The recent rally in precious metals and gold-mining shares is getting support from a softer U.S. dollar.
They are also benefiting from safe-haven money flows thanks to the latest uptick in geopolitical uncertainty. Namely, election violence in Venezuela … North Korea’s latest ICBM launch … more revelations about Russia … and the ongoing political follies in Washington, D.C.
But make no mistake: The current rally is an opportunity to reduce exposure to the metals ahead of the next cycle high forecast. Our E-Wave cycle charts indicate a pullback coming in August. You can see this clearly illustrated in the chart of the junior miners below. Take a look:
The cycle forecast for junior gold miners indicates a short-term push higher, before another decline into early September. Ditto for gold and silver, which have similar cycle patterns that call for a correction.
Keep in mind: The forces propelling the metals and mining shares higher are still at work, to be sure. But there has been a clear-cut ebb and flow to the uptrend this year.
These forces will reassert themselves in short order. But we do expect some turbulence in precious metals as we head into the fall.
In fact, mining shares have recently lagged the performance of gold, which has been up in 14 of the past 20 trading days. This is a clear warning flag that tells us to proceed with caution.
It’s too soon to say how steep of a correction we will get. And it may not amount to much at all. Still, a better buying opportunity awaits us in a few months’ time. So, for now, you must exercise patience.
Timing the next move in metals …
That’s precisely why we recommended you exit the VelocityShares 3x Long Silver ETN (USLV) last week for a combined profit of 2.8%. Granted, it’s not much of a gain. But this marked a significant turnaround from the early-July low that saw USLV dip below $10 a share.
With a near-term top approaching for silver as well as gold, this rally is now on borrowed time. That’s why it made perfect sense to exit the position now. This way, we can take the money and run … and look for a better (and cheaper) buying opportunity down the road.
Likewise, we’re looking to soon exit the Direxion Daily Junior Gold Miners Index Bull 3x Shares (JNUG) when the time is right, and perhaps the VanEck Vectors Junior Gold Miners ETF (GDXJ), too.
By reducing leverage in the sector, we can weather any near-term weakness with our longer-term core positions — Seabridge Gold (SA) and Sibanye Gold (SBGL) —
intact.
Rest assured, we’ll be looking to ratchet up our metals and mining holdings just as soon as the E-Wave cycle model forecasts the next upturn … after the upcoming setback runs its course.
But don’t jump the gun. We’ll be sure to let you know when the time is right and which specific trades offer the best upside potential ahead of the next move.
Expect downside reversal in euro …
Also last week, you should have added the ProShares UltraShort Euro ETF (EUO) at $22.18.
This ETF is perfectly designed to capitalize on a snapback rally in the U.S. dollar, which is long overdue, and a corresponding sell-off in the euro.
Supporting the view of an uptick in the buck is emerging signs of inflation. This includes this morning’s data that showed a stronger than expected reading from the PCE deflator. (That’s the Fed’s favorite inflation gauge.)
We think the July figure will be even stronger, given the rebound in commodity markets. And especially with oil flirting with the $50 level again.
That should keep pushing shares of the U.S. Oil Fund (USO) and iPath Bloomberg Coffee ETF (JO) higher, along with most other commodities. And we’re on watch for additional buying opportunities in this sector.
Additionally, the dollar has been under siege thanks to uncertainty surrounding the Trump administration. This could delay Fed rate hikes, tax reform and infrastructure spending. But we think it’s overblown and that the dollar is extremely oversold and poised to snap back.
Bond market sell-off dead-ahead …
Finally, we’re eyeing the bond market for a selling opportunity. It could come any day now. The rationale is simple …
The Fed prepared to start unwinding its massive $4.5 trillion balance sheet, which means selling a ton of Treasury and mortgage-backed securities. At the same time, the U.S. Treasury is expected to boost the size of upcoming bond auctions to compensate for reduced funds coming from the Fed.
This one-two punch of extra supply hitting the bond markets, combined with a pick-up in corporate debt issuance, points to lower bond prices and higher yields straight ahead.
We aim to profit from it with a well-timed trade in one of several inverse ETFs that track government bonds. But wait for our signal to make your move.
In the meantime, hold all open positions, and stay tuned for new trades coming your way very soon.
Good investing,
Mike and David
