It's been a strong start to the year for gold (GLD) as the metal was briefly derailed during the mid-March panic lows. However, gold has since recouped all its losses and is attempting to take out the $1,800/oz level. Unfortunately, for those hiding out in silver (SLV) that were hoping the metal might provide a sanctuary from the selling pressure, they've clearly miscalculated their bets. Not only has silver massively under-performed gold year-to-date with a negative 14% return, but it remains well below its 2019 highs. The only good news to come of this is that small speculators continue to shed their positions in silver, and they seem to be giving up on the metal finally, at a time when it is trying to stage a bounce. This is a continued step in the right direction for sentiment, though it's not an all-clear signal. Let's take a closer look below:
(Source: CFTC, Author's Chart)
As we can see in the above chart, we had a severe problem two months ago as silver was below its 2019 highs by more than 5%, but small speculators were continuing to build up their long positions in the metal. This was a massive negative divergence as the last thing one wants to see in a market they are trading is speculators accumulating significant positions and getting more and more bullish despite lower prices. The reason for this is that investors want to enter a market when levels of fear are high and people are nervous in general, not when people are becoming more bullish the lower that price goes. Since then, we've seen this negative divergence correct in a nasty way, as silver has fallen off a cliff, down 35% in just two months from its February high to its March low. The good news is that we've seen the 1-month moving average for small speculator positioning drop from 70,100 contracts to 36,200 contracts, a significant improvement from where we were in February. While this drop in positioning in small speculators is a good sign, we are still quite a distance from the net short readings we saw in May when silver was at similar prices. We can take a closer look at this below:
(Source: CFTC, Author's Chart)
If we look at the chart above, we can see that while small speculator positioning for silver is well below its previous highs, it's still well off of its prior 2019 lows. While silver was trading at $15.00/oz in May and June of 2019, we had a net short position from small speculators, indicating that they were bearish on the metal and on balance no one wanted to be long the metal. This pessimism was what allowed for a massive near 30% rally in the metal in just two months as there were tons of speculators left to buy once prices started trending higher. Currently, however, we have a medium-sized net long position, and 45,000 more contracts than in May 2019, despite the same silver price. This suggests that we do not have the same tailwind of net short positioning we did in May and June 2019 and that speculators are still quite bullish, even if sentiment has cooled down with some speculators throwing in the towel.
So what is the best course of action here?
Based on the fact that sentiment remains neutral for silver and we are now 25% off of the lows, I see no reason to do anything this moment. This is because this 25% rally has done nothing to improve the technical picture, given that we're still trading below vital support. Based on this, I remain on the sidelines for silver, and I have zero interest in initiating a new long position here. If silver trades above $17.00/oz before June, I would view this as an opportunity to book some profits.
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.Want More Great Investing Ideas? 9 "BUY THE DIP" Growth Stocks for 2020 7 "Safe-Haven" Dividend Stocks for Turbulent Times Investors Beware: It's Still Really Bad Out There!
The iShares Silver Trust (SLV) was trading at $14.34 per share on Thursday morning, down $0.15 (-1.04%). Year-to-date, SLV has declined -10.32%, versus a 4.95% rise in the benchmark S&P 500 index during the same period. SLV currently has an ETF Daily News SMART Grade of C (Neutral), and is ranked #14 of 33 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
It's been a strong start to the year for gold prices (GLD), and the metal is one of the few asset classes that are not only positive year-to-date but up double-digits. Unfortunately, for the bulls, we are now seeing the $2,500/oz and $3,000/oz price targets trotted out, and this is generally a bad time to be adding any new exposure to the group. Also, to make matters worse for gold, the metal has run up in nearly a straight line towards its first real resistance level since recording a multi-year breakout last year. While there are no guarantees, it's likely we might have some trouble in this area. Based on this, while I continue to hold my position in gold, I have zero interest in adding any new exposure to the Gold Miners Index (GDX) or gold itself here.
As we can see in the chart above, it's been a busy year and a half for gold, and the metal has shot higher following a clean breakout above the $1,380/oz level, a multi-year resistance level at the time. While it's trended higher with ease following this breakout, we're finally heading into the first potential pit stop for the metal near $1,800/oz, and this is an area that the bears might scramble to play some defense finally. If we look at the chart above, we can see that this area was a tough spot for gold on three separate occasions in 2011 and 2012, and the metal ultimately rolled over from this area and began a new bear market. While I am not expecting a similar thing to happen this time around as I believe we're in the early innings of a new bull market, I would be surprised if the bears did not put up a fight at this level on the first test. Therefore, given that futures are trading just shy of $1,800/oz currently, the reward to risk is terrible for new gold positions at current levels.
Some investors might argue that the bazooka of liquidity from the Fed means that this time is different, but this time is never different, it just feels different when the bull herd is busy bidding up prices. As we can see from a sentiment standpoint below, this is exactly what we're seeing, as bullish sentiment for gold has closed above 90% for three out of the past ten trading days, and is now nearing its August peak. This reading is not as worrisome as the August 2019 reading, which derailed gold temporarily, but it does suggest that we may be getting close to a short-term top, and it's best to curtail one's short-term bullish expectations a little. If we were to see a rally above $1,850/oz for gold, we would very likely trigger a sentiment sell signal. Typically, sentiment sell signals lead to 5-10% corrections in the metal on average.
(Source: Daily Sentiment Index Data, Author's Chart)
While the quarterly and yearly charts for gold and the fundamental backdrop are as bullish as ever, I always get a little nervous when the crowd starts talking about price targets 30% higher. This is what we're beginning to see as gold approaches the $1,800/oz resistance level, and this means it might be a wise move to trim some miner positions if one is overweight. It can pay to chase in the market, but the key is to chase prices early when everyone is in disagreement after a major low, not chase late when the herd has come to the same consensus. There is no guarantee that gold has to stall out at $1,800/oz, but I see a terrible risk to reward for starting new positions. I plan to add to my gold position this year, but I see no basis for doing so at current levels at $1,790/oz.
(Disclosure: I am long GLD)Want more great investing ideas? Is This a “Suckers Rally”? Free Access Pass to Wealth365 Online Summit– Join many of the world’s top investors to learn strategies to not just survive, but actually thrive in the midst of this bear market. Reitmeister Total Return portfolio – Learn Steve Reitmeister’s strategies and current picks that work in bull and bear markets alike.
The SPDR Gold Shares (GLD) was trading at $161.14 per share on Wednesday afternoon, down $1.54 (-0.95%). Year-to-date, GLD has gained 30.32%, versus a 3.84% rise in the benchmark S&P 500 index during the same period. GLD currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 33 ETFs in the Precious Metals ETFs category.
About the Author: Taylor Dart
We've seen a massive bounce off of the lows for the Gold Juniors Index (GDXJ), as many investors pile into the sector at fire-sale prices, given the sector's robust earnings growth rates. While this significant rally has likely improved sentiment in the sector dramatically, it's worth noting that it hasn't done much to improve the technical picture of the miners. This is because while gold (GLD) has been stair-stepping higher and is now within a stone's throw of its all-time highs, the Gold Juniors Index is still trading in the bottom half of a trading range it's been busy building for nearly a decade. This significant underperformance suggests that gold may have a difficult time getting through the $1,800/oz range on its first test. Based on this, I see no reason to be chasing miners at current levels, as I believe the risk outweighs the reward at $33.00 on the GDXJ.
As we can see from the above chart of gold (orange) vs. the Gold Juniors Index (GDXJ), we have the tale of two different assets here, with one in a clear bull market, and the other stuck in the mud for the time being. The gold price, which has found a relentless bid with inflation back on the table, broke out to new multi-year highs last year and has been in a steady uptrend with almost no interruptions since its Q2 2019 breakout. Meanwhile, the GDXJ is sitting at the same levels it was when gold broke out and has been unable to see any real traction since. This is a negative development for the miners, as it is telling us that the miners do not believe this rally in gold and that they're uncorrelated to the metal. While negative correlations can be resolved, we have not seen a resolution to this divergence yet, and this suggests the best course action is patience or smaller position sizes in the miners. The reason for this is that the most significant moves for gold typically occur while the miners are in bull markets, and it is hard to argue that the Gold Juniors Index is in a bull market when it's now back in the bottom half of an 8-year trading range. Instead, the index is neutral at best, and this is occurring at a time when the gold price is the strongest it's been in years.
While those that picked up miners near the bottom of this base at $20.00 for the GDXJ may be in a position to sit tight given their low-risk entries, we're now more than 60% off of those lows, and we're now within a hair of a formidable resistance level for the GDXJ. This level for the GDXJ comes in at $36.00, and I would expect it to be a brick wall of resistance for the time being. This is because the $36.00 level was prior support for the miners for nearly nine months in 2019, and previous support levels often morph into new resistance levels when we have significant technical breakdowns. Given that the next strong support level is more than 40% lower at $18.80 and the next resistance level is lying just overhead, I see this area as a terrible reward to risk spot for adding new miners. This doesn't mean that these miners can't push a little higher short-term, but I would be more inclined to be a seller at current levels than a buyer.
There is no guarantee that this pathetic performance in the GDXJ has to slow up the price of gold here, but the underperformance is anything but a bullish signal. Based on this, I would view any rallies that cannot get through the $36.00 level to be noise, and a spot to be taking some profits. I continue to hold my position in GLD from $136.80, but have zero plans to start any new positions in the GDXJ or individual miners here. Based on the structure of this recent rally, I believe there's a 30% chance that the GDXJ could return to the $20.00 - $24.00 level before July, and this would be a much better opportunity to add new positions.
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The VanEck Vectors Junior Gold Miners ETF (GDXJ) was trading at $32.60 per share on Tuesday afternoon, up $0.04 (+0.12%). Year-to-date, GDXJ has declined -4.48%, versus a 2.25% rise in the benchmark S&P 500 index during the same period. GDXJ currently has an ETF Daily News SMART Grade of D (Sell), and is ranked #30 of 33 ETFs in the Precious Metals ETFs category.