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.

And so it happened. The Fed raised the interest rates, just like we expected it to. And the market reacted negatively as some investors with too dovish expectations were surprised by the Fed’s move. Some parts of the market reacted more, and some parts reacted less. The part that reacted in an explosive manner were the mining stocks. After an initial rally, they exposed the true nature of the recent upswing. It was fake. Just after breaking above the previous highs, mining stocks were breaking below the previous lows – all during one session. The reversals should be confirmed by significant volume and both the size of the decline and the corresponding volume were epic. The implications are extremely bearish.

Mining Stocks’ Breathtaking Decline

The GDX ETF moved substantially lower and erased multiple daily gains in just a few hours. It even invalidated the breakout above the October highs. And that’s the least bearish of the mining stock charts that we prepared.

The XAU Index, a proxy that covers both: gold stocks and silver stocks, declined even more profoundly, erasing almost half of the previous month’s gains in one day. The intraday volatility was recently significant, so the levels that were just reached may not appear very low, and that’s a very bearish thing on its own.

You see, the entire point of consolidations and breathers is to make levels that previously seemed excessive and extreme, rather normal. Once this is established, the price can move to new extreme and excessive levels.

The XAU Index just closed where it had closed after just 3 days of small corrective upswing that we had seen in mid-August. Do you remember what was the overall “feeling” back then? It was easy to think that there’s no limit on how low the miners could go as they were just after a big slide. They are exactly at the same price levels as they were  and yet the “feeling” is different. The best part about all this is that it is precisely this “feeling” that makes the current situation much more bearish than when it was in mid-August. The market was already after a volatile drop and thus a consolidation was not that unlikely. Now, it’s after almost 4 months of consolidation and ready to move substantially once again.

The HUI Index is not as low as the XAU Index (in relative terms), but it is notable that it’s already below the daily close that we saw after Trump’s “crazy” comments (that’s how Trump described Powell’s interest rate decisions) in mid-October. That’s important because gold and silver are not yet below these levels, which simply shows that gold stocks are underperforming, even though they gave false signals of strength in the previous days. Unfortunately, many beginning investors were caught by this fake upswing and hurt by yesterday’s decline. The worst part is that they will not view this as a final chance to get out, but rather a correction and today’s pre-market upswing simply confirms it.

We’ll move to today’s intraday move while discussing the USD Index and for now let’s take a look at what yesterday’s decline in the miners changed from the weekly point of view.

The week is not over yet, but the weekly volume is already big, and the reversal is quite clear. Unless miners rally today and/or on Friday, we’ll have a powerful weekly reversal – clearest in many years. This means that we don’t have to see anything else in the miners for the implications to be extremely bearish. If they just move back and forth today and tomorrow, we will have this incredibly powerful reversal. Naturally, if miners move lower, the signal will be in place as well. Only a rally and a close higher could change it.

But wait, are we seeing a rally right now?

Gold and silver are indeed higher in today’s pre-market, but it doesn’t seem likely that this move is going to be a sustainable one.

The USD Index: The Bullish Decline

The USD Index moved sharply lower today and the reaction in gold and silver is actually quite small compared to how big it should be given the size of USD’s move. The USD Index was a bit below the rising blue support line, and it moved back up. This is a clearly visible line that’s based on the major bottoms of this year. In fact, it’s the most important support line that can be based on this year’s price moves.

What does that mean? It means that while the USD index moved lower after breaking below the triangle pattern, it also seems that the decline that was likely to happen because of this, might have already happened and that it’s over. With support line this strong, it’s very likely that we’re actually seeing a start of a new rally in the USDX. This means a start of a new decline in the precious metals.

Summary

Summing up, this prolonged correction within the big downtrend has been very tiring, but based on the long-term factors being patient was very well worth it, and based on the short-term signs (in particular based on the epic reversal in the mining stocks, invalidations in them and the size of the volume that accompanied it all), it seems that the waiting is over or about to be over. The outlook for the precious metals market remains very bearish for the following weeks and months and short position remains justified from the risk to reward point of view, even if we see a few extra days of back and forth trading or even a small brief upswing. There is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. It's confirmed by multiple factors, i.a. weekly reversals, silver’s recent outperformance and reversal exactly when it was most likely, gold’s performance relative to the general stock market, USD’s self-similar pattern that’s confirmed by PMs performance, and many more.

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: $1,272; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $47.17
• 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: $21.82; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $21.97

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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Thank you.

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

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