Briefly: In our opinion speculative short positions (full) are currently justified from the risk/reward point of view.

Last week gold declined almost $40 and moved back into the declining trend channel (with a weekly close within the channel). At the same time, the USD Index moved higher by only 0.22%, so gold clearly underperformed. Is this enough for one to expect much lower gold prices in the following weeks? The U.S. markets are closed today and nothing is expected to change in metals and miners because of that (and that’s why we generally provide alerts only on trading days), but nonetheless, since we already have Friday’s close, we have decided to provide you with Tuesday’s alert today (consequently, unless something major happens today – which is unlikely – there will be no regular alert tomorrow as today’s issue will remain up-to-date).

Moving back to the above question, it’s not enough, but there are many additional bearish signs in place that make the picture bearish for the following weeks.

Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).

In Friday’s alert, we wrote the following:

In yesterday’s trading, USD moved below the first Fibonacci retracement level (only to a very small extent, though) but not below April highs. In fact, USD moved briefly below April’s high only to rally back above it and close the session without invalidating the breakout. Overall, we don’t think that the outlook deteriorated significantly.

What’s more important is the size of the moves that this daily decline triggered.

We were correct not to expect the action in the USD to trigger another downswing – this move was followed by a daily rally and overall we can say that the USD Index was trading sideways last week, ending it a bit higher. In other words, the May rally was followed by a pause and it seems that the USD Index is now ready to move higher once again.

The most important thing is that despite the USD didn’t do much, gold declined almost $40 – that’s a clear sign of weakness in the yellow metal and a very bearish sign.

As a reminder, we think that what we have seen so far this month is only a beginning of a much bigger upswing. In addition to the previously drawn resistance levels, we added an additional one – at the late-2002 high, at about 109. Depending on how gold reacts to the USD’s movement once the USD gets there, this might be a good opportunity to go long the yellow metal with one’s investment capital, but it’s too early to say for certain at this time – we’ll keep you informed.

The chart above features the phenomenon that we mentioned in the opening paragraph of today’s alert. Gold’s comeback to the trading channel (marked with red dashed lines) is not the only bearish thing about the above chart. We also saw a very clear and profound sell signal in the weekly Stochastic indicator and we see that gold declined on big volume. These are both important bearish confirmations suggesting that gold is ready to undo the irrational (in our opinion) rally based on the NIRP remarks earlier this year.

As far as gold’s short-term chart is concerned, we wrote the following on Friday:

We once again the same thing – gold was “supposed to” rally given USD’s decline and it didn’t – that’s a profound sign pointing to lower prices in gold. What’s particularly interesting is that the intra-day price swings in gold really reflected the moves in the USD Index, but the moves to the upside were shrunk and the moves to the downside were amplified (both: USD and gold reversed but ultimately the size of the decline in gold was big enough to more than cancel any gains). This shows that gold’s underperformance is not a coincidence and it is really a bearish sign.

The above remains up-to-date and based on what happened on Friday we can also add that gold’s breakdown below the rising blue support line is now verified. Once gold confirms a breakdown below the March low and the 38.2% Fibonacci retracement level, the decline is likely to accelerate because there is little very strong support for tens of dollars.

As far as silver and gold stocks are concerned, we see breakdowns as well. In case of the HUI Index, we see a weekly confirmation in the case of the breakdown below the 2015 highs (precisely: invalidation of the breakout) and in the case of silver, we see a breakdown below the 10-week moving average. The implications of both are bearish, especially that the slide in mining stocks was accompanied by a clear and profound sell signal in the weekly Stochastic indicator.

Last week we mentioned the junior sector and the implications of the situation in it remain bearish.

Juniors have not broken higher – conversely, they stopped and declined last week by more than 2%.

Why didn’t mining stocks decline more given a rather big decline in gold? Most likely due to the same reason that likely prevented silver from plunging dramatically – the big (over 2%) weekly rally in the general stock market. Still, let’s keep in mind that the impact of the movement in the main stock indices is likely to be short-lived and even if the general stock market moves higher from here, we don’t think it will be able to prevent miners or silver from declining for much longer.

Summing up, the short-term outlook changed substantially on Tuesday (the medium-term outlook didn’t as it had been bearish previously) based on the invalidation of the breakout above the 2015 highs in gold stocks and due to gold’s move back into the declining trend channel and the weekly closing prices provided strong confirmations of the bearish case. The precious metals sector is showing great weakness relative to what is happening in the USD Index and it makes the outlook for the PMs very bearish for the coming weeks. Consequently, we view short positions as justified from the risk to reward point of view.

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

To summarize:

Trading capital (our opinion): Short positions (full position) 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: $1,006; stop-loss: $1,317, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $43.71
• Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
• Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $8.11

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: $14.13; stop-loss: $40.13
• JDST ETF: initial target price: $61.74; stop-loss: $9.38

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.

=====

Latest Free Trading Alerts:

The British referendum on the United Kingdom’s membership in the European Union is coming. Will Brexit bring financial apocalypse or deliverance from nefarious Eurocrats? What does all this mean for the gold market?

Consequences of Brexit for Gold

This month, the London Bullion Market Association published a new edition of its quarterly journal called “Alchemist.” What can we learn from this publication?

Interplay Between Interest Rates and Gold

What causes the backwardation and what does it imply for the gold market? We invite to read our today’s article about the backwardation in gold and find out how to interpret such a phenomenon.

What Does Backwardation Mean for the Gold Market?

=====

Hand-picked precious-metals-related links:

Fed Fusillade Sends Gold to $100 Loss This Month as Dollar Rises

Lack of physical gold buying leaves price vulnerable to downside: UBS

Asia Gold-Demand stays muted as buyers await steeper price correction

Swiss gold data raises new doubts on London's gold stocks

=====

In other news:

Yellen Hawkish Turn Sees Treasury Futures Tumble on Memorial Day

Fed's Bullard says global markets seem well-prepared for summer rate hike

Euro-Area Economic Confidence Rises as ECB Stimulus Kicks In

=====

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts