In short: In our opinion, small (half) short positions in gold, silver, and mining stocks are still justified (no changes since yesterday).

Yesterday was of those weird days when… Nothing happened. It is usually the case that we have multiple signals from gold, silver, mining stocks, currencies, related markets and ratios and we discuss which of them is more important than others, or whether they invalidate each other or if they make each other’s implications stronger.

Yesterday, we saw no breakout, no breakdown, and markets are more or less where they were on Tuesday. Let’s take a look (charts courtesy of http://stockcharts.com.)

Gold closed without invalidating any of the previous important price moves. It moved slightly lower and is visibly below all resistance lines that are currently in play: the declining medium-term one (solid black) and the declining short-term one (dashed red one) and the rising red ones.

Of course, there was no invalidation of the long-term breakdown in gold, and we didn’t see a move above similarly important line in silver either.

The most visible bullish sign present in the precious metals market is still the gold stocks’ breakout above the declining resistance line.

Again, nothing changed yesterday. Although we have already repeated our opinion on the current breakout, we think it’s worth repeating once again:

The current breakout is small and it’s questionable whether it has been confirmed or not. It was confirmed by 3 daily closes above the declining resistance line, but in terms of price, there has been no significant upswing. This, plus silver’s underperformance and the lack of a breakout in gold makes us want to re-examine the breakout in the HUI Index.

As we wrote previously, the current move higher is similar to what we saw in 2008 right before the final plunge of the entire precious metals sector. There was one more significant correction (like what we saw in July – October 2013) and now we see a small, barely visible one. If they history repeats or at least rhymes, then not only is the current move higher not bullish, but bearish and was to be expected to some extent.

Naturally, one analogy doesn’t entirely invalidate the bullish implication of a breakout, but it does make it much weaker. Consequently, we don’t think that one should view the gold stocks' breakout as very important.

Yesterday, we wrote the following regarding the USD Index:

We already saw a pullback yesterday, so perhaps what was likely to happen has already happened. Gold didn’t respond with a breakout and miners moved slightly lower. Overall this action was rather bearish for the precious metals market, because now the threat of a decline in the USD that could cause a breakout in gold is smaller. At this time it’s no longer very likely that another move lower will be seen based on the turning point – it might be already over.

We didn’t see a bigger slide on Tuesday either, and now the likelihood of another cyclical-turning-point-based downturn declined. The reason is that the further we get from the turning point, the less “power” it will have.

Overall, we might see another move lower in the USD Index and a move higher in the precious metals market, but we doubt that these moves would be significant. The medium-term trend in the precious metals market remains down and we can expect surprising moves to be to the downside, especially that the strong resistance levels are relatively close to where gold is right now.

Summing up, taking all of the above into account, we arrive at the same conclusion at which we arrived previously – namely, in our opinion it’s a good idea to use a small part of the speculative capital to trade the (likely) coming decline in precious metals. If we see a meaningful confirmation of the bearish case (for instance, a decline on strong volume or a breakdown in the HUI Index), we will likely think that increasing the size of the short position might be a good idea. Naturally, in case of an invalidation of the bearish outlook, we will keep you informed as well.

To summarize:

Trading capital: In our opinion a short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view. We are planning to profit on a significant downswing, so the stop-loss orders that are appropriate in our opinion are not that close (however, if something invalidates the bearish outlook, we will let you know ASAP, even if stop-loss orders are not reached).

Stop-loss orders for the short position:

• Gold: $1,307
• Silver: $21.20
• GDX ETF: $27.20

Long-term capital: No positions.

As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool).

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