There are some things in this world, captain, that will never change… Some things do change.
That is one of the lines from Matrix Reloaded, but it turns out that it could serve as quite a good description of what we saw in the precious metals market and in the currencies recently.
The thing that didn’t change was the PMs’ reluctance to rally despite a move lower in the USD Index (and a move higher in the euro). The mining stocks didn’t move much, and the GDXJ ETF even declined a bit yesterday, once again proving that the breakdown below its previous 2021 lows was a solid and meaningful event.
The thing that did change was the situation in the euro index. It invalidated its breakdown below the head and shoulders pattern, which is a bullish development.
And… That’s pretty much the only thing that we can say about this chart right now (I will get back to this topic in the fundamental part of today’s analysis though). If I was trading the EUR/USD pair, I would be concerned about any short position that I might possibly have in this currency pair, and I could even close it based on this invalidation alone.
However, we are not trading the EUR/USD pair, and I’m not concerned about our positions in the junior miners at all because of the invalidation in the euro index. Why? Because of the situation in the USD Index and – most importantly – because of the way the precious metals market refuses to react to the USDX’s weakness right now. Not to mention a fakeout in silver that has just failed.
As you can see on the above chart, the USD Index has just moved to the neck level of its inverse head-and-shoulders pattern based on the daily closing prices. So, was the formation invalidated? No, at least not yet.
The USD Index also moved very close to the 38.2% Fibonacci retracement based on the preceding rally. The analogous move lower that we saw about a month ago ended when the USDX moved to that very retracement. Naturally, the rally was smaller at that time, so the retracement based on it was a bit lower.
Consequently, the situation in the currency markets is not as bullish for the precious metals sector as it might seem when looking at the euro alone. Will the USD Index drag the euro lower? Or will the euro index push the USDX off the cliff? The long-term USD Index chart continues to point to the former, and the long-term indications tend to be more important than the short-term ones.
The USDX moves back and forth, correcting close to the middle of the year… Just as it did in 2014 (also confirmed by a very similar action in the RSI indicator – marked with red) before launching an enormous rally. And let’s not forget that the USDX started its rallies close to the middle of the year in many other cases.
So, does the euro’s performance make the outlook for the USD Index bearish? It’s a bearish factor for the latter, but it’s not the only thing that matters, and it seems that ultimately the outlook for the USDX remains bullish, nonetheless – this bullishness is only less clear at this time.
But the key question is: what impact will all this likely have on the precious metals market? The answer is that it seems that the PMs are going to slide anyway, as they have already chosen not to respond to the bullish signs from the currency market.
Gold seems to have topped at its second triangle-vertex-based reversal and, based on the specific U.S.-Labor-Day-based cyclicality, it seems to be waiting for the next week to accelerate its decline.
Silver has just moved back below its previous 2021 lows, so the attempt to break back above them failed – just like the early-August attempt to break above the June lows failed. A massive decline followed then, so, if the history rhymes once again, we’re likely to see price declines shortly.
Having said that, let’s take a look at the markets from a more fundamental point of view.
Floating Around the Rumor Mill
With the USD Index struggling for support in recent days, heavy speculation has overshadowed strong fundamentals. For example, after European Central Bank (ECB) Governing Council member Robert Holzmann said on Aug.31 that “we are now in a situation where we can think about how to reduce the pandemic special programs,” the hawkish rhetoric accelerated the ECB’s perceived taper timeline. In turn, this lit a fire under the EUR/USD – which accounts for nearly 58% of the movement of the USD Index.
And adding fuel to that fire, Bundesbank President Jens Weidmann said on Sep. 1 that “we have to watch the risks to the outlook for prices. Accommodative monetary remains appropriate, but we shouldn’t disregard the risk to too-fast inflation.” For context, Eurozone inflation increased by 3% year-over-year (YoY) on Aug. 31 (the red bar).
Please see below:
However, it’s important to remember that U.S. inflation increased by 5.28% YoY in July (the latest data released on Aug. 11) and realized U.S. GDP has already surpassed its pre-pandemic high. Conversely, the Eurozone still remains a relative underperformer.
Please see below:
To explain, the blue bars above represent the percentage change in countries’ GDP levels relative to Q4:2019. If you analyze the middle of the chart, you can see that the Eurozone remains a relative laggard. Conversely, if you turn to the right side of the chart, you can see that the U.S. is the only G7 country that’s recouped (and now exceeded) what was lost during the coronavirus crisis. As a result, the U.S. dollar should benefit from the fundamental outperformance over the medium term.
In addition, while the hawks cast doubt, ECB President Christine Lagarde outlined her monetary milestones during her press conference on Jul. 22.
I quoted her remarks on Jul. 23:
“The forward guidance rests on three key criteria’s if you will:
“We see inflation reaching 2% well ahead of the end of our projection or rising, that’s like number one and number two, durably for the rest of the projection horizon. And thirdly, we judge that realized progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilizing at 2% over the medium term …. So, by these three legs, we’re essentially saying, first of all, that we want to see inflation reach 3% well ahead of the end of our projection horizon.”
Source: Reuters
Thus, with Lagarde implying that she wants to see “inflation reach 3% well ahead” of removing policy support, hitting the milestone once in August likely means several more months of dovish observation. To that point, ECB Chief Economist Philip Lane said the following on Aug 25.
I quoted his remarks on Aug. 26:
“Regardless of when PEPP might end, that’s not the end of the ECB’s role in terms of QE. This is why we don’t need a huge lead time to think about it. We already know what we’re doing until March, which is maintaining favorable financing conditions, so we have time this autumn to work out what comes next.”
And what does this mean for a prospective taper announcement?
Source: Reuters
As a result, with the ECB hawks likely in the minority, why such a strong reaction from the EUR/USD? Well, with the Fed downplaying even higher inflation and a dovish-for-longer ECB the major consensus, the recent comments surprised investors. And with algorithms not discriminating, the mantra of ‘shoot first, ask questions later’ was on full display when the news hit the wire.
However, Stephen Gallo, European Head of FX strategy at BMO Capital Markets, said the following on Sep. 2:
“Leveraged funds were short euro-dollar, so since Jackson Hole we have seen some of those shorts being covered, but the move doesn't look violent, and there are still decent numbers of people looking to go short again. As long as the dollar doesn't have a reason to weaken, I don't think the euro on its own will break out significantly to the top side.”
Have You Seen These New Openings?
To that point, while U.S. nonfarm payrolls may disappoint today – as the spread of the Delta variant may have decelerated hiring activity – the latest coronavirus strain is unlikely to derail the medium-term momentum. For one, enhanced unemployment benefits end nationwide this month, and the lack of stimulus should accelerate U.S. citizens’ desire to reenter the workforce. Second, Indeed revealed on Sep. 1 that “[job postings] were 39.4% above February 1, 2020, the pre-pandemic baseline, after adjusting for seasonal variation. Postings were up 1.7 percentage points in the past week and 4.2 points over the past four weeks.” As a result, the Fed’s taper timeline has only been delayed by the Delta variant.
Please see below:
As further evidence, I noted on Sep. 2 that with more than 1.4 million job openings in the restaurants & accommodations sector, there are plenty of jobs available for individuals that want them.
I wrote:
With the National Restaurant Association revealing that “labor challenges intensified in the first half of the year” and that “75% [of respondents] reported recruiting and retaining employees was the top challenge facing their business,” wage inflation is poised to accelerate. For context, only 8% of respondents cited hiring as their “top challenge” in January but “the June/July number [75%] represents its highest level in nearly 20 years of the Association’s monthly tracking survey.”
Please see below:
What’s more, staffing levels at restaurants are more than 8% below their pre-pandemic high of 12.3 million. And with the restaurants & accommodations sector home to more than 1.4 million job openings as of Jun. 30 (BLS data), the figure was more than double the January 2021 reading and was the highest since the data collection began in 2000.
Don’t Buy Indices When They Are Skateboarding
Also supportive of future USD Index strength, the S&P 500 is skating on a knife’s edge. And while the economic momentum should resume once the Delta variant fades, Goldman Sachs reduced its third-quarter GDP growth estimate for the second time on Sep. 2.
Likewise, short interest in the S&P 500 has perked up once again. For context, when short interest rallied off of the lows in January 2021, volatility spiked and the NASDAQ Composite suffered mightily.
In addition, the S&P 500’s equity risk premium has also risen of extremely depressed levels (see the right side of the chart below). And with price multiples already contracting, an earnings malaise could drop the guillotine on the general stock market.
To that point, Bank of America’s global earnings per share (EPS) model signals a major slowdown in the coming months. Moreover, the combination of compressed multiples, higher risk premiums and decelerating earnings growth could create the perfect storm for the S&P 500.
Please see below:
To explain, the dark blue line above tracks the YoY percentage change in analysts’ consensus forward EPS estimates, while the light blue line above tracks the implied YoY percentage change in Bank of America’s global EPS model. If you analyze the right side of the chart, you can see that the light blue line has already moved sharply lower. And with the dark blue line still materially elevated, downward earnings revisions could severely upend investors’ optimism.
And while the wheels are in motion, even the staunchest bulls are demonstrating heightened anxiety. For example, Wharton professor Jeremy Siegel told CNBC on Sep. 2 that a significant correction could be looming.
"Personally, I think the inflation news, not tomorrow's employment report that everyone is looking at... might be more important," he said. "If they blow out the numbers, the Fed is going to have to be more aggressive going forward."
He added:
“[Stocks are] going up the staircase. I don't know when the elevator's going to come. But it looks like a momentum trade, in the sense that it just keeps on going up a little bit every day. No real news to propel it and a lot of momentum players piling on.”
The bottom line? The EUR/USD’s recent rally lacks a fundamental foundation. And with U.S. inflation and realized GDP growth outperforming the Eurozone, the USD Index should recoup those losses over the medium term. Moreover, if the general stock market suffers along the way, the pace of the USD Index’s rise could accelerate rather quickly.
In conclusion, it was the second straight day that gold and the GDXJ ETF (our short position) declined alongside the USD Index. And with dollar weakness often uplifting the PMs, it highlights their fundamental trepidation about the Fed’s taper timeline and the potential for higher U.S. real yields. Moreover, with the S&P 500 materially overbought and September a seasonal source of volatility, the PMs confront several ominous headwinds as we approach the autumn months.
Overview of the Upcoming Part of the Decline
- It seems to me that the corrective upswing in gold is over or close to being over, and the big decline seems to be already underway.
- 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 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 when gold shows substantial strength relative to the USD Index while the latter is still rallying. This might take place 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 might also happen with gold close to $1,375, but it’s too early to say with certainty at this time. I expect the final bottom to take place near the end of the year, perhaps in mid-December.
- 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 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.
Summary
To summarize, even though we saw a sizable upswing on Friday (Aug. 27), it doesn’t seem that it changes anything with regard to the bearish medium-term trend on the precious metals market. The key breakdowns / breakdowns were either not invalidated (euro, USD Index, silver, GDXJ) or were invalidated in a way that’s suspicious / in tune with what happened during the powerful 2013 slide (GDX, HUI Index).
It seems that our profits from the short positions are going to become truly epic in the following weeks.
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 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: $16.96; 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: $35.46; 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 upside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,683
Gold futures upside profit-take exit price: $1,683
HGD.TO – alternative (Canadian) inverse 2x leveraged gold stocks ETF – the upside profit-take exit price: $11.38
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 K. Radomski, CFA
Founder, Editor-in-chief