Briefly: In our opinion, full (200% 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.

All eyes are on Bitcoin which decisively broke below the $10,000 mark (we are profiting on this decline, by the way), but it doesn’t mean that the situation in the precious metals market is dull. In today’s analysis we have two interesting developments to comment on. The first one is the USD’s move lower, its implications and the strength of the reaction in the metals and miners. The second thing is putting yesterday’s moves into proper perspective – and checking if anything changed regarding breakouts and breakdowns. Is the USD Index about to resume its 2018 slide and will gold soar above its 2018 high shortly?

Let’s start with the most recent price changes, looking at gold stocks (charts courtesy of http://stockcharts.com).

The HUI Index moved higher by only 0.26 (0.13%), which is next to nothing. This didn’t change the position of the index relative to any of the support and resistance levels that we recently discussed. In consequence, everything that we wrote yesterday on that matter remains up-to-date:

However, the implications of yesterday’ session are not identical to the implications of Wednesday’s action. In yesterday’s alert we wrote: [Wednesday’s] session took form of a bullish reversal hammer candlestick, which could generate a daily or a 2-day rally, but we don’t expect more than that from it.

Did we see an intraday rally yesterday? Yes. It was rather small and it didn’t change anything, but we did see it. Consequently, the very short-term implications of the bullish reversal hammer candlestick could have already played out and they are no longer an important factor – even for the short term.

Yesterday’s session didn’t take the form of a bullish reversal, so – along with our previous comments on breakouts and breakdowns – we can say that the outlook for the following days has deteriorated.

In previous alerts, we also emphasized that it was not the decline in gold stocks by itself that was so bearish. It’s the gold stocks’ relationship with gold that’s important.

After a daily pause, gold stocks once again underperformed yesterday, which serves as a bearish confirmation.

It doesn’t seem to have any bullish implications also when compared to what happened in the first half of September 2017. After the initial decline in the ratio and in gold itself, we saw a few small daily upswings in the HUI to gold ratio. They were not followed by any meaningful rallies, so we don’t expect to see ones shortly either.

Meanwhile, silver stocks didn’t even manage to move higher – they declined a bit even though they were after a sharp slide and a quick corrective upswing would be quite normal.

Silver declined as well, but only after temporarily moving to almost $17.40. Based on the latter move, we can still say that silver outperformed on a very short-term basis, thus confirming its previous outperformance sign. The implications continue to be bearish.

So far, everything seems bearish. But, after all, gold closed higher. Does this have any bullish implications?

First of all, let’s start by saying that as far as gold’s performance in the euro is concerned, we saw a daily decline and a move to new 2018 lows. That’s very far from being bullish.

Does the regular USD perspective give hope for a sustainable rally?

Not really. Gold moved less than $5 higher and the rally didn’t take gold above any significant resistance. The accompanying volume was lower than what we had seen in the previous two days, so yesterday’s session looks just like a classic post-top corrective upswing. This doesn’t change the bearish outlook.

Actually, it could have changed it if gold had had a good reason to decline yesterday. But was this the case?

Absolutely not. Conversely, gold had a good reason to rally as the USD Index declined and closed visibly lower. That’s something that “should” take gold and silver to their previous highs. Instead, gold moved only a bit higher, silver declined and mining stocks are close to their 2018 lows. The implications are simply bearish.

But what if the USD Index keeps declining? It was the EUR/USD’s increase that caused the USD Index to decline (after all the EUR/USD is the largest component of the index) and while it is still possible that slightly (!) higher EUR/USD values will be seen in the very short term, a big decline is still very likely coming.

As Nadia wrote in Wednesday’s Forex Trading Alert regarding the above currency pair: the space for gains seems limited as the 61.8% Fibonacci retracement marked on the weekly chart [1.26027] is quite close (…).

At the moment of writing these words, the EUR/USD is already at 1.2484, so it’s only about 1% away from the mentioned retracement. The pair’s weight in the USD Index is 57.6%, so the above could translate into about a 0.6% decrease in the value of the USD index. At the moment of writing these words, the USDX is trading at 88.87, so the possible downside would be about 88.34. In other words, the USD could touch its previous intraday low before moving higher again.

Please keep in mind that the above is a “could”, not “is very likely to”. The implications for the precious metals sector are not very significant as the past few days and in particular yesterday’s session showed that even if the USD declines due to the EUR/USD’s strength, it’s not very likely to translate into much higher metals’ and miners’ prices.

Summing up, the USD’s recent epic turnaround along with gold’s extraordinary weakness relative to the USD’s last week’s intraday decline along with multiple bearish confirmations paint a very bearish picture for the precious metals market for the following weeks. The situation was very bearish for PMs based on the above, but the record-breaking weekly volume in gold took the bearishness to a new – even more extreme – level. The monthly volume served as a confirmation of the above.

Yesterday’s small upswing in gold, and the lack thereof in silver along with the weak reaction in the case of mining stocks shows that the precious metals market doesn’t really want to move higher from here. Metals and miners are somewhat forced to move higher if the value of the currency that they are priced in erodes, but since the resistance in the Euro Index is at hand and at the same time the strength of the reaction to the USD’s weakness is very limited, it doesn’t seem that the above really changes the outlook for the PM market. In other words, the outlook remains bearish.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

• Gold: initial target price: $1,218; stop-loss: $1,382; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $37.68
• Silver: initial target price: $14.63; stop-loss: $17.82; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $20.88
• Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $15.78

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 initial target prices:

• GDXJ ETF: initial target price: $27.82; stop-loss: $38.22
• JDST ETF: initial target price: $94.88 stop-loss: $37.78

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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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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