Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective.

Yesterday’s market session was one of the weirdest in a long time – gold rallied while silver declined. There are times when one metal laps the other and there are times when one lags the other, but it’s very rarely the case that they close the session with different results. Let’s check the implications of that (charts courtesy of http://stockcharts.com.)

In yesterday’s alert, we wrote the following:

From the short-term perspective, yesterday’s rally was quite significant. It took gold above the 38.2% Fibonacci retracement level based on the most recent decline, which suggests more strength before we see another decline. Based on the long-term chart, however, it seems that gold won’t rally far (the medium-term support line is too close).

Combining the above with other retracements and the mid-July high allowed us to create the target area for this rally. The area is rather wide as the situation remains mostly unclear, but overall it seems that we could see another move higher similar to yesterday’s, perhaps spread out over the next several days.

Gold moved higher once again and touched the lower border of our target area. Is the rally over? It could be, but our best bet is that gold will move even higher before declining once again. Why? Because the USD Index hasn’t really declined yet and we have yet to see silver’s short-term outperformance. The situation is unpleasant, because we are seeing the rally emerge, just as we expected it to, but at the same time, we realize that it could end quite suddenly and that it’s too risky to open a trade here – at least that’s what we think is best for most investors and traders.

Speaking of silver, let’s see its (lack of) performance.

The white metal moved only $0.06 lower yesterday, but still, it closed below the previous daily close, which means that it declined. In other words, silver is clearly not outperforming gold on a short-term basis, which means that we have yet to see this kind of confirmation that a top is likely in. Yesterday’s comments remain up-to-date:

In short, the self-similar pattern remains in place. At this time the pattern is proportionately bigger, but remains similar in terms of shape. Big declines in the precious metals sector have been very often preceded by silver’s short-term outperformance, even if this outperformance was preceded by a visible downswing in the price of the white metal. What we saw in February and March serves as a perfect example.

Why has silver underperformed recently? As always, there is no clear explanation behind any price move (other than because someone pushed the "sell" button), but it seems to us that it can be in a large part attributed to the sharp decline in the general stock market.

If we are just seeing the beginning of another huge decline, then we are still quite likely to see a sharp rally in silver, just before the big drop.

The stock market is getting oversold on a short-term basis, but it doesn’t seem that it has bottomed yet. Perhaps we will see a sharp upswing in silver when stocks form their bottom. This could be something that aggressive market players might want to take advantage of, but a bet on such a volatile move is not suggested for most traders.

Mining stocks moved only a little higher, which has little or no consequences. On a daily basis, miners were weak relative to gold, but that happened right after a day when they were very strong, so perhaps it’s just a form of a breather in this sector.

Our yesterday’s comments remain up-to-date:

How far could miners rally if gold is to move to our target area? Quite likely to their March and July highs – close to the $28 level. Again, just like for gold, the situation in mining stocks is rather unclear, but the $28 level as the target is our best bet at this time.

Finally, the situation on the USD Index chart didn’t really change yesterday, so what we had written previously remains up-to-date also here:

The situation in the USD Index is still a bullish factor for the precious metals sector. The U.S. dollar is after a sizable rally and right after the turning point, which is likely to cause at least a small decline. The index moved a bit lower yesterday and the PMs reaction was very positive.

If the USD Index doesn’t decline in the next several days, it will prove the dollar’s strength. We saw a sizable rally in July and if the US dollar is able to hold these gains and only correct in a mild, horizontal way, then we will likely see another big upswing shortly. For now, the index is still close to the cyclical turning point, and thus prone to a corrective downswing.

Taking all the above into account, we can summarize the current outlook in the same way as we did yesterday.

Summing up, it seems that even though the next big move in the precious metals sector is still likely to be to the downside (we have not yet seen actions that are usually seen at important bottoms, like huge underperformance of silver [what we saw this week was not huge enough], and gold is not actively hated in the mass media), the odds for a corrective rally are relatively high.

The USD Index is likely to decline at least a little, which is likely to cause a rally in the precious metals sector. However, let’s not forget that the USD Index is after long-, medium-, and short-term breakouts, so this corrective downswing could be small and temporary – the next big move is likely to be to the upside. The opposite seems likely for the precious metals sector.

We plan to re-enter short positions when we see either a small rally an some kind of confirmation that the next local top is in. At this time, we prefer to say out of the market. The situation simply seems too unclear and risky to open a speculative position.

To summarize:

Trading capital (our opinion): No positions

Long-term capital (our opinion): No positions

Insurance capital (our opinion): 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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