Gold, silver, and miners declined heavily in the past weeks, but it seems that they got too low, too fast, and now a quick rebound seems very likely.
On Friday, junior gold miners once again refused to decline below the $30 level, indicating that a rally was probable, which added to the list of bullish signals for the short term.
Interestingly, junior miners are now the strongest part of the precious metals sector (at least among its popular parts).
Junior miners (the GDXJ ETF) are the only ones of the above that just closed above their early-July lows. Senior miners (the GDX ETF) are only a little below their own early-July low, but gold (GLD) and silver (SLV) are much below their respective early-July lows.
Why would junior miners be so strong right now? One simple reason – because they had been so weak in the previous weeks. It’s not only a given market that usually (it’s almost always the case) doesn’t go up or down without periodic corrections, but one market’s relative performance to other markets.
So, what we see here, is not necessarily a reflection of junior miners’ “true strength,” but it’s just that since they have fallen the most, they are now bouncing more visibly. That’s likely it. Still, it seems that choosing junior mining stocks as a proxy for our current long position was a good idea.
Either way, the above chart provides us with one additional important detail.
The thing is that the GDXJ closed on Friday just a little below its declining short-term resistance line. The previous attempt to rally above it was invalidated, but given their relative strength, the recent reversals (one formed on huge volume), and the fact that GDXJ was quick to invalidate a tiny breakdown below $30, all suggest that a move higher is just around the corner.
In fact, looking at GDXJ’s performance in today’s early London trading, it seems very likely that it will be able to break above the above-mentioned declining resistance line this time.
Gold and silver futures are both up in today’s pre-market trading as well, and so is the general stock market. At the same time, the USD Index is down.
This is in perfect tune with what I wrote previously – the USDX reversed in a big way recently while reaching its long-term resistance.
Consequently, my previous comments on the above chart remain up-to-date:
The USD Index has quite likely formed a short-term top here, and it’s now likely to correct. How low would the USD Index be likely to move? Quite possibly to the 104 level or so, as that’s where we have very strong medium-term support. This support level is strengthened by the 1999 high (approximately), the 2002 low, the 2016 high, and the 2020 high – all very important highs.
Additionally, please note that the middle of the year is just around the corner, and that’s when the USD Index usually reverses, and it’s usually the case that those reversals are bottoms. I marked those cases with vertical red dashed lines. So, if the USD Index continues to correct here (and I think that it will), the decline might be rather short-lived.
All in all, it looks like the precious metals sector is going to rally and probably top close to the end of this month as the USD Index pulls back after a sizable rally.
Having said that, let’s take a look at the markets from a more fundamental angle.
The Bull Case
With U.S. retail sales outperforming expectations on Jul. 15, Bank of America’s bearish forecast didn’t come to fruition. However, with dovish Fed-speak resulting in a material drop in July rate-hike expectations, moving away from 100 basis points helped risk assets seek higher ground.
Please see below:
Source: Bloomberg/ZeroHedge
To explain, the black line above tracks the market-implied probability of a 100 basis point rate hike at the FOMC’s July 26-27 monetary policy meeting. If you analyze the sharp spike, you can see that the odds of a jumbo rate hike surged following the Consumer Price Index (CPI) release and the Bank of Canada’s (BoC) hawkish surprise on Jul. 13.
However, with the metric declining on Jul. 14 and retreating further on Jul. 15, a move back toward 75 basis points helped alleviate some of investors’ anxiety. Therefore, with the GDXJ ETF recouping its intraday losses and closing in the green, short-term upside should materialize as Fed officials help talk down the USD Index.
To that point, Atlanta Fed President Raphael Bostic hinted on Jul. 15 that he’s against a 100 basis point rate hike this month. He said:
“Moving too dramatically will undermine a lot of the other things working well. We want it to be orderly” and for Americans to have “the right perceptions” about the economy. As a result, Fed officials are eager to reverse some of the BoC’s 100-point damage.
Please see below:
Source: Bloomberg
In addition, Goldman Sachs told clients: the "buyback blackout period ends 7/22. We expect $300B worth of US Corporate buyback execution in Q3." As such, if corporations' stock purchases help uplift the S&P 500, the positivity should support higher prices for the GDXJ ETF.
Furthermore, Goldman Sachs Prime Brokerage noted that hedge fund positioning has fallen off a cliff. Therefore, the data is contrarian bullish and could culminate with a short squeeze this week.
Please see below:
Source: Goldman Sachs
To explain, the pink line above tracks the S&P 500, while the blue line above tracks Goldman Sachs Prime Brokerage’s tally of institutional clients’ positioning. If you analyze the right side of the chart, you can see that the blue line has declined dramatically as hedge funds short U.S. equity futures to either profit on the downside or hedge their long positions. Either way, bullish sentiment has eroded, and bear market rallies are often born out of extreme pessimism.
Likewise, the Cboe Equity Put-Call ratio remains materially elevated, and further downside supports higher prices for risk assets.
Please see below:
To explain, the blue line above tracks the Cboe Equity Put-Call ratio, while the orange line above tracks the ratio of value to growth stocks. When the blue line rises, investors purchase more puts than calls, which means they're bracing for further downside. Similarly, when the orange line rises, investors swap growth stocks for value stocks, which often occurs during risk-off periods.
However, a continued decline in the blue line could reduce the Cboe Volatility Index (VIX) – which measures S&P 500 volatility – and provide more fuel for short-term upside. As a result, the prospect is short-term bullish for the S&P 500 and the GDXJ ETF and bearish for the USD Index.
The only caveat is that the NASDAQ 100 has to participate. Despite the tech wreck in 2022, the information technology and communication services sectors still account for nearly 36% of the S&P 500's movement. Moreover, Apple, Microsoft, Amazon, Alphabet, and Tesla are the five largest companies in the index and account for roughly 22% of the S&P 500's movement. As such, it will be important to monitor the NASDAQ 100 in the days ahead.
Please see below:
To explain, the candlesticks above track the NASDAQ 100, while the blue line above tracks its 50-day moving average. If you note the price action, you can see that the index has only surpassed its 50-day MA during one bear market rally in 2022. Moreover, with the key level less than 1% above the Jul. 15 close, the spotlight is now on Big Tech. For context, Apple, Microsoft, Amazon, and Tesla account for nearly 37% of the NASDAQ 100’s movement.
Thus, if the NASDAQ 100 recoups its 50-day MA, a realization is bullish for the S&P 500 and the GDXJ ETF.
Future Mistakes
With Fed officials largely against a 100 basis point rate hike in July, their preference for patience has been their undoing over the last two years. Thus, while their recent caution is short-term bullish for the GDXJ ETF, the misstep will likely cause more pain over the medium term.
For example, I noted on Jul. 15 that the Atlanta Fed’s measure of wage inflation hit a record high. Therefore, the wage-price spiral is still running ahead of the Fed. I wrote:
The Atlanta Fed updated its Wage Growth Tracker on Jul. 14. And surprise, surprise, wage inflation hit a new all-time high in June.
Please see below:
Likewise, the lowest-earning Americans saw their wages increase by 7%.
Please see below:
Furthermore, when the Fed’s dovish disposition uplifts the general stock market, economically-sensitive commodities often participate. As a result, inflation progress is eroded each time the Fed takes its foot off the hawkish accelerator. To explain, I wrote on May 31:
When economic optimism elicits rallies on Wall Street, that same optimism uplifts commodities. Therefore, if the Fed tries to appease investors and passively attack inflation, it will only spur more inflation.
As such, the idea of a “positive feedback loop” where ‘stocks rally, inflation cools [and] Fed tightening expectations abate” is extremely unrealistic. In fact, it’s the exact opposite. The only bullish outcome is if economically-sensitive commodities collapse on their own. Then, input inflation would subside and eventually cool output inflation, and the Fed could turn dovish.
However, the central bank has been awaiting this outcome for two years. Thus, my comments from Apr. 6 remain critical. If investors continue to bid up stock prices, the follow-through from commodities will only intensify the pricing pressures in the coming months. Therefore, investors are flying blind once again.
To that point, while commodity prices have declined materially over the last ~45 days, the general stock market’s optimism on Jul. 15 didn’t go unnoticed.
Please see below:
Source: Investing.com
To explain, the table above depicts the performance of several commodities on Jul. 15. If you analyze the vertical red rectangle, you can see that most commodities rallied sharply. As such, while many investors assume that falling commodity prices are bearish for inflation, the ramifications are counterintuitive.
Yes, inflation can subside if commodity prices crash. However, they only plunged over the last ~45 days because the Fed’s hawkish disposition elicited fears of a recession. As a result, if the Fed slows its roll and alleviates investors’ recession fears, the optimism will spur more bids for commodities and inflation will reign once again.
Therefore, while Fed officials’ miscalculation is short-term bullish for the GDXJ ETF, the future mistake is clear: Fed officials can’t have it both ways. If a “soft landing” is bullish for the S&P 500, it’s also bullish for economically-sensitive commodities. Moreover, you can’t tame inflation with commodity prices increasing month-over-month (MoM).
In addition, another missing link is the medium-term impact on core inflation. While the recent drop in commodity prices (prior to Jul. 15) is short-term bearish for the headline CPI, a continuation of the theme is bullish for the core CPI. Think about it: lower food and fuel costs will increase Americans’ disposable income. Moreover, wage inflation at an all-time high enhances their ability to spend more on discretionary items. Thus, the dynamic should shift inflation from one category to the next.
Finally, the University of Michigan released its Consumer Sentiment Index on Jul. 15. Moreover, while the data was mixed as Americans’ long-term inflation expectations declined, the report revealed:
“Consumer sentiment was relatively unchanged, remaining near all-time lows (…). The share of consumers blaming inflation for eroding their living standards continued its rise to 49%, matching the all-time high reached during the Great Recession. These negative views endured in the face of the recent moderation in gas prices at the pump.”
As a result, if the Fed wants to add to its war chest of monetary mistakes, we can profit on the long side. However, the missteps should only increase the chance of a sharp recession in the months ahead.
The Bottom Line
The NASDAQ 100 faces an important test this week, and its reaction to the 50-day MA could impact other risk assets. However, with investors profoundly bearish and already positioned for sharp declines, any bit of positive news could induce a short-covering rally. Therefore, when we combine the prospect with the GDXJ ETF’s strong technical backdrop, the short-term outlook is bullish for the PMs.
In conclusion, the PMs were mixed on Jul. 17, as gold and the GDX ETF closed in the red. However, since silver and the GDXJ ETF outperformed, their rallies highlight the rise in risk-on sentiment. As such, more follow-through should materialize this week.
Overview of the Upcoming Part of the Decline
- It seems to me that we’re going to see a corrective upswing here (probably ending in the final week of July) that will then be followed by a very big decline in the precious metals sector.
- 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.
- 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 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 $1,400. 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 $1,400, 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 or clear enough for me to think that they should be used for purchasing options, warrants, or similar instruments.
Summary
Summing up, it seems that while the medium-term trend in the precious metals sector remains down, we are likely to see a corrective upswing soon. Based on the confirmations that we have seen recently, the short-term outlook is bullish.
Based on the new bullish indications that we got – junior miners’ reversal and relative strength on Friday, plus today’s pre-market strength in the precious metals market (and weakness in the USDX), I’m once again increasing the size of our current long position to 200% of the regular size of the trade. Of course, it’s not 200% of one’s entire capital – it’s just 200% (so one and a half) of how big a regular trade would be (so, just a portion of the trading capital that one is comfortable with).
It seems likely that the profits that we earned from the last couple of trades will increase even further in the near future.
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 long positions (200% 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: $33.87; 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 JNUG (2x leveraged). The binding profit-take level for the JNUG: $36.78; stop-loss for the JNUG: 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: $20.28
SLV profit-take exit price: $18.78
AGQ profit-take exit price: $24.57
Gold futures upside profit-take exit price: $1,776
HGU.TO – alternative (Canadian) 2x leveraged gold stocks ETF – the upside profit-take exit price: $13.46
HZU.TO – alternative (Canadian) 2x leveraged silver ETF – the upside profit-take exit price: $9.18
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
Insurance capital (core part of the portfolio; our opinion): Full position
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Please note that 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.
Sincerely,
Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief