Briefly: in our opinion, full (150% 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.

Gold and silver rallied in a volatile manner for about 20 hours after the dovish announcement from the Fed. But some things aren’t meant to last, and this rally was one of them. Both precious metals declined after peaking in yesterday’s session morning hours and are more or less where they were before the Fed’s move. This can tell one a lot, but only if one knows where to look.

Today’s Gold & Silver Trading Alert will feature fewer charts than the recent ones, because of two things. First, practically everything that we wrote yesterday remains up-to-date or has developed as we outlined it yesterday. Second, at the moment of writing these words, gold and silver are almost exactly where they were 48 hours before. Consequently, whatever changes, yesterday’s session might imply, they were already invalidated.

Let’s take a closer look.

Gold & Silver: 48-hour Rewind

Gold and silver have both moved above Wednesday’s intraday highs, but then they both moved back down before the end of the session. Silver closed the day even below Wednesday’s close and gold closed a bit above it. The rallies were generally invalidated. And what wasn’t invalidated yesterday, was invalidated in today’s pre-market trading – gold is trading visibly below its Wednesday’s closing price.

Our usual Stockcharts’ charts would not reflect the overnight changes yet and they play an important role in the current situation, which is why we’re featuring other charts instead.

The particularly interesting thing is the issue of silver’s outperformance and underperformance. Silver closed below the previous day’s close, while gold closed above it, so silver underperformed. However, at the same time, silver moved temporarily (!) higher on an intraday basis in a much more profound way than gold – which means that silver outperformed.

That’s how silver can outperform and underperform at (more or less) the same time. Underperformance that we expected to see based on the breakout in the gold to silver ratio was likely to materialize in the more long-term time frame. At the same time, silver’s tendency to outperform in the very short term was likely to (just as its name suggests) be seen in the more short-term timeframe. And that’s exactly what we saw yesterday. In general, the more long-term factors work in terms of daily or weekly closing prices, whereas the outperformance signal works on an intraday basis. It’s more of a guideline than a strict rule, though.

Miners’ Fake Breakout

Miners showed significant strength, but that was just one daily close above their long-term declining resistance line, which is what we described as one of the possible outcomes.

Quoting our yesterday’s analysis:

The line based on the 2016 and 2018 highs that we marked with red provides very strong resistance. After all, the more important the highs are that create a given line, the more important and stronger implications it has. This line is not as significant as the two lines that we see on the gold chart, but it’s definitely one of the strongest lines that we have in case of the mining stocks.

It’s at about 167 – 168, which is in tune with what we wrote based on HUI’s short-term chart.

(…) The upside is very limited, however, we cannot exclude the possibility in which there are more intraday attempts to move higher, or even a single- or double-day close above this line that is then invalidated.

Before summarizing, let’s take a look at the USD Index. Since nothing really changed, the section below will be a quote from yesterday’s analysis, but we will supplement it with an additional paragraph below.

The USD Index and Its Upcoming Reversals

The USD Index moved a bit below the most short-term declining support line, but, it stopped at medium-term line based on the January 2017 and August 2018 tops. It’s also above the rising line based on the September 2018 and January 2019 bottoms. Consequently, instead of viewing yesterday’s slide as a breakdown, it seems more appropriate to view it as a move to the strong support area.

Was the final low reached? It’s certainly possible, but the USDX could briefly move to the January lows before rallying. The USD Index has been moving lower on a short-term basis and we have an upcoming reversal that’s based on several vertexes of triangles that confirm each other. We also have one smaller reversal that took place yesterday.

To be clear, the USDX doesn’t have to decline until the second reversal day – it can just trade sideways and start the rally in the first days of February.

How far could it fall? Not far – the January 2019 low is the lowest of the nearby support levels and we expect it to hold even if the combination of the support lines doesn’t. The more important thing is the looming reversal that’s confirmed by analogous indications for gold, silver, and mining stocks.

But could the USD Index simply trade sideways for a few days and bottom in this way? Yes, and it would not be anything odd. In fact, it’s one of the most common ways for the USD Index to form its bottoms. We marked several bottoms with red rectangles – they all formed in this way. In particular, the mid-October 2018 bottom looks interesting. The USDX first moved a bit higher, then erased this small move lower and then formed the final intraday low. Then we saw much higher USDX values.

The USD Index moved a bit higher, just like it did in mid-October 2018. This doesn’t have to be the final bottom – we may see an additional one at the final reversal in the next few days. Gold, silver, and mining stocks may move higher at that time once again. And we will likely increase the size of our trading short position at that time.

To be clear, we don’t expect to see confirmed breakouts above the long-term resistance levels in gold and mining stocks. It’s also unlikely in silver, but it would be acceptable as long as it is not accompanied by analogous breakouts in gold and miners. What seems more likely is an initial corrective downswing (like the one that we are already seeing in today’s pre-market trading), and then another – final – attempt to move higher at THE reversal (precisely, combination of multiple reversals). Then THE decline.

On a side note, it seems that the crude oil price was early to reverse - we had previously taken profits from the long position and today we are opening a short one on this market.

Also, there was one more non-chart confirmation of the topping process in the precious metals market. Your Editor has a friend who wants to invest in gold, but is waiting for lower prices. This friend gets impatient at times and calls to check if your Editor is still waiting for lower prices. Why does it matter at all? Because he almost always calls at or very close to major tops in gold and he just called yesterday.

Summary

Summing up, the strong resistance levels in gold and mining stocks that we featured previously, were reached and they stopped the rally in terms of the daily closing prices, so the medium-term outlook didn’t change. Yesterday’s small breakout in the mining stocks is not confirmed, and it’s likely to be invalidated shortly, because that’s what’s happening in gold and silver in today’s pre-market trading. Both metals are erasing the gains that they made in the previous 48 hours.

The very important detail about the most recent price moves is that they took place in light of a very positive news from the Fed. The thing is that the dovish comments from the Fed (“the case for raising rates has weakened somewhat”) should have caused a much more spectacular rally. Despite the intraday rallies that we saw yesterday and on Wednesday, gold is now just $2 higher, while it could have easily (based on the news alone) rallied $30 - $80 by now.

One of the most bullish situations in any market is when everything that could go wrong for it… Already did. The best confirmation of such bullishness is when the market doesn’t decline despite the facts that should make it decline. We seem to have just witnessed the exact opposite of the above. Gold doesn’t really want to move higher from here, and its technical situation is perfect for a start of a profound decline to the final lows of the prolonged slide that started in 2011.

The upside remains limited, while the downside remains enormous. However, since the turning points have not yet been reached (there are several more days) it wouldn’t be surprising to see a pause here or a brief decline that is immediately followed by a re-test of yesterday’s intraday highs.

Consequently, the short position remains justified, but given the level of volatility that we just saw, it’s possible that we will still see some short-term strength. We plan to add to our short positions shortly – we’ll aim to do so at the final short-term upswing at THE reversal.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (150% 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: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
• Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.18
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.27; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $16.27

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 1st 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: $34.62
• JDST ETF: initial target price: $154.97 stop-loss: $35.87

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.

Thank you.

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