Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective. However, day-traders might consider a small speculative long position in silver.

While gold, silver and mining stocks moved only slightly higher in the past week and the overall action in the precious metals sector was rather calm, there are sings that this is about to change. Let’s take a closer look and start with the USD Index chart (charts courtesy of http://stockcharts.com.)

The USD Index moved higher once again, but hasn’t managed to move above the Sep 2013 high. The RSI indicator suggests a heavily overbought condition and the cyclical turning point is upon us. The combination of the above suggests that a corrective downswing has become very likely.

What can we see on the medium-term chart?

More of the same. The USD Index is overbought also from the medium-term perspective and, given the recent breakout above the late-2013 and early-2014 highs, we wouldn’t be surprised to see a correction even to the 81.70 level, or so.

While the USD Index hasn’t really corrected its sharp rally, gold has already somewhat erased its previous decline.

The GLD ETF moved slightly lower on Friday, but overall appreciated last week. The weekly move, however, took place on relatively low volume, which is characteristic of a corrective upswing rather than a beginning of a new rally. This is very much in line with what we wrote the day before yesterday and, consequently, these previous remarks are still valid:

This tells us 2 things. Firstly, gold is likely correcting the downswing – not starting a new rally (low volume). Secondly, gold is very eager to move higher in the short term – it has done so even without the dollar’s help.

How high can gold go during this upswing? It seems likely that gold will correct to one of the classic Fibonacci retracement levels. The lower one is at the same price level as the 300-day moving average, and the upper one is very close to this month’s high. We’ll be watching the markets for bearish confirmations once we see gold close to these levels.

Please note that the strongest resistance is created by the combination of the 38.2% Fibonacci retracement, the 300-day moving average and the declining resistance line. However, given gold’s ability to rally without the dollar’s decline, we would not be surprised to see the above resistance temporarily broken (but this followed by bigger declines anyway). The above is up-to-date also given today’s (Sep. 2) pre-market $10 move lower (at least that’s what we see at the moment of writing these words).

We have previously written about the dollar’s cyclical turning point, but that’s not the only one that we are monitoring. The white metal – silver – also has a cyclical nature. It moved higher last week but, given the situation in the USD Index, it’s quite likely to move even higher in the short term.

The most interesting thing about the turning points in the USD and silver is that the one in silver is several days behind the one in the dollar. This paints a picture in which the USD Index declines first, causing silver and the rest of the precious metals sector to rally, perhaps sharply, but then silver’s turning point “kicks in” and metals and miners reverse and start declining. Let’s keep in mind that silver tends to outperform in the final part of a given upswing, so we could see a jump in the price of the white metal right before a downturn. Naturally, there are no guarantees that the above scenario will be realized, but it seems quite likely in our view.

What can we infer from the mining stocks chart?

That we are likely to see some short-term strength, based mainly on the buy signal from the Stochastic Indicator. Similarly, to what we’ve seen in gold, the volume on which miners rallied last week was small, suggesting that this rally was just a temporary phenomenon.

Overall our previous closing sentence remains up-to-date also today:

Summing up, it seems that the USD Index is not done declining and that precious metals are not done rallying, but the next big moves are still likely to be to the upside in case of the USD and down in case of PMs.

Even though it seems that not much is going on in the precious metals market and it just moves back and forth week after week, it’s definitely not the time to put your guard down. In our view, this sideways trading is the calm before the storm and it’s the time for the precious metals investors and traders to stay alert and focus on signals indicating big moves. It seems that we might experience much bigger volatility in the precious metals market in the following weeks and it will be the ones who are prepared that will reap the most benefits from this situation. Don’t let yourself be surprised.

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.

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 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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