Another 2018 Bottom in Silver

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Briefly: in our opinion, full (250% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

The white metal continues to slide to new yearly lows each day now, proving the previous bottom-callers incorrect. The next stop is the 2015 low, but it doesn’t seem that it will be able to prevent the big decline for longer, if it manages to do it at all. And we just saw new signals that confirm the bearish outlook not only for silver, but also for the rest of the precious metals market.

The PMs are following our previous indications and thus our previous analyses remain up-to-date. The thing that we would like to emphasize today is what we saw in silver, mining stocks and in the USD Index. Gold is still moving around the $1,200 level and nothing new happened in this market from the technical point of view.

Let’s start with the USD Index.

USDX and PMs’ Relative Weakness

The US currency moved lower yesterday. The USDX closed practically right at the rising black neckline of the inverse head and shoulders formation. Without a close visibly below it, the breakout above it remains intact. The implications are bullish and since the USD Index moved higher in today’s pre-market trading as well, it further confirms it.

From our – precious metals investors’ – point of view, the most important thing about yesterday’s decline is that it didn’t trigger the precious metals sector to move higher. It should have, but it didn’t. We previously wrote that gold is now going to magnify the signals from the USD that are going to make it decline and mostly ignore those that should make it rally. Yesterday’s session serves as a perfect confirmation and the implications are very bearish.

The USDX is very likely to move higher from here, and gold, silver, and mining stocks are likely to respond to this move with a big decline.

Gold Miners’ Weakness

In yesterday’s analysis, we wrote the following about the HUI Index:

From the short-term point of view, we see that the mining stocks have just completed the bearish head-and-shoulders formation. Therefore, there are additional bearish implications for the short term, even though the breakdown below the neck level was not yet confirmed. The previous inverse head-and-shoulders pattern is definitely over and the bearish implications of the current formation are in place.

The implications are even more bearish today, because the HUI closed even lower yesterday, which means that we have now seen two subsequent closes below the neck level of the bearish head-and-shoulders formation. Seeing a third close below this level today will likely fully confirm the breakdown and make the implications extremely bearish. They are already bearish at this time, though.

We can say something similar about the silver market.

Silver’s 2018 Breakdown

We saw a new yearly low yesterday and silver is now even closer to its 2015 bottom. That’s a second daily close below the previous 2018 bottom. One more and the breakdown will be fully confirmed. The implications are very bearish, and our yesterday’s comments remain up-to-date:

And it’s a fact. Silver just closed the day below the previously lowest closing price of this year. It’s a major breakdown and the implications are bearish. However, the 2015 lows are very close and since they provide support that’s stronger than the previous lows, then perhaps we’re going to see a bottom shortly anyway?

In short, that’s very unlikely. The move that precedes a given consolidation is likely to be similar to the one that follows it and the move that preceded the recent consolidation took silver more than $3 lower.

The most recent high was about $14.90, so if this decline is indeed going to be similar to the previous one, then we should see silver much lower – likely close to $12, instead of seeing it decline just several cents and then bounce back up.

Naturally, there can be a temporary move back up to the previous 2018 low before the decline continues, but it seems that the silver dam is broken.

The previous major low (weekly closing price) is at $13.82. That’s only $0.19 below today’s closing price.

(…)

From the long-term point of view, silver seems to have already completed the post-breakdown correction and has now started its next move lower. The moves that preceded the consolidation tend to be repeated after the consolidation is completed and this means that silver is soon likely to break below its 2015 bottom.

This will be a shocking event to those, who were willing to bet the farm on the “bottom is already in” statement. This shock might – and is quite likely to – turn into panic and sharp selling as investors want to limit their losses. The support that is relatively far below the 2015 low and at the same time approximately corresponds to the size of the preceding decline is the area around the $12 level. That’s where we have two 2009 bottoms. None of them is extremely important, but they are the only ones that we have between the 2015 bottom and the 2008 bottom, so they are quite likely to provide temporary support.

Another reason why Friday’s move is so important is the situation in the gold to silver ratio.

With a weekly close above 85, it’s clear that the ratio broke above the previous long-term highs. The next long-term target is the rising red line that’s approximately at the 90 level and the final one is at about 100. Interestingly, with gold at about $1,050 and the ratio at 90, we get $11.67 as the silver price prediction, which is very close to the April 2009 low (the lower one), which is $11.72. The above further validates the interim price target area (around $12) for the white metal.

Silver’s decisive decline yesterday caused the gold to silver ratio to move even higher, almost to the 86 level. It’s now obvious that we have a long-term breakout in the ratio and the implications are critical.

The 2015 intraday low was $13.62 and the real shocker will be when silver closes below this level. And this moment is very close. And, if you’ve been following our analyses, you are well positioned to profit from it.

Summary

Summing up, the outlook remains strongly bearish for the precious metals sector and there are increasingly more signals that confirm it. There is a huge opportunity in taking advantage of the upcoming slide and then taking on big positions close to the final bottom, when others will be too scared to do so. It seems that another big decline in gold, silver and mining stocks has already begun and that the huge profits on our short positions will become enormous shortly.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (250% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

Gold: profit-take exit price: $1,062; stop-loss: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67

Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. In case one wants to bet on junior mining stocks’ prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and target prices:

GDXJ ETF: profit-take exit price: $17.52; stop-loss: $31.23
JDST ETF: initial target price: $154.97 stop-loss: $51.78

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

Important Details for New Subscribers

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it 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, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

Plus, 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 (like 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: UGLD, DGLD, USLV, DSLV, 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” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) 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 on a daily basis 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. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.

As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.

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