Gold Joins the Decline – the Earth is Shaking

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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.

Gold, silver and mining stocks declined in a quite visible way yesterday, which is in tune with our previous expectations. In the previous days it was only silver and miners that declined in a meaningful manner, but yesterday gold joined them, making this a sector-wide decline. Is this the groundbreaking decline that we’ve been writing about for so long? Time will tell, but the earth is already shaking.

Precious Metals’ Decline

Gold declined on a significant volume and closed yesterday’ session below the 50-day moving average. The Stochastic indicator flashed a sell signal. We previously saw something similar earlier this month, which was followed by a short-term decline. This is a short-term sell signal also this time, but…

It really doesn’t matter. What matters is the combination of the powerful long-term signals that have been in place for a long time and that have been pointing to much lower gold prices. It’s not a $10 decline in gold that is important here. It’s the $150 slide that’s likely to follow shortly… And that will likely be followed by even lower prices (to about $890) after a temporary corrective upswing.

Silver - Continuous Contract

Silver moved lower once again after topping out practically exactly as the triangle-vertex-based reversal had suggested and as we had described it earlier. Silver invalidated the previous breakdown below the $14 level, but will it manage to invalidate the upcoming breakdown as well? It may not be strong enough to do so, since it didn’t even manage to get back to its previous high earlier this month.

Miners’ Breakdown

The mining stocks declined on strong volume and once again closed the session below the rising neck levels of the bearish head-and-shoulders pattern. The current pattern is a bit different than what we usually see as a head and shoulders pattern. It usually has one head and two shoulders. In this case, we have a pattern that had two left shoulders and two right shoulders. It seems odd, but it’s within the definition of what could be viewed as the H&S pattern. The implications are just as bearish as they would be if the pattern had a regular shape.

But, to be 100% objective, this pattern is not fully completed. The two neck lines that we have on the above chart are not the only way that such line can be created. Another way would be to create it based on the mid-October and mid-November bottoms. Such line would have not been reached, let alone broken. The decline is still likely based on multiple other reasons, but let’s keep in mind that the final bearish confirmation will be when the GDX ETF confirms the breakdown below approximately $18.30 – the above-mentioned hypothetical neck level.

This breakdown is likely to happen shortly and lead to a move to new 2018 lows. Confirmed breakdown below the September bottom will open the way to much lower mining stock prices and volatile declines.

The Direct Trigger

The ultimate direct trigger for the huge decline in the precious metals market will likely come from the breakout above the neck level of the inverse head-and-shoulders pattern in the USD index. This will only be a “direct” reason, because there are many other technical reasons for the big slide in the PMs that we outlined in our previous analyses, and because the foremost reason for the entire decline is that gold and silver simply haven’t fallen enough in 2015. Back in 2015, the sentiment wasn’t bad enough to confirm the final bottom and thus lower prices were likely to be seen eventually even despite the early 2016 rally.

The USD Index is not yet above the upper neckline that’s based on the intraday highs and once it gets there it will be very close to the 61.8% Fibonacci retracement (approximately 97.8) based on the entire 2017 – 2018 decline. Consequently, we may see a pause close to this level, but once the above is taken out and the USD confirms a breakout above 98, the following rally would likely be big and sharp. The corresponding decline in the PMs is likely to be big and sharp as well.

Summing up, 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. It is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. It seems that our big profits on this short position will become enormous in the future and that we will not have to wait much longer. Gold’s inability to rally on the increased geopolitical tensions regarding Ukraine confirm this scenario.

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: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
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: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67

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.