In short: In our opinion short positions (half): gold, silver, and mining stocks are justified from the risk/reward perspective.

Generally, the situation in the precious metals market hasn’t changed since yesterday and what we wrote then remains up-to-date. Consequently, today we will focus on developments in two markets that we didn’t mention yesterday. The first one is seen in the gold market (charts courtesy of http://stockcharts.com.)

Gold broke below the very short-term rising support line (marked with red) and it closed there for a second day. If it closes there one more day, we will have a confirmed breakdown and the situation will become even more bearish.

The volume was very low once again and since gold moved slightly higher yesterday this can be viewed as a bearish indication.

Moreover, gold has invalidated the breakout above the 61.8% Fibonacci retracement level based on the August – December 2013 decline. This is also a bearish sign on its own.

The second market that we would like to feature is the USD Index.

From the short-term point of view, we saw a small daily decline that didn’t change much. There are two things that we would like you to focus on on the above chart: the approaching cyclical turning point and the short-term support line.

The turning point implies that we will see some kind of turnaround shortly. The support line implies that even if the USD moves lower, then it’s not likely to move much lower – in fact, it’s likely not to move below the previous February lows.

The two factors taken together paint a picture in which the USD Index could move a bit lower only to rally more significantly shortly thereafter. This could result in another small move higher in the precious metals sector before a bigger decline, which means that if one takes place, it should not surprise us.

The above doesn’t mean that the decline in the USD is likely – we could see a move higher right away and a simple correction at the turning point – perhaps to the 80.50 level after a rally to the 81 level.

The USD Index moved below the rising support line in today’s pre-market (in U.S. terms) trading but the move is not confirmed at this time. Actually, the unconfirmed breakdown could now be viewed as somewhat bullish because of the turning point. The turning point could ignite a move back above the support line meaning an invalidation of the breakdown which would be a bullish signal supporting a bigger rally.

The bottom line is that the downside for the USD Index seems limited and the medium-term chart confirms this.

Quoting Tuesday’s alert:

The medium-term USD Index chart suggests that we are still likely to see much higher USD values. The index is right at the long-term (or medium-term depending on one’s approach) support line and after a breakout. It’s an index just waiting to start a big rally. A rally in the USD Index to the 85 level or so would likely have a devastating effect on the precious metals market and this type of rally could be seen based on the above chart.

If the USD really rallies and gold refuses to decline, then we will be happy to conclude that the medium-term decline in the precious metals market is probably over. It simply doesn’t seem to be the case just yet.

The above remains up-to-date. We’ve recently seen a move higher in the U.S. Dollar Index, and gold, silver and mining stocks have indeed declined. For now it seems that if the USD Index rallies significantly, the precious metals sector will drop significantly – and that still seems a likely outcome for the following weeks and perhaps months.

To summarize:

Trading capital (our opinion): Short position (half): gold, silver, and mining stocks.

Stop-loss details:

• Gold: $1,366
• Silver: $22.60
• GDX ETF: $28.9

Long-term capital: No positions

Insurance capital: Full position

Please note that we have started to include the insurance capital on the above list in order to avoid the impression that we suggest being entirely out of the precious metals market. Those of you who have been with us for a long time are well aware of this, but since a lot of new subscribers have joined us recently, we though a quick reminder should be useful.

We have suggested being out with one’s long-term investment capital, but being in as far as the insurance capital (physical precious metals holdings) is concerned. You will find details on our thoughts on gold portfolio structuring in the Key Insights section, but in short, it depends on your approach and experience. Below you will find a “portfolio” that we created for Eric – the fictional character that we use to illustrate suggestions (not investment recommendations) for beginning investors. More precisely, this was the portfolio before we suggested moving out of the precious metals market (so, before April 2013).

Now the “investment” category would be 0%, but the insurance remains at 44.1%. Please note that the average size for the trading position (we provide the netted amount in the above points regarding positions / trades) is just 1.4% of the entire capital in this case, so half of the position means using just 0.7% (11.8% is kept in cash / dedicated to trading but only a part of it is used for each trade). The entire portfolio report provides also 2 other fictional characters and their “portfolios”. John being the proxy for an experienced investor is the other extreme (Eric being the beginner). He “has” 17.6% in insurance capital and the average size of his trading position is 31.6% (half of which is 15.8%).

The bottom line is that if you assume that precious metals have much further to go (beyond 2011 highs) like we do, having just some money in the sector might appear as being out – and opening a small speculative short position in addition to it might seem as betting against it. When one looks at it from a “fresh perspective” without any assumptions about the gold bull and reads about shorting, they might get the impression that we suggest being entirely out of the market, which is not the case. Actually, the netted effect of small speculative short positions is simply hedging the insurance capital to a smaller or greater extent. It might be more than that if we suggest doubling the size of the short position, but that’s not the case just yet. Of course the above is not an investment advice and consulting an investment advisor before taking action regarding your portfolio is encouraged.

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.
Gold & Silver Trading Alerts