Briefly: In our opinion (full) speculative short positions in gold, silver and mining stocks are now justified from the risk/reward perspective.

Yesterday we emphasized how important the most recent development in the Euro Index was for the precious metals market. Today we will get back to this topic, as we have seen another move in the European currency. Let’s see why (charts courtesy of http://stockcharts.com.)

The Euro Index continued its decline on Wednesday. This means that the situation deteriorated once again, as the odds for the breakdown below the rising support/resistance line to be confirmed increased. The Euro Index now would have to rally further, in order to invalidate the breakdown and it has now only 2 trading days left to do so before we see a confirmation in the form of a weekly close below the line. Once we see such confirmation, the continuation of the decline will be even more likely.

All in all, what we wrote yesterday remains up-to-date:

It was only a few months ago that the Euro Index invalidated a breakout above the very long-term resistance line, and at that time it was likely that the next big move would be to the downside. However, as long as the rising support line remained unbroken, there was still a significant possibility that the currency would move higher. This month and – in particular – this week this changed. We saw a key breakdown. Of course, as it is always the case with long-term charts, we would like to see a confirmation in the form of at least a weekly close below the broken line, but it’s already likely that we will see it.

The situation has deteriorated and it will deteriorate further each day the Euro Index remains below the rising support/resistance line.

Why is this breakdown so significant? In short, because previous similar breakdowns led to massive declines in the value of the European currency (and in other currency markets) and they were also followed by huge declines in the precious metals market. These implications are of medium-term nature, so we may not see the reaction on the very next day, but it’s likely to be seen this or next month.

How did gold react?

Quite normally. The small move lower in the Euro Index was seen along with a small move lower in gold. The decline was not significant enough to change anything on its own, so what we wrote remains up-to-date again:

On the above chart you can see that we have just seen another sell signal from the Stochastic indicator. These signals were quite useful in the previous months, so it seems to us that paying attention to it is useful also at this time.

We would like to once again emphasize the fact that even though gold rallied last week, it hasn’t moved above the 61.8% Fibonacci retracement level, which suggests that the move was just a counter-trend correction, nothing more. Please note that we can say the same about the June – July rally – it was a correction of the March – June decline.

The situation in silver, mining stocks and the USD index didn’t change yesterday, so our previous comments remain up-to-date.

Summing up, the outlook for the precious metals sector remains bearish.

To summarize:

Trading capital (our opinion): Short (full) position in gold, silver and mining stocks with the following stop-loss levels:

• Gold: $1,353
• Silver: $21.73
• GDX ETF: $28.30

Long-term capital: No positions

Insurance capital: Full position

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 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 (opinion) 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
Founder, Editor-in-chief

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