Contrary to yesterday’s long analysis, today’s issue is going to be rather short, as nothing really happened on the precious metals market yesterday. The thing that did happen was the USD Index moving higher.
The U.S. currency index once again broke to new yearly highs, and – more importantly – it also broke above its rising trend channel. This breakout is not yet confirmed, but it is already notable. The implication of this breakout is that we’re likely to see a post-breakout rally at least equal in size to the height of the trading channel that the USDX just broke above. I marked the above with dotted lines in the above chart.
This means that a rally to about 97 has now become even more likely. That’s bearish for the precious metals market due to its historically low correlation with the USDX.
Still, we also have a bullish lining for the PMs here. The thing is that yesterday was once again a day when PMs and miners refused to decline despite USD’s rally. This is a bullish sign for the PMs as it shows their strength. Will this sign continue to hold? Will PMs rally? Does it invalidate the bearish outlook altogether, or is it just a small bullish blip on the radar that also indicates massive bearish clouds on the horizon?
Based on numerous other indications, I continue to think that the latter interpretation is more likely to be the correct one.
If the USDX rallies to 97 or so, then gold will have quite a few chances to catch up with its bearish reaction to the former’s strength.
Components of the Bearish Picture
Speaking of the gold price, there’s one factor that I didn’t feature yesterday. That’s the fact that right now gold is at a declining resistance line based on the previous medium-term 2021 highs. The highs are important, and so is the resistance line. This, plus the RSI very close to 70, plus the situation in the USD Index, creates a situation in which gold is likely to decline soon.
Just as gold did nothing yesterday, the same happened in the mining stocks - nothing. They (the GDX that is) once again moved to their recent intraday high on an intraday basis but ended the day below $35. This level has kept the rallies in check since late June, and now it has been strengthened by the 38.2% Fibonacci retracement level.
This, plus the fact that the RSI is above 70, creates a bearish picture. In fact, my previous comments on the above chart remain up-to-date:
To explain, the GDX ETF rallied on huge volume on Nov. 11 and there were only 4 cases in the recent past when we saw something like that after a visible short-term rally.
In EACH of those 4 cases, GDX was after a sharp daily rally.
In EACH of those 4 cases, GDX-based RSI indicator (upper part of the chart above) was trading close to 70.
The rallies that immediately preceded these 4 cases:
- The July 27, 2020 session was immediately preceded by a 29-trading-day rally that took the GDX about 42% higher. It was 7 trading days before the final top (about 24% of time).
- The November 5, 2020 session was immediately preceded by a 5-trading-day rally that took the GDX about 14%-15% higher (the high-volume day / the top). It was 1 trading day before the final top (20% of time).
- The January 4, 2021 session was immediately preceded by a 26-trading-day rally that took the GDX about 17%-18% higher (the high-volume day / the top). It was 1 trading day before the final top (about 4% of time).
- The May 17, 2021 session was immediately preceded by a 52-trading-day rally that took the GDX about 30% higher. It was 7 trading days before the final top (about 13% of time).
So, as you can see these sessions have even more in common than it seemed at the first sight. The sessions formed soon before the final tops (4% - 24% of time of the preceding rally before the final top), but the prices didn’t move much higher compared to how much they had already rallied before the high-volume sessions.
Consequently, since history tends to rhyme, we can expect the GDX ETF to move a bit higher here (but not significantly so) and we can expect this extra move higher to take between additional 0 to 7 trading days (based on the Nov. 12 session, so as of Nov. 16, it’s between 0 and 5 trading days).
Why 0 – 5 trading days (as of today – Nov. 16)? Because with the 4% timeline now in the rearview, the latter represents the updated 24% timeframe based on the preceding rally (that took 30 trading days).
Since it’s unlikely to take the mining stocks much higher, and the reversal could take place as soon as today, I don’t think that making adjustments to the current short positions in the mining stocks is justified from the risk to reward point of view.
Is there a meaningful resistance level that would be likely to trigger a decline in mining stocks? Yes! The GDX ETF is just below its 38.2% Fibonacci retracement level based on the August 2020 – September 2021 decline. The resistance is slightly above $35, so that’s when the final top could form.
As a result, those historical readings provided us with great shorting opportunities. And while I’m not increasing my short position, if I didn’t already have one in place, I would consider the current setup as offering a great risk-reward proposition.
The Silver Concern
One thing that’s concerning for the short term is the fact that the silver price is not outperforming the price of gold right now.
As a reminder, whenever silver outperforms gold on a short-term basis, it indicates that a top might be just around the corner. However, it hasn’t outperformed recently, which might mean that the final top is not yet in.
In yesterday’s “Letters to the Editor” section, I wrote that, in my view, the chance of gold moving to $1,900 this week was less than 40%. I think it’s now – based on silver’s lack of outperformance and the PMs’ strength relative to the USD Index – closer to 50/50.
Still, please note that even if gold rallies here, it doesn’t mean that mining stocks must follow it to a major extent. If it’s the final part of the upswing, gold stocks are likely to underperform (while silver might outperform).
Having said that, let’s take a look at the markets from a more fundamental point of view.
Be Careful What You Wish For
With the EUR/USD cutting through 1.1400 like a knife through butter on Nov. 15, the currency pair has been slaughtered in recent weeks. And with the EUR/USD accounting for nearly 58% of the movement of the USD Index, the former’s pain is the latter’s gain.
Headlining the move, ECB President Christine Lagarde acknowledged reality on Nov. 15 and admitted that prophecies of a hawkish shift are much more semblance than substance. She said:
“At a time when purchasing power is already being squeezed by higher energy and fuel bills, an undue tightening of financing conditions is not desirable and would represent an unwarranted headwind for the recovery.
“If we were to take any tightening measures now, it could cause far more harm than it would do any good,” said Lagarde.
As a result:
Source: Reuters
For context, I’ve been warning for months that the ECB would disappoint euro bulls. I wrote on Jul. 20:
Not only is the U.S. economy outperforming the Eurozone, but the Fed and the ECB are worlds apart. And with the U.S. HICP rising by 6.41% YoY in June and the Eurozone HICP rising by 1.90%, the Fed is likely to taper well in advance of the ECB.
To that point, with the Fed’s taper already underway, the ECB lags materially behind. And with interest rate hikes next on the hawkish docket, Lagarde repeated on Nov. 15 that liftoff in 2022 is likely off the table. Conversely, the hot inflation print on Nov. 10 has the futures market pricing in three rate hikes by the Fed in 2022.
Please see below:
Thus, the ECB-Fed dove-hawk divergence continues to widen, and it’s no coincidence that the EUR/USD is now at a 2021 low. And as we look ahead, more downside should materialize over the medium term. Aligned with our beliefs, Danske Bank told clients on Nov. 15 that lower-for-longer ECB policy implies a lower-for-longer EUR/USD:
“Tapering is starting here in November. This will continue to shift the market’s attention towards the USD on a theme of monetary divergence vis-à-vis the EU. Such upside risk is amplified by the dollar rebounding from relatively weak levels.
“As a reflection of broader market themes increasingly turning pro-dollar with global liquidity conditions tightening, PMIs moving lower and central banks facing rising inflation concerns, we keep our profile for the EUR/USD to 1.10 in 12 months in favour of USD strength.”
Likewise, Swedbank expects that the Fed’s Summary of Economic Projections – which will be released after the Fed’s policy meeting on Dec. 16 – will include more hawkish tidbits:
“Net bond-buying finishes in June, but it could go faster if needed. Fed chair Powell has not pushed back at market rate expectation of a hike already next summer followed by another hike in Q4. Our guess is that median dots in December will reflect 2 hikes next year rather than the current one.”
As a result, Swedbank expects “the EUR to remain an underperformer in G10” and projects that the EUR/USD will hit 1.12 over the next 6-12 months.
For context, I wrote on Oct. 19:
Unlike in 2013, the Fed/ECB ratio should decline immediately. And with the ratio likely to fall materially throughout 2022, the EUR/USD (excluding the abnormal strength that we witnessed in 2017-2018) has been unable to record lasting rallies when the ECB is outprinting the Fed. As a result, 1.1500 should break over the medium term, and assuming that the Fed/ECB ratio approaches its all-time low, the EUR/USD’s fair value likely lies in the 1.100 to 1.1250 range.
Also noteworthy on the currency front, Japan’s economy contracted by 3% in the third quarter (data released on Nov 15) – versus an expected decline of 0.8% – as supply chain disruptions hit exports and business spending, while new COVID-19 cases upended consumer activity.
More importantly, though, since the USD/JPY and the EUR/USD combined account for more than 71% of the USD Index’s movement, the greenback’s 2021 fundamental foundation is stronger than ever.
Is Gold Ignoring Fundamentals?
Despite all of that, though, the U.S. dollar is merely an input in our thesis for the PMs’ potential output. And if gold, silver and mining stocks ignore the U.S. dollar’s ascent, is their pathway to higher prices now unconstrained?
Well, for one, the PMs’ negative correlations with the U.S. dollar have stood the test of time. And while the relationships have broken down in recent weeks, history has shown that the PMs, and many other assets, can only ignore the U.S. dollar’s uprising for so long.
Second, it’s not only the U.S. dollar – the PMs have thrown plenty of fundamental caution to the wind. To explain, I include the copper/U.S. 10-Year Treasury yield ratio within Monday’s flagship Gold & Silver Trading Alert. And since the ratio is a leading fundamental indicator of the gold futures price over the medium to long term, its signals align perfectly with gold’s long-term MACD indicator, its two triangle-vertex-based reversal points and its cyclical turning point.
For context, I wrote previously:
When the copper/U.S. 10-Year Treasury yield ratio is rising (meaning that copper prices are rising at a faster pace than the U.S. 10-Year Treasury yield), it usually results in higher gold prices. Conversely, when the copper/U.S. 10-Year Treasury yield ratio is falling (meaning that the U.S. 10-Year Treasury yield is rising at a faster pace than copper prices), it usually results in lower gold prices.
Moreover, since the copper/U.S. 10-Year Treasury yield ratio has had a correlation of 0.94 with the gold futures price since 2017, the latter should confront these harsh realities over the medium term.
Please see below:
To explain, the red line above tracks the copper/U.S. 10-Year Treasury yield ratio, while the gold line above tracks the gold futures price. If you analyze the relationship, you can see that when gold attempted to run away from the ratio in 2018, 2019, 2020 and 2021, the yellow metal ended up suffering hard landings. As a result, if you focus your attention on the divergence on the right side of the chart, is this time really different?
To that point, with the price action on Nov. 15 pushing the copper/U.S. 10-Year Treasury yield ratio even lower, the metric now implies a gold futures price of roughly $1,670. And while the correlation is weaker over the shorter time horizon (0.75 vs. 0.94), as mentioned, gold’s recent shunning of fundamentals has been the main culprit.
Please see below:
The bottom line? While gold may seem invincible at the moment, ignoring fundamentals is akin to a person driving a car with their eyes closed. And with the inevitable crash likely a matter of when, not if, the yellow metal should suffer a sharp re-rating if all of these reliable indicators continue to head in the opposite direction.
In conclusion, the PMs were mixed on Nov. 15, while the USD Index continued its sharp rally. And while the PMs’ recent sugar highs have investors assuming that new highs are inevitable, history has been unkind when technical and fundamental realities go by the wayside. As a result, lower lows should commence over the medium term and the odds of a precious metals ‘flash crash’ have risen materially.
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 seems to be another short-term move more than it seems to be a continuation of the bigger decline, I think that junior miners would 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 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. 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: I am surprised you did not mention another item that could have been boosting the PMs over the last few days. No doubt, the idea that Russia could move, again, into Ukraine was probably leaked. I suspect there are some who bought the rumor and will sell the news.
https://www.bloomberg.com/news/articles/2021-11-11/u-s-warns-europe-that-russian-troops-may-plan-ukraine-invasion
Here is the Politco follow up article.
https://www.politico.com/news/2021/11/12/russia-ukraine-invasion-putin-521139
As far as the rumor/news cycle goes, is the rumor that there will be an invasion, or that there will be a news story about an invasion?
A: The rumor might have boosted gold as well recently. I doubt that it will become a near-term reality, though.
The article also says that the assessments are believed to be based on information the U.S. hasn’t yet shared with European governments. So, it’s more or less just speculation, and I wouldn’t attribute any major price moves to it in the near future. It might be one of the explanations of gold’s strength though, but geopolitical events tend to have only a temporary impact on gold’s price.
Summary
The PMs rallied last week, and their momentum has teetered on euphoria. However, when prices diverge from fundamentals, sharp sell-offs often occur when sentiment shifts. As a result, caution is warranted, and the PMs’ recent bout of optimism will likely end in disappointment. This disappointment could start within the next few days, based on analogies to very similar cases in mining stocks. The decline in the GDX could start right away or once it moves to or slightly above $35, quite likely in 0 – 5 trading days.
Since it seems that the PMs are likely about to start another short-term move lower more, I think that junior miners would be likely to (at least initially) decline more than silver.
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 K. Radomski, CFA
Founder, Editor-in-chief