Even More Cracks in the Golden Dam

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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.

We’re getting there. Inch by inch, we’re moving closer to the tipping point of the decline when the slow, regular, and somewhat boring move lower turns into a violent drop. Yesterday’s session was still in line with the less exciting manner of declining, but we saw another crack in the dam that’s still somewhat holding the prices at the current levels. It doesn’t seem that it’s going to last for long. Are you prepared?

Before moving to the details of yesterday’s session, we would like to stress that the key bearish factors that we outlined in our Monday’s analysis remain up-to-date, so if you haven’t had the chance to read it yet, we strongly encourage you to do so today. Gold is likely to drop far in the next 2.5 weeks.

Having said that, let’s take a look at yesterday’s price changes (charts courtesy of http://stockcharts.com).

Miners’ Underperformance Completes the Bearish Case

On Monday, we commented on the above chart in the following way:

The GLD ETF ended the session only $0.40 higher and since its opening price was above the closing price, Stockcharts marked this session in black. As we emphasized yesterday, these sessions may – and recently did – indicate the end of the brief upswing and the beginning of another wave down.

The SLV price outperformed on an intraday basis by rallying almost to Tuesday’s (July 31st) intraday high, while the GLD price was not even close to its July 31st high. That’s yet another bearish sign as silver often outperforms in this way just before declines.

We haven’t seen underperformance in mining stocks, but their performance has not been particularly strong either. The GDX ETF didn’t invalidate the breakdown below the previous 2018 and lows and it bounced from the 2017 lows in a rather inconclusive manner. Overall, it seems that we haven’t seen any convincing signs from the mining stocks’ Friday price action.

With bearish signs from GLD and SLV and a neutral one from GDX, the overall implications of Friday’s intraday action, are bearish.

Now, based on yesterday’s profound decline in mining stocks, we can say that the relativity-based outlook is completely bearish. We have all the confirmations from the relative valuations that we could get. Silver outperformed on a very short-term basis and mining stocks underperformed in a very clear manner. And if that wasn’t enough, the GLD ETF repeated the bearish black candlestick that heralded declines multiple times in the previous months.

Let’s keep in mind that this is not the first time that we’re seeing this kind of bearish confirmation – we’ve been seeing them over and over again in the past weeks. The implications are strongly bearish.

Gold Stocks’ Major Breakdown

In our yesterday’s Alert, we emphasized that the HUI Index was already after a breakdown below the late 2016 low in terms of the weekly closing prices and it was now once again after a breakdown in terms of daily closing prices. The previous attempt had been invalidated and followed by a small and rather unreliable rally. The fact that we saw another attempt so soon and that it resulted in a lower low suggests that the breakdown may be successful this time.

Yesterday’s big decline serves as a strong indication that the breakdown will indeed be confirmed. Only one additional daily close is required for our 3-day confirmation rule. The fact that HUI closed below the late 2016 low also in intraday terms is a strong indication that the daily-close breakdown will indeed be confirmed.

If the HUI Index had moved just a bit below the late 2016 low as a result of a huge decline in gold, we would say that the breakdown probably was accidental and that it was still likely to be invalidated. But that was not the case. Gold stocks took a dive without barely any help from gold and this tells us that the breakdown is very likely to be confirmed.

The late 2016 low is gold stocks’ last stand. Once they break below this level, there is no significant support all the way down to the early 2016 low. To be precise, there’s also the 2008 bottom at about 150, but if gold truly slides and gold miners continue to underperform, this level may not hold.

The final crack in the precious metals dam that we’ll discuss today is what we saw in silver.

Silver’s Breakdown

But didn’t silver move higher yesterday?

It did. But only by 3 cents, which means that it was the first time since early 2016 when silver closed below $15.43 (July 2017 bottom) for more than one day. That’s a very important breakdown and it’s almost confirmed by the 3-day rule. The breakdown is not yet fully confirmed, but silver is definitely showing us that something is very different this time than it was in mid-2017 when it rallied sharply shortly after the intraday reversal.

Naturally, the implications are bearish.

There’s not much more that we can report to you today as the situation in other important charts is just as we described it on Monday. The PMs appeared to be on the verge of a major decline and this appears to be even more likely based on what happened yesterday and during Monday’s session.

Summary

Summing up, the outlook for the precious metals sector is extremely bearish and there are signs that we’re on the verge of seeing another big wave down and that the next local bottom is going to form in about 2.5 weeks. In other words, it seems that our sizable profits on the short positions are going to become even bigger 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: $1,272; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $46.38
Silver: profit-take exit price: $12.72; stop-loss: $16.46; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $24.07
Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.64; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $20.87

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: profit-take exit price: $17.52; stop-loss: $34.82
JDST ETF: initial target price: $154.97 stop-loss: $42.78

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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