Gold and silver dive on November 9.

Central bank liquidity and government stimulus at the risk of repetition.

A new reason why 2020 is looking a lot like 2008.

Buying gold and silver scale-down for 2021.

NUGT and JNUG with tight stops and a strategy.

On Monday, November 9, the gold and silver markets put in bearish reversal patterns on the daily charts. A close below $1873.30 and $23.36 on Friday, November 13, would establish the same patterns on the weekly charts. At the end of this month, prices under $1859.20 and $22.625 would create bearish reversals on the monthly charts.

In my last article on gold and silver on Seeking Alpha on November 2, I wrote,

The end of the year selloff in the gold and silver markets appears to have begun on November 9. We could see even deeper corrections that create ugly bearish patterns on the medium and longer-term charts over the coming weeks. The economic landscape continues to favor new highs above the early August peaks in 2021. It is virtually impossible to pick bottoms in markets. During corrections and rallies, prices often fall below or rise above logical levels. We witnessed a stark example of this phenomenon in March when silver fell to an eleven-year low below $12 before turning higher and taking out its technical resistance level from 2016 in July. Fasten your seatbelts for a wild rise.

Gold mining shares tend to outperform the price of the metal during rallies and underperform when it falls. The Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) turbocharges the VanEck Vectors Gold Miners ETF (GDX). The Direxion Daily Junior Gold Miners Index Bull 2X Shares (JNUG) is a leveraged product that replicates twice the price action in the VanEck Vectors Junior Gold Miners ETF (GDXJ). NUGT and JUNG are power trading tools that magnify the price action in gold and gold mining stocks.

Gold and silver dive on November 9

On Monday, November 9, Pfizer’s news that its COVID-19 vaccine had 90% effective results launched the stock market, and crude oil moved back above its $40 pivot point. However, a vaccine’s potential was poisonous for gold and silver bulls, who watch the precious metals’ prices meltdown.

Source: CQG

As the daily chart of December gold futures highlights, news of the vaccine hit gold like a ton of bricks. After rising to a marginally higher high than on November 6, the previous session, the price dropped to the lowest level since late July at $1848. December closed the session at $1854.40, not far above the day’s lows and far below the prior day’s low. At just over the $1860 level on November 11, gold was not far from its recent low.

Open interest declined from 570,926 contracts on November 6 to 547,449 contracts on November 10 as speculative longs scrambled for an exit. The volume of almost 615,000 contracts on November 9 was the highest since mid-August. Price momentum and relative strength indicators were trending lower below neutral readings. Daily historical volatility spiked from below 17.5% at the end of last week to 29% on November 11 as gold took an elevator to the downside on Monday.

Source: CQG

Silver followed the same path as gold on November 9 as the Pfizer news weighed on the speculative precious metal. The bearish silver reversal came as volume reached 196,210 contracts, the highest level since late August. As the chart of December COMEX silver futures illustrates, the price dropped to a low of $23.60 from over $26 and was trading closer to the low than the high on November 11 with the price at the $24.25 level. The total number of open long and short positions fell from 159,521 contracts on November 6 to 155,011 contracts on November 10. Price momentum and relative strength metrics were just below neutral conditions on November 11, and daily historical volatility moved from below 43% last Friday to over 48%. While silver put in the same bearish technical pattern, its decline was not as severe as in the gold futures market.

Central bank liquidity and government stimulus at the risk of repetition

Gold and silver are both substantially higher than at their respective lows from March and the end of 2019 as we head into the final weeks of 2020. One of the reasons why selling cascaded through the precious metals futures markets on November 9 was that the potential for a massive stimulus package declined if the vaccine will end the global pandemic. However, even if the vaccine stands all the FDA tests for approval, widespread immunization is months away. Economic pain and high unemployment levels require government stimulus, which is long overdue. Another stimulus package is on the way, but even if the government decides not to spend more, the US Treasury already borrowed a record $3 trillion in May. The deficit is now north of $27 trillion.

The Fed is encouraging both inflation and fiscal stimulus. Short-term interest rates remain at zero percent. Even though rates spiked higher further out along the yield curve over the past week, the central bank stands ready with its massive put option on the bond market to control rising rates. The strike price of that put option is likely near last week’s low of 169-16 on the December 30-Year US Treasury bond futures contract.

I have written before, and you will likely hear it from me again, unprecedented levels of central bank liquidity and the $3 trillion tidal wave of fiscal stimulus, with even more on the horizon, comes at a price. The Fed is encouraging, even begging, inflation to rise. They are likely to get a lot more than they are bargaining for in the coming years.

The 2008 global financial crisis was a lot different than the 2020 worldwide pandemic. However, the central bank and government programs have been the same. The only difference is that liquidity and stimulus in 2020 are far higher than in 2008. From the 2008 lows to the 2011 highs, gold rose from $681 to $1920.70 per ounce, a rise of 182%. Silver rose from $8.40 to $49.82 over the period, an explosive move of 493%.

A new reason why 2020 is looking a lot like 2008

At the March low, gold fell to $1450.90, and silver tanked to a low of $11.74. The same percentage moves over the coming years would take gold and silver to $4,092 and 69.60, respectively. The only difference is that the liquidity and stimulus levels are far higher in 2020 than in 2008.

In the aftermath of the November 3 election, a new reason why this year is shaping up to be a replay of a dozen years ago emerged. In late 2008, the US elected Barrack Obama and Joe Biden as President and Vice President. This year, President-elect Joe Biden and Vice President-elect Kamala Harris will take office in late January 2021. Therefore, the leading economy of the world is likely to follow the same political script. The political and economic landscapes could be the final puzzle pieces when forecasting the coming years. Why should we expect a different result? In 2011-2012 commodity prices rose to multi-year or all-time highs. Gold reached a record level, and silver rose to its highest level in thirty-one years and came within 54 cents of a record nominal price.

Buying gold and silver scale-down for 2021

The vaccine may have triggered the selloffs in the precious metals, but seasonality during the final weeks of 2020 made them susceptible to corrections. After all, gold at the $1860 level is $340 or 22.4% higher than the closing price at the end of 2019. Silver at $24.25 is $6.35 or 35.5% above its level on December 31 last year.

It is virtually impossible to pick highs or lows in markets. They tend to rise to levels that defy gravity and logic during bull markets. They often move to prices on the downside that blow away technical levels and supply and demand fundamentals. In March 2020, silver fell below $12 for the first time since 2009. Silver took out its critical technical support level at the late 2015 low from 2016 at $13.635 per ounce. Gold remained over $400 above its support level from December 2015.

I expect precious metals prices to rise to new and higher highs over the coming years. While Bank of America believes gold can rise to $3000 per ounce by early 2022, I think that could be a conservative estimate. When Citigroup analysts forecast a $2000 gold price in the next 12-24 months in February, the only thing they got wrong was timing as it came less than six months after the projection.

We are now in the time of the year when gold and silver often reach seasonal lows. The correction on November 9 may only be the start of a far deeper selloff before the end of 2020. I will be buying physical gold and silver and unleveraged ETF products on price weakness over the balance of 2020. I will use broad scales on the downside as I have no interest or skills in picking bottoms in the precious metals or any markets.

NUGT and JNUG with tight stops and a strategy

From a short-term perspective, I typically follow trends. When it comes to gold and silver, a correction could get ugly in the highly volatile silver market, so I will stick to a program of accumulating physical metal or ETF products on a scale-down basis. The gold market tends to be less volatile, which allows for a little more cautious speculation with tight stops.

Gold mining stocks tend to outperform the yellow metal on the upside and underperform on the downside. I will be using the NUGT and JNUG products with tight stops to probe for bottoms in the gold market. The Direxion Daily Gold Miners Index Bull 2X Shares (NUGT) is a double leveraged product. The fund summary and top holdings of NUGT include:

Source: Yahoo Finance

NUGT is a highly liquid product with $1.0 billion in net assets. It trades an average of over 3.25 million shares each day and charges a 1.17% expense ratio. NUGT provides double leverage for the leading gold mining stocks held by the GDX ETF product, including:

Source: Yahoo Finance

Meanwhile, the Direxion Daily Junior Gold Miners Index Bull 2X Shares (JNUG) replicates twice the price action in the GDXJ junior gold miners ETF product. JNUG’s fund summary and top holdings include:

Source: Yahoo Finance

JNUG is a highly liquid product with $643.54 million in net assets. It trades an average of over 1.47 million shares each day and charges a 1.12% expense ratio. JNUG provides double leverage for the leading gold mining stocks held by the GDXJ ETF product, including:

Source: Yahoo Finance

NUGT and JNUG are only appropriate for short-term risk positions on the long side of the gold mining shares. The mining stocks tend to be more volatile than the gold market, so they turbocharge the results on the up and the downside. When using these products, I use a price and a time stop.

We are now in a typically weak time of the year for gold and silver prices. However, 2020 is anything but an ordinary year. The parallel between 2008 and 2020 is compelling for the gold and silver markets for the coming years.

The Hecht Commodity Report is one of the most comprehensive commodities reports available today from the #2 ranked author in both commodities and precious metals. My weekly report covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. I just reworked the report to make it very actionable!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.