Briefly: In our opinion speculative long positions (half of the regular size) in gold, silver and mining stocks are justified from the risk/reward perspective.

Yesterday, gold reversed in a rather profound manner and so did mining stocks. Silver’s reversal was less meaningful, but still important given that the USD Index moved to its long-term resistance line and pulled back before the markets closed. Did we just see a true reversal in both markets?

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

The resistance level that was just reached is very significant and that’s the most important thing that the above chart tells us. We also see that the USD Index is overbought on a short-term basis, but that’s more visible on the short-term chart.

The RSI indicator is well above the 70 level, so we indeed have an overbought situation. Overbought situation plus long-term resistance line is very likely to equal local top. This would be even more likely, if we saw some kind of confirmation… And we just saw it. The USD Index reversed on an intra-day basis and formed a “shooting star candlestick” which is a sign of a reversal.

What did gold do given the above? One would probably expect it to decline (given the dollar’s rally) and probably reach an important support level (the $1,200 level for example). That was the likely scenario for yesterday, but another one became even more likely for the coming days when it turned out that gold managed to reverse its direction and rally on huge volume despite the bearish impact from the USD Index. That was a big sign of strength.

Moreover, the way that gold rallied is a bullish “hammer candlestick”, which also signals a reversal. It’s already confirmed by strong volume. Please note that when we saw similar intra-day reversals in the past, at least short-term rallies followed.

Consequently, the bottom is quite likely already in. If it’s not, then it’s probably not much below the current price levels anyway, as the $1,200 (or a few dollars below it) level would likely support prices even if they moved temporarily below yesterday’s low.

In today’s alert we will cover the situation in silver in a slightly different way. We will focus on its performance in terms of currencies other than the U.S. Dollar.

The medium-term support line was reached and the RSI Indicator shows that the situation is extremely oversold on a short-term basis. Consequently, we have another reason to believe that higher prices will be seen at least temporarily (silver confirmed the breakdown below the previous lows in terms of the USD Index, so its likely to decline even more in the coming weeks, but not likely right away).

Let’s check the situation in gold and silver mining stocks.

In yesterday’s alert we mentioned opening long positions and these positions are already profitable. Miners reversed (in a “bullish hammer candlestick” way, just like gold) on volume that was decent. It was not huge, but it was above the average value for the last few months, so overall the implications of yesterday’s session alone are bullish. The RSI is still below 30, which means that the situation is still oversold and that a corrective upswing is to be expected.

Finally, let’s take a look at the junior mining stocks sector.

In Wednesday’s alert we wrote the following regarding the above chart:

Junior mining stocks moved sharply lower yesterday. This was not surprising to those who had followed our analysis for many months. We have been skeptical toward the strength that we saw in the juniors sector in the first part of 2014 and we called this upswing “temporary”. It seems that we were correct as the juniors sector has been declining in the most recent past. The short-term trend is definitely down.

Please note that juniors are about to reach a support line and we are quite likely to see some kind of a move higher (consolidation?) before the decline continues. Once it does, it’s likely to take juniors to their 2008 low. This is in tune with what we expect of the mining stocks sector in general.

The above remains up-to-date. Juniors have reached the above-mentioned support line and it seems that a local bottom is in over very close to being in.

Summing up, it seems that the corrective upswing in the precious metals sector is underway or is about to start in the next few days. In our opinion, it’s not the beginning of another big rally in the precious metals just yet, but a counter-trend move, which will be followed by further declines. At this time it seems likely that we are just ahead (in terms of weeks) of a big slide in the prices of metals and the final bottom for this prolonged decline. We’ll keep you updated.

To summarize:

Trading capital (our opinion):

It seems that having small (half of the regular position) long positions in gold, silver and mining stocks is a good idea:

• Gold: stop-loss: $1,187, initial target price: $1,249
• Silver: stop-loss: $16.89, initial target price: $18.07
• Mining stocks (price levels for the GDX ETF): stop-loss: $21.59, initial target price: $23.37

In case one wants to bet on higher junior mining stock ETFs, here are the stop-loss details and initial target prices:

• GDXJ stop-loss: $33.80, initial target price: $37.14
• JNUG stop-loss: $12.37, initial target price: $16.34

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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