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

Gold and silver didn’t do much yesterday – the latter rallied a bit, but not significantly. The general stock market didn’t do much as well. Consequently, it seemed likely that mining stocks wouldn’t do much as well, right? Wrong. The surprises are to the downside and this is something that one should expect at this time. Mining stocks plunged, broke below MAJOR support levels and closed at the levels not seen in more than 13 years. What are the implications?

What has been will be again, what has been done will be done again; there is nothing new under the sun. - Ecclesiastes 1:9

We have seen this kind of performance and when we saw it, it heralded major changes in the precious metals world. Gold stocks continued to underperform for some time, repeating their warning. Those paying attention to only metals and neglecting to monitor all the other critical markets and important ratios were still hoping for a quick rebound, but this rebound never arrived. Still, gold and silver stocks were the first to break below their lows and give a screaming sell signal. Not everyone listened.

If you’ve been following the precious metals market for years, you might already recognize when the above happened – not only yesterday and in the previous days. We had also seen it much earlier…

In 2013, right before the major plunge of the entire precious metals sector.

Let’s jump right into the charts (charts courtesy of http://stockcharts.com).

As mentioned above, gold didn’t do much and consequently our previous comments remain up-to-date:

The pace of the decline is currently in tune with what we’ve seen previously and just because gold doesn’t move lower each day is not a bullish sign on its own.

Gold closed the week slightly above the mid-2015 low, but it had stayed below this low for many sessions and we don’t think this low is very important at this time.

The price of gold didn’t change much yesterday, so we can say that the above remains unchanged – there was nothing to make the picture bullish. The same goes for today's pre-market move to $1,100 - it doesn't change much in light of yesterday's action in mining stocks.

Silver moved a bit higher but didn’t break below the 50-day moving average (in terms of closing prices) and the same goes for the declining resistance line. Consequently, our previous comments on the above chart remain up-to-date:

During Friday’s session was saw a repeat of what we had seen previously – a sharp move higher (to the 50-day moving average) that was immediately canceled. We’ve previously written the following about the mentioned phenomenon (and it remains up-to-date also today):

(…) that was something we had seen quite often right before big declines, for instance in late October 2015 or mid-August 2015. Silver is known (at least by those who have been following it for a longer time) for its fake moves, so it’s important to consider confirmations and other signals before making an investment or trading decision based on what happens in silver.

We summarized that silver’s recent performance may have seemed positive, but based on the way similar situations had developed previously, we actually viewed the white metal’s unconfirmed rally as something bearish – especially given the very weak performance of mining stocks.

We didn’t have to wait long for a confirmation of the above – silver canceled the previous day’s upswing and the rest of the precious metals sector followed on the very next day. The trend remains down.

The trend remains down. It seems that the upswing will be invalidated once again shortly.

From the long-term point of view, silver remains below the long-term declining resistance line, so the recent events didn’t change anything – the trend remains down.

The silver to gold ratio moved lower recently, but what are the implications?

There are none. This means that the trend remains in place and the trend is down. Some may say that silver’s recent underperformance is a sign of a bottom in the precious metals sector, but… It isn’t.

The key thing to understand is what you actually call underperformance. Is it a daily lack of rally, despite gold’s upswing? No. Is it silver’s daily rally despite gold’s lack of action? No. There is a very good way to measure if silver is indeed outperforming or not and that is the ROC indicator based on the silver to gold ratio. At this time it doesn’t point to anything unusual. It would take much more for this indicator to flash a major buy signal than the recent local underperformance of silver.

Having said that, let’s move to the main thing of this week so far – the mining stocks’ breakdown.

From the long-term point of view, we clearly see that the consolidation continued for some time and gold stocks have just broken below the critical support line and thus below the “neck” level of the head-and-shoulders pattern. Mining stocks have also broken well below the previous lows. The situation in the Stochastic indicator continues to favor lower prices as well.

The above is very significant. The last 2 times when we saw the above, major declines followed. Should we be expecting something else this time? No. We’re likely to see yet another decline and the breakdown below the previous lows confirms this.

Gold stocks have truly plunged. They broke not only below their previous lows, but also below the important support lines. These breakdowns are very important as gold stocks moved lower not just a little, but significantly. The implications are very bearish.

Silver stocks have broken even sooner – the implications of the above chart are even more bearish. We already saw a breakdown below the head-and-shoulders formation and lower prices following it – the implications are very bearish.

Let’s take a look at the important ratios.

The long-term HUI to S&P Index continues to have the same implications that it had previously. What we wrote previously about it, remains up-to-date:

We can say the same about the situation (and its implications) in the gold stocks to other stocks ratio. It had moved to the declining resistance line, but once again reversed and the decline seems to be ready to continue.

Finally, let’s take a look how mining stocks are performing relative to other underlying metals and other stocks.

Gold stocks relative to gold have just plunged and the implications are bearish.

The performance of mining stocks relative to other stocks is also quite informative. The ratio of mining stocks vs. other stocks has just invalidated a breakout, which is an important sell sign. Naturally, the implications are bearish.

Finally, we would like to briefly discuss the situation in the USD Index.

Friday’s intra-day decline and the following reversal continue to have bullish implications. The reason is that the USD was right at the cyclical turning point on Friday. If it weren’t for the quick turnaround, the USD would be likely to decline as its most recent move was to the upside. With a quick decline and a comeback already behind us, the rally can continue and the implications of such a rally are likely to be bearish for the precious metals sector.

We realize that there may be some analysts that believe that the last 30-day performance of the USD Index is just a flag formation that suggests a continuation in the pattern, however, we would like to point out that the 50-day moving average was not broken and thus the implications of the above chart for the USD Index remain bullish, which is bearish for the precious metals sector.

Please note that the last few weeks’ consolidation would have bearish implications only if the flag was broken to the downside and such a breakdown was confirmed. This is not the case at this time.

Summing up, the outlook for the precious metals sector remains bearish and the mining stocks’ underperformance and their major breakdown serve as a confirmation - full short positions appear to be justified from the risk / reward point of view. The gains in the full short positions in mining stocks are already significant, but we think they will become much bigger before the trade is over and the same goes for profits on gold and silver short positions.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

• Gold: initial target price: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
• Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
• Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

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 initial target prices:

• GDXJ ETF: initial target price: $15.23; stop-loss: $21.13
• JDST ETF: initial target price: $52.99; stop-loss: $21.59

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

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 sings 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 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 Tools and Indicators.

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.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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