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

Yesterday, we commented on the miners’ lack of reaction to gold’s daily decline. Today we’ll discuss the opposite as miners declined more than gold during yesterday’s session. What should one make of these contradictory signals? Let’s take a closer look (charts courtesy of http://stockcharts.com).

First of all, from the long-term perspective nothing really changed – gold simply moved lower after touching the long-term resistance line. What we wrote previously remains up-to-date:

On the long-term chart we see that even though gold moved higher – slightly above the rising resistance line – it remained below the declining red (dashed) resistance line. From this perspective, not much changed yesterday. We still think that the medium-term trend remains down.

On a short-term basis gold declined on an intra-day basis, but came back up once again. This move was accompanied by low volume – suggesting that the traders remain mostly at the sidelines, waiting for things to become clearer. Based on the above chart alone, the situation in gold is indeed unclear. It is the gold-USD link that makes it clearer at this time.

Yesterday, we wrote the following about mining stocks:

Mining stocks were basically flat with only a $0.02 move. At the first sight it seems that if the mining stocks have not declined despite gold’s move lower, then it means that we have a bullish confirmation. Please note, however, that in the case of the mining stocks, the volume was small – a little more than half of the previous day’s volume. Consequently, it’s not that certain that the miners’ strength really represents what the market participants currently think of the sector.

Additionally, it’s worth noting that because of the holiday in the U.S., many investors and traders likely turned down their computers earlier on Thursday and didn’t respond to what gold and other markets had done. Simply put, Thursday’s session might not have been as important as it seems at the first sight and the low volume confirms it. On the contrary, high volume in gold despite the above suggests that the decline in the yellow metal was indeed meaningful.

Interestingly, yesterday’s session provided exactly the opposite signs. Mining stocks declined (and on volume that was slightly higher than the one seen on the previous day). In our view, it’s currently best to treat these contradictory signals together. Taking the last 2 trading days into account, we get the picture in which both gold and mining stocks declined as the USD Index moved higher. In other words, the situation is quite normal, and we can expect the precious metals market to move lower, should the USD Index rally.

The USD Index is likely to rally and what we wrote previously provides justification. Basically nothing changed yesterday, so what we wrote previously remains up-to-date:

(…) the thing that changed in case of the USD Index was its turnaround and the invalidation of the breakdown below the upper of the declining resistance lines. It happened almost right at the cyclical turning point so it seems to us that we have already seen the local bottom here and that we will see higher values of the USD index in the coming days and weeks (we could have a bit more weakness in the next few days, though, but that’s not that likely).

The implications of the above are bearish for the precious metals sector. Just as the beginning of June marked a local bottom in gold, silver, and mining stocks, it looks like the beginning of July marks the beginning of a downturn.

(…)

The turning point worked once again.

Before summarizing, let’s take a look at the juniors to other stocks ratio.

The spike in the ratio of volumes (juniors vs. other stocks) has been usually seen when the precious metals sector was at a local top, or slightly before the top. In other words, when the volume accompanying the move in the GDXJ ETF, which serves as a proxy for the juniors, was high on a relative basis, it suggested an extreme situation in terms of the precious metals investors’ sentiment, and this is something that accompanies local extremes. At this time, we’ve seen a huge spike and the implications are bearish.

Summing up, the situation in the precious metals market remains bearish.

To summarize:

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

• Gold: $1,343
• Silver: $21.63
• GDX ETF: $27.30

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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