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 are moving the stop-loss levels for gold and silver insignificantly (but still) higher.

On Friday, many investors and traders were caught by surprise by gold’s rally – but not you. You knew that the vertex of the recent triangle in gold was likely to correspond to a reversal and we described the possibility that gold moves higher, especially if the USD Index was to test the breakout above its rising support line and move higher. And that’s exactly what happened in both markets.

To be clear, we didn’t expect gold to move above its recent highs, but this move doesn’t change much anyway. The breakout is not confirmed, it took place only in gold (not in silver and not in case of the miners) and gold moved only a little above the previous high. Moreover, in light of the upcoming multiple reversals at the end of January and in early February, whatever bullish action might take place, it would be very likely to be erased shortly thereafter.

Let’s start today’s chart analysis by taking a look at what happened in the USD Index.

In short, the USD Index appears to be verifying its breakout above the rising purple support line. This breakout was already verified by three consecutive daily closes above this line, so it’s is likely to hold and serve as support. And that’s what happened on Friday.

If the USD Index was moving the support line in a slow manner, gold and silver might have reacted differently, but since the daily decline was rather quick, so was the PMs’ reaction. The emotionality of the sudden moves makes their implications less clear than if the move was decisive and based on several days of data. That’s the key reason why it’s useful to wait for a confirmation of a given breakout. Gold might have moved a bit above the previous resistance, but the USD didn’t move below the previous support. If USD reverses and moves higher, gold will likely invalidate its breakout thus flashing a strong sell signal on its own.

But have similar things happened in gold?

They have not only happened – they have actually happened at almost identical price levels. In the late June 2018, gold was also after a back-and-forth trading in a triangle. It then broke below this pattern very briefly and shot up right at the triangle’s vertex. It moved slightly above the recent high at that time and – just like on Friday – it was accompanied by a relatively big volume.

And while it appeared that gold was breaking higher, it was the last stop before the big decline resumed. Higher gold prices were not seen since that time and it took less than 2 months for gold to decline almost $150.

The above analogy confirms what we wrote previously on the above chart:

Because of the vertex-based reversal of the recently broken triangle. Gold verified the breakdown below it by closing below the lower border for (actually more than) 3 consecutive trading days. This means that gold is likely to decline in a profound manner. However, it doesn’t exclude the possibility in which gold first verifies the breakout once again by temporarily moving back to the pattern. This would imply an approximately $10-$15 rally from the current price levels.

The perfect time to do so (based on technical tools), would be at the nearest reversal and the nearest reversal is today or on Monday. The chart is a bit unclear with regard to the specific date. Consequently, we might see a small move up before the slide takes place and gold’s reluctance to decline based on the USD’s yesterday’s upswing seems to be confirming this scenario.

Now, you may be wondering if this leaves enough room for a decline in the upcoming 1-2 weeks, because of the combination of 8 reversals at the end of January and in early February. It does. We marked two weekly declines with red and we copied them to the current situation (assuming that they would start from the vertex of the triangle).

One of the declines is based on how gold declined in June 2018, and the other is based on how it declined in August. The former is more like the current situation as the decline is starting, not ending. Still, both analogies suggest that gold could easily slide to the $1,230 - $1,245 range and reverse from there. Reaching the rising dashed support line at about $1,220 is therefore not out of the question either. Please keep in mind that we are discussing just how low gold could get within a week, not where this decline is going to end. It’s likely to end much lower.

Therefore, we could have both a quick rally today and / or on Monday and then a big decline until the end of the month and possibly in the first week of February. At this time this scenario seems likely, but we’ll keep you updated as we move forward, and we have more details to analyze.

We moved the starting points of the above-mentioned weekly declines to Friday’s high and they now point to the possible near-term target range of $1,240 - $1,260. The more important point that if we don’t see a quick decline here, gold is still likely to start the decline no later than in 1-2 weeks based on the combination of the long-term triangle-vertex based reversals. We’ll discuss them in the following part of this Alert, and in the meantime, let’s take a look at silver.

The white metal moved higher, but – unlike gold – it didn’t exceed its previous short-term highs. There’s a good reason for it – the declining long-term resistance line (marked with green) is just above and since it is declining, it means that unless it is broken, the following local highs should be lower. Moreover, the recent breakout in the gold to silver ratio continues to support silver’s underperformance of gold.

This underperformance doesn’t have to take place on a very short-term basis, though, as silver tends to outperform gold at the end of a given rally, but overall, we the above-mentioned breakout in the ratio is a reason to expect silver to decline faster than gold.

The above gold stocks’ chart doesn’t feature any breakout or invalidation of the previous breakdown. Gold just made a new short-term high, but miners didn’t, which is yet another proof of the underperformance of the latter. Technically nothing changed on the above chart and since miners are after several confirmed breakdowns, the implications thereof remain bearish.

Moving back to gold, one may be wondering if gold’s move wasn’t too big given the size of the decline in the USD Index. After all, gold was supposed to magnify USD’s bearish signals and on Friday it did the opposite.

Let’s check the strength of gold’s reaction relative to the USD Index by looking at the changes in gold’s price in terms of the euro. After all, the euro is the biggest component of the USD Index, and thus, by dividing the USD-based gold price by the euro–USD exchange rate, we can see what would be taking place with gold if most of the USD’s movement was not happening at all.

Just like it’s the case with gold priced in the US dollar, gold priced in the euro moved very slightly above the previous high. And… that’s exactly what happened in mid-June 2018, which further confirms the analogy to the current moment, along with its bearish implications.

The RSI is very close to 70 and the vertex of the most recent short-term triangle is just several days. This suggests that one shouldn’t trust Friday’s strength even though it may appear encouraging. Even if gold doesn’t magnify USD’s bearish signals, but magnifies the bullish ones, this is very likely to reverse shortly.

Speaking of reversals, we would like to provide you with a quick update on the looming long-term triangle-vertex based ones. In the January 18, 2019 Alert, we wrote the following:

Namely, the USD Index is likely to reverse in a profound way at the end of January or in early days of February. Three vertexes confirm each other at that time. The previous vertex based on two of the lines creating the upcoming vertex indicated the December top, so it seems that it’s worth paying attention to this technique.

Knowing how miners performed yesterday and being aware of multiple bearish factors for the precious metals market, it seems that we might see a powerful USDX rally in the second part of the month. However, on a stand-alone basis, the USDX chart is not yet fully bullish.

We did see a rally in the USDX in the second half of January, but half thereof was erased on Friday. At this time, it’s not clear – at least not based on the above chart – if the next major reversal is going to be a top or a bottom. If it is a bottom, then might see a decline toward the 95 level or a month or so. However, it’s important to note that such a weekly decline would be smaller than what already happened on Friday (USDX had declined by 0.83 and it’s only 0.46 away from the 95 level on the above chart).

The key thing about the nearby triangle-vertex-based reversals in gold is that they fully confirm the above.

There are two apexes in early February, suggesting a strong reversal. After that, there are no indications of this technique (at least not based on the long-term lines) for the following months. The next reversal is in late June.

The above chart fully confirms the signals from USD and gold. This is remarkable, because these lines are based on totally different charts. Yet, they provide a signal at the same time. Just like in case of gold, there are two vertexes that point to a reversal in early February. Then – again just like in gold – there are no reversals after the nearest one until we’re close to the middle of the year. In silver, the second nearest reversal is in late April / early May. It’s notable that there is also a reversal at the end of June.

It’s even more notable that when there were no reversals for longer (mid-2018), silver simply declined. And it declined far. That’s not a strong analogy, but still, it’s another confirmation that we can expect a sizable slide shortly.

In case of gold stocks, we have one reversal right about now and – unsurprisingly – one coming at the end of January or in early February. Then there are a few extra reversals, but there is also one due in late June, just like in silver and gold.

The reversal that we have right now doesn’t tell us anything new. We already know that we might see a quick pop-up higher, perhaps due to USD’s short-term decline. But, the reversal at the end of the month (or early in February) emphasizes how important this date is. All key parts of the precious metals market and also the USD Index suggest that something major will happen in about 3 weeks. This is confirmed by total of 8 reversal signals (3 in USDX, 2 in gold, 2 in silver, and 1 in gold stocks).

Based on the weakness in mining stocks and the way in which silver is preparing to slide, it seems likely that the USD Index will break above the declining short-term resistance line and rally, thus triggering a big sell-off in the precious metals and mining stocks. Then, we might see the initial top in the USD and an initial bottom in the PMs in early February.

The next major turnaround that all PM charts emphasize is in late June – perhaps this is where we should expect the final bottom for this prolonged decline in the precious metal sector.

The necessary update here is that the sector-wide sell-off in the PMs has not yet started despite a short-term breakout in the USD Index. Therefore, it is definitely possible that the major top in the PMs and the major bottom in the USD will form this or during the next week. 

However, just as we described earlier today, it’s also possible that gold will slide right away and form a quick reversal after the early part of the decline. The upside potential is limited while the downside potential is huge, so the risk to reward ratio continues to favor short positions, even without the clarity regarding the very short term.

Summary

Summing up, we saw a quick run-up in gold, silver and mining stocks, but it didn’t change the outlook. It didn’t invalidate any medium-term points that confirm the bearish scenario for the following months either. What did it change then? It might have changed the implications of the upcoming multiple-vertex-based reversals in USD, gold, silver, and mining stocks. It became less clear if that’s going to be a major top or a local bottom. This, however, doesn’t change the trading strategy, because the upside remains limited, while the downside remains enormous.

The key thing remains to be that the bearish outlook for the following weeks has been confirmed by multiple factors, i.a. silver’s extreme outperformance and miners’ underperformance, gold’s performance link to the general stock market, gold getting Cramerized, and many more. This all tells us that more weakness in the PM market is just around the corner. The number of signals confirming the above and the profit potential of this situation are enormous, especially compared to the very limited upside for the possible corrective upswing. It’s not the best time to prepare as the best time was many months ago. But it’s the final time when you can do something about this huge opportunity without regretting it in several weeks, months, and – perhaps – years.

Also, we are moving the stop-loss level for gold several dollars higher and for silver several cents higher, so that a move to the June 2018 high in gold and very brief outperformance of silver don’t trigger them. Neither of the above would invalidate the bearish reasons based on which we expect the short positions to be extremely profitable in the upcoming weeks and months.

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: $1,322; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $43.87
• Silver: profit-take exit price: $12.32; stop-loss: $16.14; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.68
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $22.03; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $20.37

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: $32.03
• JDST ETF: initial target price: $154.97 stop-loss: $42.17

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