Briefly: in our opinion, full speculative long position in silver is justified from the risk/reward point of view at the moment of publishing this Alert.

Not much changed in the precious metals market yesterday, despite the early decline. The initial price moves were reversed - silver and mining stocks close relatively unchanged, while gold finished a few dollars higher.

This is bullish for the precious metals market, because based on USD's rally, the PMs should have declined. And they didn't either decline or move higher, which shows relative strength. The initial move lower in silver is bullish on its own because of where silver moved and what it didn't manage to do.

Silver's Bullish Sign

Silver moved below the very short-term declining support line which is also a neck level of the supposedly bearish head and shoulders pattern. "Supposedly", because this pattern is bearish only once it's confirmed. And instead of confirming it, silver made a tiny attempt to break below the neck level and then invalidated this breakdown. The invalidation of the breakdown is a very bullish sign for the very short term.

The above chart is based on just hourly candlesticks - the H&S pattern is not really visible in case of our regular daily perspective. Still, the implications are quite important for the next several days.

The Full PMs Perspective

Gold's close was actually the third highest close of this year, which is quite bullish given USD's daily upswing. But we already wrote about that. What we didn't mention yet, is the reversal in mining stocks. It looks like a bearish reversal and it does take away some of gold's short-term shine, but overall we don't think it's a topping sign yet.

Why? Because there was absolutely no confirmation from silver yet. And by confirmation we mean clear strength and outperformance of gold. That's what tends to take place at the top and we have yet to see it.

What we saw in miners was similar to their late October 2019 performance, relatively early in the short-term upswing.

You might also be wondering about the lack of visible rally in light of the recent session when the volume was extremely low.

As we wrote yesterday, we saw only a handful of similar sessions and they were mostly good opportunities to go long. The above chart features 8 similar sessions. 5 out of them were good opportunities to go long in the short term, but not necessarily in the immediate term. 2 of them were good opportunities to go long in the very short term. The only remaining case - in early November 2018 - was followed by a very short-term downswing and then a rally.

In almost all cases, bullish price action followed, which confirms our bullish outlook for the short term (and short term only).

The key thing is that in most (5 out of 8) cases, the rally didn't follow immediately but a day-few days after GDX declined on extremely low volume. Consequently, the lack of visible movement yesterday is perfectly normal.

Also, let's keep in mind that the USD Index is still vulnerable to a corrective decline.

USD Index Status

The blue lines show the times when the USD Index corrected meaningfully for the first time since bottoming in a meaningful way. We saw only a very modest correction so far, which means that this might have not been "it". Consequently, another quick slide could be in the cards for the USDX before its rally continues. Such a pullback would be a perfect trigger for the precious metals' upswing.

On Monday, we featured a long-term triangle-vertex-based reversal that's scheduled for early February. There is, however, also a short-term reversal in case of the USD Index. It's based on the declining short-term resistance line and the very short-term rising support line. They cross very close to the end of January, suggesting that this is where the next reversal could take place.

In our view, the most likely outcome is a pullback that would end (or start to end) at that time - quite likely along with topping precious metals.

Summary

Summing up, it seems that the final part of the corrective upswing in the precious metals market is still ahead of us, which is confirmed by several short-term signs, including Wednesday's extremely low volume in the mining stocks. This means that silver is likely to rally particularly strong in the next several days. Consequently, before getting back on the short side of the precious metals market due to myriads of bearish medium-term factors, we aim to profit on a quick long trade in silver.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative long position (100% of the full position) in silver is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

• Silver futures: profit-take exit price: $18.49; stop-loss: $17.46; initial target price for the USLV ETN: $99.97; stop-loss for the USLV ETN: $84.49

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

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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