%, the PMs’ daily upswings were relatively muted. As a result, precious metals investors sense that caution is warranted. And with their trepidation a sign of heightened anxiety, they likely realize that going long the PMs involves much more risk than reward.
Overview of the Upcoming Part of the Decline
- It seems to me that the current corrective upswing in gold is about to be over soon, and the next short-term move lower is about to begin. Since it appears to be another short-term move more than a continuation of a bigger decline, I think that junior miners will be likely to (at least initially) decline more than silver.
- It seems that the first 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.
- After the above-mentioned correction, we’re likely to see a powerful slide, perhaps close to the 2020 low ($1,450 - $1,500).
- 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.
- 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. I expect the final bottom to take place near the end of the year, perhaps in mid-December. It is not set in stone that PMs have to bottom at that time. If not then, then early 2022 would become a likely time target.
- 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. The additional confirmation will come from the tapering schedule, as markets are likely to move on the rumor and reverse on the fact as they tend to do in general.
- 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: PR, I am having a hard time understanding this equity market. Is it as simple as a mania to the top? Is this new money coming into the market or just trading positions? I do not feel safe taking any positions in the market, yet it continues to rise.
A: It’s a tough call to say exactly “why” a certain price moves take place. But it’s safe to say that yes, it’s partially a mania, and partially a consequence of the massive money printing – the money has to go somewhere, after all. Technically, people can keep it in cash or in their bank accounts, but most people would prefer to buy something that’s likely to increase in value. And people usually (without bigger analysis) assume that what moved higher recently, will continue to move higher – and they buy high in order to sell higher. And that’s how speculative bubbles form.
I wouldn’t feel safe in stocks either.
Q: Hi PR,
I hope you are doing well. Thanks for your fantastic newsletters. I think it was a great move to change the flagship newsletters to Fridays; it gives us more time to digest it. I have a question for you. You mentioned in Monday’s newsletter that back in 2013, when the taper began, junior miners rallied for several months before rolling hard. Based on how the FED is cornered currently, do you think they'll mention exactly when and how fast they'll taper? Do you think the same will happen with the junior miners this time – that they'll rally before coming down hard? Lets say PR would like to add more positions in gold miners… would he add them right now or wait after the FOMC meeting?
A: Thanks, I’m happy that you liked my idea. In a way it’s a move back to what already worked in the past. Years ago, I published “Premium Updates” on Fridays, which were the main part of the service.
As far as the Fed’s tapering is concerned, I wouldn’t necessarily believe that they would stick to their stated pace of tapering, and instead, if they see higher inflation numbers once again, they might speed it up once again (or more than once). So, even if they mention how fast they’ll taper, I think we can easily get an update or more updates on that pace.
I think that this time junior miners won’t correct as high and for as long as they did in 2013. Or it could be the case that the corrective upswing is already behind us. The situation is changing faster (the Fed is becoming hawkish faster) than in 2013. The fundamentals kind of aligned with technicals here – the current situation is somewhat between what we saw in 2008, 2013, and (if the Omicron variant of the coronavirus makes vaccines ineffective) early 2020.
If I wanted to add more (short) positions in mining stocks, I’d do it right now. I wouldn’t wait for the FOMC or try to guess what other piece of news might trigger the decline or the rebound. Of course, this is not an investment advice, I can’t say with certainty if the above is a good approach for the person, who asked this question, or anyone else.
Summary
Summing up, gold declined in tune with my long-term-based indications, and the medium-term downtrend appears to have resumed. Based on the analogy to 2013 and other factors, a bigger decline in gold appears to be just around the corner (regardless of what happens in the very near term).
If the new Covid-19 variant makes the vaccine rather useless, we might be in for very wild price moves in most markets. In the case of the precious metals sector, the initial move should be to the downside, but at the same time, it makes the long-term outlook even more bullish.
It seems that we might see a short-term bottom close to the middle of December, and perhaps that’s when gold will move to its previous 2021 lows. However, I don’t think that it would be the final bottom. Conversely, it seems that the final bottom would form lower after a short-term correction (from the above-mentioned December lows).
From the medium-term point of view, the key two 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 following 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.
By the way, we’re currently providing you with the possibility to extend your subscription by a year, two years or even three years with a special 20% discount. This discount can be applied right away, without the need to wait for your next renewal – if you choose to secure your premium access and complete the payment upfront. The boring time in the PMs is definitely over, and the time to pay close attention to the market is here. Naturally, it’s your capital, and the choice is up to you, but it seems that it might be a good idea to secure more premium access now while saving 20% at the same time. Our support team will be happy to assist you in the above-described upgrade at preferential terms – if you’d like to proceed, please contact us.
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: $35.73; 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: $16.18; 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: $32.08; 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: $41.38
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: $12.48
HZD.TO – alternative (Canadian) inverse 2x leveraged silver ETF – the upside profit-take exit price: $30.48
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
