Like a Libyan Dictator! – Gold Prepares to Die. (GDX)

[Housecleaning note: we’re a day early due to Passover travel plans.]

We’ll try to do this as gently as possible.

Not least because the majority of precious metals investors are… shall we say, sensitive types, who, while not quite snowflakes, are easily triggered when someone announces that gold is about to decline.

Fast. And. Hard.

And while we hate to play the role of micro-aggressor as much as the next right-wing, conspiracy-minded lunatic… someone has to tell the truth.

“Oh, so white!”

Anyway, the precious metals are on the verge of a nervous breakdown.  Along with those who’ve fallen in love with them.

The proof is in the charts – which we’ll get to in a moment.

But first a word on money.

To begin with, gold is money.

It’s the best money, as we’ve stated numerous times.

And it behooves us, therefore, to collect as much of it as we can, in keeping with the notion that having an abundance of resources is a smart, forward-looking and altogether realistic strategy of dealing with the vagaries and vicissitudes of life.

And yet, at times, that also means that we must sell it.

Yes, gentlemen, sell it.

Why?

Why, indeed! – so that we might buy more of it later.

Because unless you’ve implemented a regimen of acquiring precious metals using a strict gold/silver ratio strategy, you require money – cash dollars – to accumulate the stuff.

And that means dumping your gold when it’s about to take a spill.

Or, at the very least, getting on the right side of the trade in order to profit now – the better to purchase more of that joyous, aurous delight, cheaper, later.

Don’t get stuck!

Our trade today is based on the miners, specifically the VanEck Vectors Gold Miners ETF (NYSE:GDX).

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It’s a trade on which we’ve refrained from pulling the trigger for a while.

We wanted to be sure we saw the whites of their eyes.

The daily chart, below, will explain the matter in full.

Have a look –

Technically, we have a breakdown in process –

1. Since the highs struck in August of last year, the action has been sideways to lower, but only recently has the technical damage become measurable.
2. Consider: RSI and MACD are both sub-waterline, meaning momentum belongs to the bears (in green).
3. The short-term, 27 day MA has now broken below all the salient moving averages and the all-important 137 DMA is about to break below the 274 (both circled, in blue). That would place a cap over price at roughly 36, where we hope to set our trade.
4. Finally, as of yesterday, price has broken free of all her moving averages (in black), as she did at the beginning of the month. In that instance, a bounce ensued.  But with the moving average rollover now more advanced, we’ve doubts about the likelihood of a repeat performance.
5. The shares are very likely headed toward a simple Fibonacci retracement level at 27 (not seen on chart).

And it’s for all the foregoing that we’ve set the following synthetic short sale –

A Jew and His Gold recommends you consider setting the January 21^st 36 synthetic short (sell the 36 CALL and buy the 36 PUT) for a debit of $3.84 (2.46/6.30).  Set a STOP buy on the shares at 36.

Rationale: the technical picture for GDX is bearish.

The only challenge is finding a means of exploiting the decline cheaply and safely.

Fortunately, spreads on GDX are super-tight, affording us lots of possibilities to craft a trade that conforms to our understanding of the price action to come.

We’ve chosen the 36 strike because it lies north of the last retracement high at 34.50 and precisely in line with the descending 137 day moving average, where we expect significant overhead resistance to emerge.

With GDX now trading at $32.19, the trade is virtually at-the-money, with breakeven arriving at $32.16.

Maximum gain on the trade is unlimited.

Maximum loss – with proper STOPs in place – is limited to the initial debit (3.84).

Remember to reset a STOP sell at 36 should the initial STOP buy be triggered.  Thereafter, reset a new STOP buy if the STOP sell is triggered.  There should always be an open STOP on the trade until we close in order to keep the trade square.

Many happy returns,

Matt McAbby

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