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

Gold moved higher yesterday, continuing its bounce from the levels close to the 2013 low. Silver declined a bit, however, and mining stocks declined significantly. The HUI Index closed below the 2013 lows. In other words, we have just seen a major breakdown. Is it high time to get in or time to get out?

Let’s examine the charts and see what actually changed (charts courtesy of http://stockcharts.com). First, some background information. The general stock market declined heavily yesterday, while the USD Index moved lower only slightly.

Yesterday, we wrote the following:

We already saw a significant daily decline yesterday, so it could be the case that the corrective downswing in the USD Index is already underway. The odds will further increase once we see a move below the rising short-term support line (which is likely to be seen shortly).

We have not yet seen the move below the rising, short-term support line. Consequently, even though the market moved lower, it was not that important.

There is a small bearish sign on the above chart, after all. Please note that we have seen 2 subsequent trading days during which USD declined. This might not seem like a big deal, until one realizes that the last time we saw something like that was in the first half of July. There have been a few cases when we saw 2 daily declines in a row since that time, but in all cases one of the sessions was almost flat. The last 2 days were the first exceptional case in this regard.

What about gold?

It moved a bit higher, which was a normal reaction given a small decline in the USD Index. Gold seems to be continuing its corrective upswing after (almost) reaching its Dec. 2013 low. Our previous comments on gold remain up-to-date:

Gold moved almost to its Dec. 2013 intra-day low, which is a very important support, so this fact by itself makes a move higher very likely. The fact that gold rallied shortly after declining to this level and ended the session over $16 higher (and forming a reversal hammer candlestick) makes the situation even more bullish. This kind of action is likely to be followed by further rallying.

From the non-USD perspective (the weighted average of prices of gold in terms of currencies other than the USD), we saw bullish sign this week. There was a breakdown below the rising, medium-term support line and an immediate invalidation thereof. The implications are bullish.

The Dow to gold ratio chart, however, tells us that if we see a move higher here (which we are likely to see, in our opinion), it will not be the final one, as the resistance level that we have been expecting to be reached at the final bottom, has still not been touched.

The above long-term chart is great for filtering out the short-term price swings and focusing on major moves in gold and the rest of the precious metals sector. At this time it shows us that even though the ratio has been on the rise recently, it has not yet reached an important resistance level, and thus is not likely to stop the rally just yet.

This fits our expectations based on other charts. It seems that we haven’t seen the final bottom in gold, but we might have seen a local one.

Silver moved only a little lower yesterday, and basically nothing changed based on this move. Silver remains above the rising, long-term support line and combining it with its heavily oversold status (as shown by the RSI indicator) provides us with bullish implications.

Gold stocks moved and closed slightly below their 2013 lows, despite a combination of support levels. Naturally, this looks like a bearish sign. However, the move below the 2013 low itself is very small and there was only one daily close below it. Consequently, the breakdown is not confirmed and doesn’t necessarily have very important bearish implications just yet.

Please note that until the day before yesterday only gold and silver had reached (in the case of gold “almost reached”) their major support levels. After yesterday’s close, we can say the same about gold mining stocks as well. Perhaps it was the necessary step for the precious metals market to form an important bottom – meaning that we would see a major support being reached in gold, silver and mining stocks (and also in platinum to gold ratio).

Was there any good reason for which the miners fell down so significantly despite a move higher in gold? Yes, the general stock market declined on significant volume. Consequently, we’ll need to see some additional bearish signs before we change our bullish attitude (taking the short term into account).

The gold stocks to gold ratio has also moved to an important support level – the Dec. 2013 low. This by itself suggests a move higher shortly. At this time, we additionally have a buy signal from the RSI indicator that has just moved below 30.

All in all, we can summarize the situation in the same way as we did yesterday:

Summing up, the situation in the precious metals market is still bullish for the short term, even if Friday’s intra-day action [and Monday’s moves in gold stocks] might suggest otherwise. Monday’s price action seems to be the true direction in which the market is likely to head next – up. The corrective downswing in the USD Index has probably already begun. The same goes for the precious metals sector, only in this case, the correction would be to the upside. A lot of money has been saved by staying out of the precious metals market in the past months with one’s long-term investments (details below), and it seems that the corrective upswing will provide additional profits from the trading capital.

To summarize:

Trading capital (our opinion):

It seems that having speculative (full) long positions in gold, silver and mining stocks is a good idea:

• Gold: stop-loss: $1,172, initial target price: $1,249, stop loss for the UGLD ETF $11.29, initial target price for the UGLD ETF $13.56
• Silver: stop-loss: $16.47, initial target price: $18.07, stop loss for USLV ETF $23.94, initial target price for the USLV ETF $31.73
• Mining stocks (price levels for the GDX ETF): stop-loss: $19.94, initial target price: $23.37, stop loss for the NUGT ETF $18.25, initial target price for the NUGT ETF $28.99,

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: $28.40, initial target price: $37.14
• JNUG stop-loss: $6.19, 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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