Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward point of view at the moment of publishing this Alert.

We started yesterday's analysis with the investigation of the Euro Index and gold price in this European currency. Today, we'll take a moment to analyze the gold market from the Indian point of view. Gold has a special place in the Indian history and culture, India is the second biggest "consumer" of gold (right after China). USA's gold consumption is third biggest in the world, but it's less than one fourth of the Indian gold consumption. This means that to a considerable extent, the Indian gold buyers can influence gold's fundamental situation.

Moreover, India is the second-largest English-speaking country (US comes in first with 268 million English speakers, while about 125 million people speak English in India). Since we're writing in English and about gold, it's only natural to discuss the Indian side of the gold market. And by that, we mean taking a closer look at gold's price in the Indian rupee.

In the recent years the value of the Indian currency has declined compared to the value of the U.S. dollar, and so did gold. This mean that if you live in India, you have yet another reason to be holding gold and one less reason to worry that gold is going to decline profoundly. Yet, the situation is not that simple. After all, the huge value increases in the USD Index translated into declines in gold that were even bigger. This means that from the non-USD point of view, for instance from the Indian point of view, gold price still declined. Where does that lead us to?

It leads us to checking what really happened with the price of gold in terms of Indian rupees during two situations that appear most similar to the current situation with regard to the USD Index movement (the 80s and mid-90s). In particular, the less distant from these situations - the mid-90s - is outstanding in terms of similarity, and looking at what happened to gold form the Indian perspective at that time should give us invaluable insight into what may be lurking just around the corner.

First things first - why should you care about some two situations from a rather distant past? We wrote about it, but it was already some time ago, so it seems appropriate to go over it once again.

Let's start with the fact that the USD Index is holding up extremely well. It's not plunging and it's moving in a rising trend channel despite Trump's - U.S. President's - numerous calls for lower USD values, the major shift in Fed's policy (moving from monetary tightening to loosening). If it happens for a day, or a week, or even a month, it could be accidental. But it's been taking place for many months. And it's not a coincidence either.

The USD Index is after an epic breakout and a huge verification thereof.

The Big Picture View of the USD Index

The 2014-2015 rally caused the USD Index to break above the declining very-long-term resistance line, which was verified as support three times. This is a textbook example of a breakout and we can't stress enough how important it is.

The most notable verification was the final one that we saw in 2018. Since the 2018 bottom, the USD Index is moving higher and the consolidation that it's been in for about a year now is just a pause after the very initial part of the likely massive rally that's coming.

If even the Fed and the U.S. President can't make the USD Index decline for long, just imagine how powerful the bulls really are here. The rally is likely to be huge and the short-term (here: several-month long) consolidation may already be over.

There are two cases on the above chart when the USD Index was just starting its massive rallies: in the early 1980s and in mid-90s. What happened in gold at that time?

Gold Performance When the USD Index Rises

These were the starting points of gold's most important declines of the past decades. The second example is much more in tune with the current situation as that's when gold was after years of prolonged consolidation. The early 1980s better compare to what happened after the 2011 top.

Please note that just as what we saw earlier this year, gold initially showed some strength - in February 1996 - by rallying a bit above the previous highs. The USD Index bottomed in April 1995, so there was almost a yearly delay in gold's reaction. But in the end, the USD - gold relationship worked as expected anyway.

The USD's most recent long-term bottom formed in February 2018 and gold seems to have topped right now. This time, it's a bit more than a year of delay, but it's unreasonable to expect just one situation to be repeated to the letter given different economic and geopolitical environments. The situations are not likely to be identical, but they are likely to be similar - and they indeed are.

What happened after the February 1995 top? Gold declined and kept on declining until reaching the final bottom. Only after this bottom was reached, a new powerful bull market started.

Please note that the pace at which gold declined initially after the top - in the first few months - was nothing to call home about. However, after the initial few months, one could report gold's decline as really fast.

Let's compare the sizes of the rallies in the USDX and declines in gold. In the early 80s, the USDX has almost doubled in value, while gold's value was divided by the factor of 3. In the mid-90s, the USDX rallied by about 50% from its lows, while gold's value was divided by almost 1.7. Gold magnified what happened in the USD Index in both cases, if we take into account the starting and ending points of the price moves.

However, one can't forget that the price moves in USD and in gold started at different times - especially in the mid-90s! The USDX bottomed sooner, which means that when gold was topping, the USDX was already after a part of its rally. Consequently, when gold actually declined, it declined based on only part of the slide in the USDX.

So, in order to estimate the real leverage, it would be more appropriate to calculate it in the following way:

• Gold's weekly close at the first week of February 1996: $417.70
• USDX's weekly close at the first week of February 1996: 86.97

• Gold's weekly close at the third week of July 1999: $254.50
• USDX's weekly close at the third week of July 1999: 103.88

The USD Index gained 19.44%

Gold lost 39.07% (which means that it would need to gain 64.13% to get back to the $417.70).

Depending on how one looks at it, gold actually multiplied USD's moves 2-3 times during the mid-90 decline.

And in the early 1980s?

• Gold's weekly close at the third week of January 1980: $845
• USDX's weekly close at the third week of January 1980: 85.45

• Gold's weekly close at the third week of June 1982: $308.50
• USDX's weekly close at the third week of June 1982: 119.01

The USD Index gained 39.27%

Gold lost 63.49% (which means that it would need to gain 173.91% to get back to $845).

Depending on how one looks at it, gold actually multiplied USD's moves by 1.6 - 4.4 times during the early-80 decline.

This means that just because one is not using U.S. dollars as their primary currency, it doesn't result in being safe from gold's declines that are accompanied by USD's big upswings.

Let's get back to the topic of gold price in Indian rupees. If gold's trading in 2020 is going to resemble its mid-90s performance, then it would be a good idea to check what happened with gold in terms of Indian rupee at that time.

Gold from the Indian Perspective

Gold price in terms of the Indian rupee declined about 30% from its 1996 top before forming the final bottom. That's not a small move - that's a move that could erase a large part of the buy-and-hold investors capital and it would take many months to just get back to the initial level. If one managed to get out close to the top, or even profit thanks to adjusting one's positions to the ones that profit from gold's decline, it would be entirely different and much more pleasant.

The highest weekly closing price of 2019 is 109151 per oz. A 30% decline from this high would imply a move to about 76400. Based on the nearby technical support levels, this would imply either a decline back to the late-2016 bottom, or the 2015 bottom. If we see a particularly bearish market news, gold could decline even below the 2015 bottom. Of course, we can't guarantee that this will indeed happen, but it seems that gold could decline quite a lot before the final bottom forms.

If it seems like it can't happen, because the price rallied so high so soon, please note that the times after sharp upswings were exactly the times when gold was starting the declines - especially in 2013 and 2016.

All the above might seem quite complex, so let's discuss it once again, this time using a brief Q&A:

Gold is likely to decline in the following months, also in terms of the Indian rupee.

• But why? It's been rallying so nicely in the recent years...

There are numerous reasons, but one of the key ones is the epic breakout in the USD Index that was more than confirmed. Big USD Index rallies follow such breakouts, and they sooner or later trigger big declines in gold.

• So what? If I live in India, why should I be concerned with the U.S. dollar? I'm not using it and I'm buying gold with rupees.

The big USD Index rallies trigger declines in gold that much bigger than the said rallies. This means that even if you never bought anything using U.S. dollars, the big increase in its value can still affect you, if you're investing or considering investing in gold.

• Really? Did it happen in this way when the USD was previously gaining value quickly?

It did. Back then - in mid-90s - gold priced in the Indian rupee declined by about 30%. It doesn't have to happen again, and nobody can guarantee any outcome, but that's exactly what happened.

• Ouch... So, is a decline in gold really likely in 2020?

Again, we can't guarantee anything with regard to performance, market movement, or individual stock picks, but in our view it's very likely that we'll see much lower gold values before we see much higher prices. A decline below $1000 in terms of the USD is likely in our view. Gold price in terms of the Indian rupee could move to its late-2016 bottom, the 2015 bottom or even below it. The $890 target in the USD terms seems to be the most precise one and it appears to be a good idea to monitor gold price movement and make gold price forecasts based on the USD perspective in order to determine the optimal entry point for big long positions and perhaps to exit the positions that would be aimed to profit from lower gold prices.

On a short-term note, you might be concerned with yesterday's relatively strong performance in the miners. Let's take a closer look.

Mining Stocks Yesterday

The price of the GDX ETF has indeed moved higher, but not above the rising red line, which it had broken on the previous day. Consequently, what seemed to be strength is actually a verification of a breakdown. Since the breakdown was not invalidated, the above is not a bullish action.

Consequently, the implication is that our bearish comments regarding the miners' made earlier this week, remain up-to-date:

The thing that we would like to add today is a note about miners' relative performance. They were acting relatively strong in previous days, but the opposite was the case yesterday. Gold closed the day relatively unchanged, and miners declined over 1%.

(...)

We saw the same thing once again yesterday. Gold moved up by mere $0.10 and yet miners declined almost 1% instead of moving a bit higher. Let's keep in mind that the general stock market was slightly up yesterday, which means that miners' weakness can't be explained by poor performance of the stock market in general. Miners closed at the fourth lowest close of this month, while gold is trading relatively close to its previous December highs. The miners are clearly underperforming and the new sell signal from the Stochastic indicator serves as yet another bearish confirmation.

Naturally, the numerous other factors that we discussed previously continue to support lower precious metals prices in the following months. If you haven't read these analyses - especially the ones from the "critical" section, we strongly encourage you to do so. These are not quick reads, but they are really well worth the time spent reading them.

Key Factors to Keep in Mind

Critical factors:

• The USD Index broke above the very long-term resistance line and verified the breakout above it. Its huge upswing is already underway.
• The USD's long-term upswing is an extremely important and bearish factor for gold. There were only two similar cases in the past few decades, when USD Index was starting profound, long-term bull markets, and they were both accompanied by huge declines in gold and the rest of the precious metals market
• Out of these two similar cases, only one is very similar - the case when gold topped in February 1996. The similarity extends beyond gold's about a yearly delay in reaction to the USD's rally. Also the shape of gold price moves prior to the 1996 high and what we saw in the last couple of years is very similar, which confirm the analysis of the gold-USD link and the above-mentioned implications of USD Index's long-term breakout.
• The similarity between now and 1996 extends to silver and mining stocks - in other words, it goes beyond USD, gold-USD link, and gold itself. The white metal and its miners appear to be in a similar position as well, and the implications are particularly bearish for the miners. After their 1996 top, they erased more than 2/3rds of their prices.
• Many investors got excited by the gold-is-soaring theme in the last few months, but looking beyond the short-term moves, reveals that most of the precious metals sector didn't show substantial strength that would be really visible from the long-term perspective. Gold doesn't appear to be starting a new bull market here, but rather to be an exception from the rule.
• Gold stocks appear to be repeating their performance from 20 years ago, which means that a bottom in the entire precious metals sector is quite likely to form at much lower prices, in about a year

Very important, but not as critical factors:

• Long-term technical signs for silver, i.a. the analogy in terms of price to what we saw in 2008, shows that silver could slide even below $10.
• Silver's very long-term cycles point to a major reversal taking place right now and since the most recent move was up, the implications are bearish (this is also silver's technical sign, but it's so important that it deserves its own point)
• Long-term technical signs for gold stocks point to this not being a new gold bull market beginning. Among others, it's their long-term underperformance relative to gold that hint this is rather a corrective upswing within a bear market that is not over yet.
• Record-breaking weekly volume in gold is a strong sign pointing to lower gold prices

Important factors:

• Extreme volume reading in the SIL ETF (proxy for silver stocks) is an effective indication that lower values of silver miners are to be expected
• Silver's short-term outperformance of gold, and gold stocks' short-term underperformance of gold both confirm that the precious metals sector is topping here
• Gold topped almost right at its cyclical turning point, which makes the trend reversal more likely
• Copper broke below its head-and-shoulders pattern and confirmed the breakdown. The last time we saw something similar was in April 2013, when the entire precious metals sector was on the verge of plunging lower.

Moreover, please note that while there may be a recession threat, it doesn't mean that gold has to rally immediately. Both: recession and gold's multi-year rally could be many months away - comparing what happened to bond yields in the 90s confirms that.

Summary

Summing up, the 2020 outlook for gold remains bearish based on multiple factors. Gold is likely to decline not only from the USD point of view, but also in terms of other currencies. Depending on the currency, gold might or might not move below its 2015 lows, but that continues to be the most likely outcome for gold priced in the U.S. dollars.

As far as the short-term is concerned, the outlook for the precious metals sector remains bearish for the next 1-2 weeks. It's quite likely (no promises, though, as it depends on what the market does) that we're going to take (partial or complete) profits from the current short position this month. We might also reverse the position and go long, but - as above - it's too early to say with certainty at this time. For now, it seems that the USDX is about to rally and the PMs are about to slide.

Also, we would like to repeat our yesterday's announcement in case you haven't had the chance to read it yesterday or you haven't had the time to review the services that we describe (we made this week's publications free for your review):

This week, we are introducing two new services: Market News Reports and Stock Pick Updates. They are both weekly reports: Market News Reports are published early on Mondays, and Stock Pick Updates are published each Wednesday.

There are quite a few free economic calendars available online. Most trading platforms have them. The problem with making use of them is that they often include so much information that it's difficult to really know what to pay attention to. Sometimes there are some "importance" filters there, but it's unclear how one should interpret and use them. It takes both expertise and time to "weed out" the really important info from these calendars.

Different set of news and announcements will be important for those who are investing in the stock market for the long term, and different news are likely to be important for those trading gold in the short term. And different news may be important for those trading crude oil. And so on and so forth. From the long-term investors' point of view, it might be very useful to know that while there are myriads of news that are going to be released in a given week, there's nothing significant enough to likely impact their portfolios. No nail-biting news releases means greater peace of mind and more time to focus on more pleasant non-market activities.

If only someone with experience in all this could segregate the news with regard to the market and one's perspective (investors vs. traders)...

That's exactly what we're doing. Well before the trading starts on Monday, Paul Rejczak is reviewing the upcoming news and creating an easy-to-use Market News Reports where both traders and investors can check which market news are particularly likely to impact their positions in a more meaningful way. We wanted these reports to be accessible for everyone, so they are priced at just $19 per month and there's a 3-week trial for $9.

Now, Stock Pick Updates are probably in tune with what you expect, but also much more than that. There are top 5 candidates for long positions and top 5 candidates for short positions. All 10 carefully selected each week by Paul Rejczak, based on two separate techniques for improved diversification. One technique focuses on choosing the best of the most promising sectors, and the other aims to find the stocks that showed most resilience despite being part of a lagging sector. Both approaches are applied to many sectors and then all stock candidates are reviewed manually, before making it (or not) to our weekly list.

We've been testing both above-mentioned approaches since early October (11 weeks ended since that time) and the total results of their mix was 11.86% gain. During the same time, the S&P 500 gained 10.43%, so the performance of the strategy may not seem that good.... Until one realizes that it was a strategy that was designed to be market neutral as there were just as many long positions as there were short positions. Remember the early-December slide in the S&P? While it declined by 1.66%, our strategy gained 1.53% thanks to profits from the short positions.

During the 11 weeks of tests, there were 8 weeks that were profitable and only 3 that were not.

Looking only at the long candidates and averaging their performance, they gained 13.75% during the time when S&P gained 10.43%. In other words, by selecting stocks with better potential, our long picks gained almost one third more than the stock market in general.

Consequently, regardless if our candidates during the testing period were used as a market neutral strategy, or in order to magnify the gains from long positions, they would have made one very happy with the outcome. Of course, we can't promise any kind of profits or performance - just like no one else in this business can - but we do think that the results achieved week over week justify at least giving this service a try.

We think that the value of this service is greater than that, but - similarly to our profitable Day Trading Signals - we are introducing them at a relatively low monthly price of $99. We are also starting with a promotion that allows one to subscribe for just $9 for the first 3 weeks.

This means that for just $18 you can enjoy both new services for the next 3 weeks and see if the value they generate is in tune with your expectations. This would also be a perfect time to let us know what you think and what else can we do with regard to both services to make them even better for you. This might also be a good time to consider our All-Inclusive Package, which includes all products that we have and will include all products that we add during one's subscription. You can subscribe to some or all of the above over here.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

• Gold futures: profit-take exit price: $1,391; stop-loss: $1,573; initial target price for the DGLD ETN: $36.37; stop-loss for the DGLD ETN: $25.44
• Silver futures: profit-take exit price: $15.11; stop-loss: $19.06; initial target price for the DSLV ETN: $24.88; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $23.21; stop-loss: $30.11; initial target price for the DUST ETF: $14.69; stop-loss for the DUST ETF $6.08

In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:

• GDXJ ETF: profit-take exit price: $30.32; stop-loss: $44.22
• JDST ETF: profit-take exit price: $35.88 stop-loss: $11.68

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

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