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.

The precious metals, the turning points, the USD Index. Not that much seems to be happening at first sight. Actually, the opposite is true. The combination of powerful resistances, modest upswings and other short-term developments. The logic behind the moves and what we can likely expect next. The devil is always in the details. Is this the slick move up before THE reversal itself takes place?

Gold: Bidding Its Time

In Friday’s Alert, we wrote that:

The next turning point for gold is very close, so it might be the case that gold will postpone the breakdown and the big post-breakdown decline until the turning point is reached. Of course, this is not mandatory. We are mentioning this, because you might be concerned by the lack of action – the turning point suggests that we will see more decisive price moves soon.

Gold moved to the turning point with a small upswing, which is encouraging, because that’s one of the few times (without taking volume into consideration) when an upswing is a development with bearish implications. Other such cases include a rally before a reversal based on another technique apart from cycles (for instance based on the vertex of a triangle), and the case, when gold moves only a little higher while the underlying factors would suggest a much bigger move. In fact, we saw the perfect example of the latter, when gold failed to register a sizable rally after the Fed made surprisingly dovish remarks.

The above chart is based on Friday’s closing prices (no Monday trading in the US means no update on Stockcharts charts) and gold moved a few dollars higher since that time. It’s now testing the resistance provided by the previous highs. The turning point is practically here, so gold is not likely to break them.

Silver: Feeling Its Resistance

Silver is practically right at the declining long-term resistance line, so it’s not likely to visibly break above it either. Surely, silver is known for fake breakouts, but it’s not likely to break out far above such an important line. The move higher – if we see one at all- is more likely to be similar to what we had already seen – a tiny and brief upswing. It could also be the case that silver moves higher by just a few cents and then reverses in a big way (as gold’s reversal is likely to affect silver as well) – after all, the gold to silver ratio is on the rise. The bottom line is that the upside for silver in the medium term is very, very limited, while the downside is huge.

Gold Stocks Update

Gold stocks are flirting with their declining medium-term resistance line after invalidating the previous breakout last week. The current – even smaller – breakout is not likely to hold either.

Please note that if it wasn’t for the small upswing that we just saw, then cyclical turning point for gold might have bullish implications. While the upswing was not pleasant in the short run, it might be viewed as a “necessary evil” that fits and confirms the bearish scenario for the medium term.

On the short-term chart, we see that the brief upswing didn’t change the overall picture much. Gold miners remain constrained below both the rising short-term resistance lines and the sell signal from the Stochastic indicator remains intact. More seems to have happened at the first sight, than it actually did happen.

USD Index: The Big Picture vs. Daily Reversal

Looking at the currencies, we have a very interesting situation, because the USD Index repeated its reversal and this time it was even more profound.

Quoting our Friday’s Gold & Silver Trading Alert:

This is a bearish sign, and it would have been a very important factor if it wasn’t for one key detail.

The biggest (over 50% weight) component of the USD Index – the EUR/USD currency pair, had already moved below the rising support line that corresponds to the declining resistance line on the USDX chart. The index can only move as its individual components lead it to move, therefore viewing USD’s breakout invalidation as an important bearish signal doesn’t seem appropriate.

There is also the second most important component of the USD Index – the USD/JPY pair. We have analyzed it recently, and the key takeout is that neither there the situation looks bullish for the non-USD currency.

With the medium-term outlook for both the euro and the yen looking bearish, the implications for the USD Index are clearly bullish. This, in turn, is bearish for gold. Technically, however, the USDX just formed two daily reversals and invalidated the short-term breakout above the declining resistance line late last week.

At the moment of writing these words, gold us up by around $2 while the USD Index is making another attempt to once again move higher and finally break above the declining resistance line. If it succeeds (and we expect it to succeed shortly – the only question is if it’s going to take place immediately) right away, gold is likely to slide.

Summary

Summing up, the recent rally and kind of resilience in the PMs complex may appear encouraging, but it doesn’t change the medium-term trend and outlook, which remain bearish. It seems that gold’s reaction to the strength in the USD Index is simply delayed. The USD Index breakout above the declining red resistance line is the likely catalyst that gold is waiting for.

The upside is quite limited, while the downside remains enormous. The key triangle-vertex-based reversals have been reached last week. As PMs, miners, and the USD Index move beyond their reversal dates, the chance for any meaningful upswing in the former before the medium-term decline’s continuation, is decreasing with the time passing. Gold is practically right at its cyclical turning point, so the fact that we just saw a small upswing is not particularly bullish. In fact, the existence of the turning point changes the implications thereof to bearish.

On an administrative note, your Editor will be traveling today and will not have Internet access for the entire day, which means that we will not be able to send intraday Alerts today. Tomorrow’s Alert will be posted normally. We apologize for the inconvenience.

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: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
• Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.18
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.27; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $16.27

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: $34.62
• JDST ETF: initial target price: $154.97 stop-loss: $35.87

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.

=====

Latest Free Trading Alerts:

Sixteen states sue Trump over border wall emergency. Is it good or bad for the yellow metal?

Should We Declare Emergency for Gold?

=====

Thank you.

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