Once again, quite a lot happened yesterday in the markets, and once again I’ll start today’s discussion with an examination of the fundamentals.
Tales That Fail
With gold, silver, mining stocks, and the S&P 500 continuing their short squeezes on Oct. 4, the Fed pivot narrative still dominates investors’ decision-making. Moreover, with JOLTS job openings declining by more than one million month-over-month (MoM) and missing expectations, a cooler U.S. labor market has the bulls assuming inflation and future rate hikes will slow.
Please see below:
Source: Investing.com
In addition, a realization of the narrative would be profoundly bullish for the PMs. Fundamentally, fewer rate hikes should reduce real interest rates and suppress the USD Index. Therefore, the PMs’ primary fundamental adversaries would be on the defensive.
However, the narrative lacks credibility, and the post-GFC crowd is repeating the same mistake. Remember, when the headline Consumer Price Index (CPI) peaked year-over-year (YoY) in June, investors assumed the battle was won. However, I warned on numerous occasions that peak inflation was irrelevant. What matters is how high the U.S. federal funds rate (FFR) needs to go to normalize the metric to 2%.
Thus, after the consensus came around to our way of thinking, rate hike expectations rose dramatically, and the crowd realized how silly the peak inflation narrative was. Yet, we find ourselves in a similar situation now.
For example, with the weak JOLTS data emboldening the pivot predictors, the ‘bad news is good news’ mantra was on full display. However, the reality is that there are more than four million job openings compared to the number of the unemployed Americans. As a result, the supply/demand imbalance still favors employees and supports wage inflation.
Please see below:
To explain, the red line above subtracts the number of unemployed Americans from the number of U.S. job openings. If you analyze the right side of the chart, you can see that the metric is still well above any figure realized pre-pandemic. So, while an all-time high is no longer present, the spread is far from the low inflation levels witnessed from 2000 to 2020.
Second, while investors focused all their attention on the headline figure, they ignored that quits increased by 100,000 MoM.
Please see below:
To explain, the red line above tracks the number of Americans that quit their jobs each month. If you analyze the right side of the chart, you can see that the metric is down from its all-time high but increased in August.
Therefore, with more Americans resigning MoM, the data highlights how job opportunities remain plentiful. Think about it: employees don’t voluntarily leave their jobs unless better opportunities await them elsewhere. Moreover, the deciding factor is often higher pay.
Thus, with the JOLTS spread and quits still well above their pre-pandemic norms, the small progress is not enough for the Fed to pivot.
To that point, New York Fed President John Williams said on Oct. 3:
“Clearly, inflation is far too high, and persistently high inflation undermines the ability of our economy to perform at its full potential (…). We need to make sure that we take the actions to get inflation turned around, start bringing it back to our 2% goal.”
Also, when asked about Treasury market illiquidity and the stress of higher interest rates, Williams largely brushed off the issue. He said:
“We’ve seen enormous volatility in these markets, not just because of monetary policy, but because of the uncertainty around the outlook, global events. Hopefully, the volatility that we’ve seen in the last few weeks will come down somewhat, and that will help with that situation. But right now, I would say that trades are being made, market liquidity is definitely lower, but it’s still functioning.”
As such, while the consensus assumes the Bank of England’s (BoE) QE flinch will be mirrored by the Fed, Williams said that interest rate hikes still have a “significant ways to go.”
Please see below:
Source: Bloomberg
Likewise, San Francisco Fed President Mary Daly said on Oct. 4:
Inflation is a “corrosive disease; it is a toxin that erodes the real purchasing power of people. An inclusive economy goes both ways. It doesn’t mean just jobs, it means jobs and price stability.”
As a result, Daly projects a much higher FFR and wants the Fed to hold the policy in place until “we are truly done.”
Please see below:
Source: Reuters
Making three of a kind, Fed Governor Philip Jefferson said on Oct. 4 that reducing inflation is paramount and economic growth could be an unfortunate casualty.
“Inflation remains elevated, and this is the problem that concerns me most,” he said. “Inflation creates economic burdens for households and businesses, and everyone feels its effects.”
He added:
“Restoring price stability may take some time and will likely entail a period of below-trend growth (…). [But] it is important that we get back to [a stable] kind of economy, and that is what I think the intent of the Fed is.”
So, while the bulls price in a dovish pivot, Fed officials’ consistent hawkish message signals the exact opposite.
Please see below:
Source: Reuters
Thus, while the crowd engages in wishful thinking, the harsh truth is that inflation remains problematic and the U.S. labor market remains resilient. Furthermore, when data points decline from their cycle highs, the battle is not won. Sure, the financial markets react as if it's a major victory.
However, since it's taken 12 25 basis point rate hikes for the headline CPI and JOLTS job openings to come down from their peaks, investors underestimate how difficult it will be to bring them back to pre-pandemic levels. Therefore, the FFR should rise materially in the months ahead, and the USD Index and the U.S. 10-Year real yield should be substantial beneficiaries. In contrast, gold, silver, and mining stocks should head in the opposite direction.
Why All of the Short-Term Optimism?
Because asset prices don’t move in a straight line, countertrend moves are an unfortunate byproduct of medium-term investing. So, while the GDXJ ETF’s recent uprising is far from fun, bear market rallies are commonplace along the journey to a final low.
To that point, with precious metals pessimism increasing dramatically in recent weeks, the reversal should fail once sentiment normalizes.
Please see below:
To explain, the light blue bars above track weekly gold flows, while the blue line above tracks the four-week moving average. According to Bank of America, before the squeeze started on Oct. 3, gold funds suffered their longest streak of outflows since January 2014. As a result, the yellow metal was profoundly out of favor.
Second, CNN’s Fear & Greed Index hit abnormally low levels, which signaled extreme fear in the financial markets.
Please see below:
Source: CNN
To explain, the blue line above tracks CNN’s Fear & Greed Index. If you analyze the horizontal black line, you can see that the index ended September at its lowest level since May. Thus, over-positioning helped fuel the S&P 500’s squeeze higher.
Finally, while the gold permabulls are perpetual predictors of a Fed pivot, disappointment should confront the hyper-inflationists in the months ahead.
Please see below:
Source: Bloomberg/ZeroHedge
To explain, the blue line above tracks the gold/copper futures ratio, while the red line above tracks the FFR. If you analyze the vertical gray rectangles, you can see that gold often outperforms copper when the Fed cuts interest rates. Or, when the red line peaks and declines, the blue line often rises.
Therefore, it’s no surprise that hopes of a dovish pivot have investors piling into the PMs. However, the FFR has not peaked, and the permabulls have lost money repeating this bet throughout 2022. Likewise, since inflation doesn’t die easily, the FFR should continue its ascent, and gold should hit lower lows before it’s all said and done.
The Bottom Line
While gold, silver and mining stocks continued their uprisings on Oct. 4, their rallies are built on foundations of sand. Moreover, while the pivot predictors gain confidence, the latest iteration is no different than their previously poor forecasts. In reality, inflation is nowhere near 2%, and Fed officials are united in supporting a higher FFR.
As a result, risk assets’ recent strength is more about positioning than medium-term fundamentals or technicals; and while the short term is always unpredictable, more reality checks should emerge in the months ahead.
In conclusion, the PMs rallied on Oct. 4, as the shorts ran for cover once again; and while positioning imbalances can fuel short-term upswings, 2022 highlights how these rallies fail when the fundamentals and the technicals don’t participate. As such, the bear market should resume sooner rather than later.
Technically Speaking
In yesterday’s analysis, I wrote the following about gold:
Gold is now slightly above $1,700 (gold futures are trading at $1,718 at the moment of writing these words). There’s very strong resistance just $20 higher – at about $1,740 – the previous high and the declining blue resistance line based on the March and August 2022 highs.
Gold might reverse right away because it’s in the resistance zone and the breakdown below this zone was already confirmed. However, if it first soars to $1,740 and declines only after that, it won’t really change much from the medium-term point of view.
Indeed, gold moved to (almost) the $1,740 level – the declining resistance line and the 50-day moving average, then it declined a bit. It also declined some more in today’s pre-market trading – at the moment of writing these words, gold futures are trading at $1,720, which means that they are pretty much right where they were when I wrote the above-quoted text.
Did the rally burn itself out? It’s quite possible.
Wasn’t the rally too big to call it just a correction?
Well, please consider the context. Here’s gold’s long-term picture.
In short, the link to 2013 remains intact, which means that the recent move wasn’t too big.
Besides, please note that during one of the biggest declines in gold – in 2008 – gold’s sharp corrective upswing was much bigger, and it was still followed by an even bigger decline.
The GDXJ rallied sharply once again yesterday, and it reversed close to its September high. That happened slightly above the 50-day moving average. Both previous attempts to break above this moving average failed, and that’s when declines to new lows started. The same is likely right now.
Just like gold, the GDXJ ETF is also down in today’s London trading.
In other words, my yesterday’s comments on the above chart remain up-to-date:
That’s the fourth attempt of the GDXJ to break above its 50-day moving average (marked in blue). All previous cases failed, and in all previous cases the rally taking prices to this MA were sharp.
Is this time different? That’s unlikely, as the fundamentals (as explained earlier today) haven’t changed.
Additionally, please note that the RSI just jumped above 50, and ever since the April 2022 top, these levels in the RSI meant that local tops were in. I marked that with red ellipses in the upper part of the chart.
There’s also one additional factor explaining why this counter-trend bounce might be so volatile – that’s because the mirror image of this decline – the 2020 rally – also features a sharp correction around those price levels.
This time, the correction doesn’t have to be as big as the move that led to it was not as sharp.
Now, as you may recall, I previously had a downside target of about $26, but I ended up resigning from it. I continue to think that this decision was justified from the risk to reward point of view (given the data that we had available at that time), as there were previously corrective upswings, and it was not a no-brainer that we’re going to see a rebound also one more time.
However, as geopolitics came into play this time, the counter-trend rally has indeed materialized. Since it doesn’t make much sense to try to predict those near-term geopolitical events – the world is too unpredictable, it’s better to focus on the part of the picture where we can actually gain an extra edge over other market participants. That is recognizing trends and tendencies. Once the very short-term dust settles, the markets are likely to get back to their previous trends and surprise those who assume that short-term geopolitical events have a lasting impact on the markets. They don’t. If that was the case, gold would be above $2,000 at this time, as that’ where it soared based on the Russian invasion. Well, the war didn’t end, and yet gold is at about $1,700.
My yesterday’s comments on silver remain up-to-date as well:
In Monday’s intraday Alert, I wrote the following about silver’s outperformance:
“The precious metals market moved higher today, and I just received the following question:
“What is happening with silver?”
The thing is that silver soared in a major way today, gaining about $1.5. It moved above its September 2022 high, and almost touched its August high.
The GDXJ did move above $30 (it has yet to close above it, though), and gold moved a bit above its late-September highs, and the downtrend in both markets remains visibly intact.
However, silver soared. What gives?
Those, who have been following my analyses for some time likely know what this means. It means that the current move up is likely fake. Silver tends to outperform gold in a major, yet brief way, right at the end of a given upswing, or close to it.
That’s exactly what we see today.
The S&P 500 futures are up today, but let’s not forget that they broke to new yearly lows in weekly terms. Therefore, it would take more than a daily rally to invalidate this bearish indication. Do you remember the Sep. 28 session, where stocks “invalidated” the breakdown to new lows? Well, it was followed by another slide. Since Friday’s breakdown was more important (weekly!), it seems that the bearish forces are likely to return shortly this time as well. And with them, lower gold, silver, and mining stock values.
All in all, the very bearish outlook for the following weeks/months remains intact.”
Now, we know that silver’s daily rally was accompanied by one of the biggest volume readings that we’ve seen so far this year. This makes the above even more up-to-date.
The session with the highest volume was the 2022 top, by the way.
So, where do we go from here?
If you’d like a price prediction for the next three days, then I don’t think it’s possible for anyone to provide it. The markets are volatile and are focusing on pretty much random things at the moment. I described what the reality is, and I described what people choose to focus on instead. Emotions, not logic, drive these price moves. Consequently, we could theoretically use – as always – technical tools. However, with this kind of volatility, it’s possible that we get an immediate turnaround, but it’s also possible that the rally remains sharp for several hours – days, and we get a massive reversal only then.
Fortunately, we’re not in the day-trading business, and I haven’t written about short positions in silver, either (the price levels for silver and gold are only provided as some subscribers request that). This means that we can simply continue to focus on what’s much more predictable by using tools that don’t just randomly stop being useful.
The link to 2013 remains intact, and so does the very bearish outlook. When in doubt, or when things appear too hectic, and you want to drop the towel, give up, and run for the hills, take several deep breaths, and return to the long-term charts. Has anything major happened to them. No. So, whatever you see is most likely just short-term price noise.
Investing and trading are simple but not easy. This year has been extremely profitable so far, but no market can move up or down without corrections, and no position can grow more and more profitable each day – there have to be some corrections. The key thing is how one approaches those days. Will one allow short-term emotions to cloud their vision, or will one stand firm and in tune with the original strategy?
I can’t make any guarantees with regard to gold’s price performance or profitability, but I do think that this counter-trend upswing is just a very temporary phenomenon, and that the big downtrend remains intact. In my opinion, the short position in junior mining stocks remains justified from the risk to reward point of view, and I’m keeping my position intact. Of course, whatever you decide to do with your money is completely up to you – it’s your capital, after all.
Still, it could be the case that the top is already in.
Overview of the Upcoming Part of the Decline
- It seems to me that the corrective upswing is over or about to be over after an additional – very brief – rally, and that the next big move lower is already underway.
- 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 prices close to $1,600.
- I plan to switch from the short positions in junior mining stocks or silver (whichever I’ll have at that moment) to long positions in junior mining stocks when gold / mining stocks move to their 2020 lows (approximately). While I’m probably not going to write about it at this stage yet, this is when some investors might consider getting back in with their long-term investing capital (or perhaps 1/3 or 1/2 thereof).
- I plan to return to short positions in junior mining stocks after a rebound – and the rebound could take gold from about $1,450 to about $1,550, and it could take the GDXJ from about $20 to about $24.
- 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 prices close to $1,400 and GDXJ close to $15 . 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 $1,400, but at the moment it’s too early to say with certainty.
- 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 nor clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Letters to the Editor
Q: I am wondering your opinion on how much of the recent surge in gold and mining stock prices over the past week is attributable to geopolitical fears over the Russia/Ukraine situation and how much is tied to the general rebound seen in markets over the past week and to the natural correction that wasn't surprising when gold prices fell so fast. Thanks!
A: That’s a very good question, but I don’t think there’s a way to really measure this. In my view, the market had this internal “possibility” to correct, but due to so many geopolitical factors taking place at the same time (it’s not just the war in Europe, but also protests in Iran, the public excitement about the possibility of seeing the Fed’s U-turn, and safe-haven demand due to non-U.S. QE), what would have normally been a tiny rebound became a sharp rally.
Still, these events are likely to either not have a lasting effect (even the Russian invasion didn’t have a lasting effect on gold’s price, and miners are well below their pre-war levels) or are likely to be reversed (expectations about the Fed’s U-turn), which is likely to trigger a sharp decline (just as people bought based on the expectations, they could sell once those expectations disappear).
Q: I hope you are doing good. Thanks for your good analyses which keep us in profits.
I have read that the 10-year yield declined, which made the DXY decline and gold and silver bullish . What’s your view on how long this effect last? Can the DXY decline more? How much can gold and silver go up? Can you explain?
Thanks again for your analysis .
A: Thank you for your comments (much appreciated!) and for your questions.
I think I commented on that throughout today’s analysis, but to summarize – it could be the case that the rally is already over, and if not, I think that it will be over soon.
All markets have periodic corrections within big moves, and it seems that we’re seeing one of them right now.
How high can gold and silver go? Well, they CAN rally by hundreds of dollars… But it’s not LIKELY that they would. I can’t provide you with a price level above which gold and silver “can’t” rally – nobody can. The markets are too unpredictable for anyone to do this. The only thing that I can write about is what I think is likely based on what I see on the charts and in the world in general – based on almost two decades of experience in the precious metals market. And right now, it looks to me like this rally is a fake, emotional move that’s unlikely to last much longer.
Q: Do you think the rise in gold/silver prices was a reaction to the Russian pipeline being blown up? Is it another example of world politics affecting a fragile economy?
A: This might have been one of the factors, but I think it was a combination of many factors at the same time. You will find a more detailed reply to the two questions above.
Q: Hi Przemyslaw,
I hope all is going well.
In your recent analysis you mention that the ECB, BoJ, BoE make up 83% of USD index.
I saw a video recently where someone noted that the Chinese Finance Minister wanted to make the USD less strong. I thought the context was the short term. Can China move the USD very much if they tried?
Longer term, BRIC nations + others are working on a currency that may be more attractive than the USD to many nations. Also, the holders of US debt may decide to reduce their exposure, especially once another alternative (BRIC currency) is available. In the medium to long term, these changes could be very significant.
In the short term, until the precious metals bottom, should any of these forces have much of an impact on the USD?
I have enjoyed your analysis and reliable information for several years.
A: Thank you for your trust and staying with us for many years! This really means a lot – trust is the most important thing that I can receive, and I’m grateful for it.
China is a very important trade partner for the U.S. and for practically every country on the planet, so yes, it could move the USD significantly if they tried. They also hold sizable positions in US bonds, so that could definitely happen.
With the tensions rising between the U.S. and China, at some point China will probably want to dominate in the financial world, at least in a part thereof. And since China is growing faster than the U.S., it’s almost guaranteed that it will happen at some point.
Some time ago, I recall reading an analysis where the author argued that the world is likely to be split into (at least) two blocks, where one is U.S.-centered (or “West”-centered) and the other is China-centered. In fact, it seems that China is already preparing for this – after all, they have their “own” Internet, right?
So, at some point, it’s quite likely that an alternative big currency will appear. It’s not clear to me if it will take a regular form, though. It could be some form of gov’t cryptocurrency. What if something like that was introduced and the only way to get Chinese goods would be through the use of this currency?
What are the long-term implications for gold? They are bullish, in my view, because if there’s turmoil in the currency markets, people will want to own what was a stable currency for millennia.
What are the short-term implications for gold? None. The above-mentioned possibility has been out there for months, and nothing has happened to make it more likely recently.
Summary
Summing up, it seems that the biggest part of the 2013-like decline is taking place right now, and – while I can’t make any promises regarding performance - it seems likely to me that our big profits are about to become huge, and then ridiculously big in the relatively near future.
As far as this quick corrective upswing is concerned, it seems that it might already be over (or about to be over).
The current quick upswing most likely doesn’t change anything. Fundamentals and technicals continue to point to lower precious metals values in the coming weeks / months. The current geopolitical news-based rally is likely to serve as nothing more than just a verification of the breakdown below the previous lows in gold.
Things might happen very fast in the coming days, and if I plan to make any adjustments, I’ll keep you informed. Still, if the targets that I’m mentioning in the “Trading” part of the summary are reached, I think that profits should be taken off the table without an additional confirmation from me. I will probably get on the long side of the market at that time, but I’ll send a confirmation if I decide to do so.
After the final 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.
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: $20.32; 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). The binding profit-take level for the JDST: $29.87; stop-loss for the JDST: 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: $12.32
SLV profit-take exit price: $11.32
ZSL profit-take exit price: $79.87
Gold futures downside profit-take exit price: $1,504
HGD.TO – alternative (Canadian) 2x inverse leveraged gold stocks ETF – the upside profit-take exit price: $19.87
HZD.TO – alternative (Canadian) 2x inverse leveraged silver ETF – the upside profit-take exit price: $49.87
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’ve 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 (as 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