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

On Wednesday, before the markets opened in the U.S., we posted an alert in which we suggested taking profits off the table by closing the long position in the precious metals sector. Gold, silver, and – in particular – mining stocks declined on Wednesday and Thursday, so it seems that exiting the positions was a good idea.

Was that the real top? More and more signals seem to confirm this view. Let’s start with the USD Index (charts courtesy of http://stockcharts.com).

On Wednesday we saw a small, unconfirmed breakout above the short-term declining trend channel. The USD Index stayed there on Thursday, so some traders already view this move as confirmed. However, we prefer to take the careful approach and wait for a third confirmation before saying that the breakout is really meaningful. It is more meaningful today than it was yesterday, though.

The implications are just as they were yesterday, only a bit stronger:

What does it mean? That the odds for the USD Index reaching our target area have slightly decreased. The target area remains valid, but it’s no longer an 80% or so subjective probability that it will be reached – it’s more like [55%]% at this time. Could the USD Index rally at least to the Oct. high now? Yes, but that’s not a sure bet either – the breakout was not confirmed, and the previous upswing was so sharp and significant that it’s not clear if what we saw this month was enough of a correction to cool the market participants so as to make them convinced that USD can rally even higher in the short term.

In other words, the impact that the USD Index is likely to have on the precious metals market is rather unclear at this time. However, if the USD Index moves lower, then we will likely see a decline to our target area.

Just as the breakout above the declining short-term resistance line is almost confirmed in case of the USD Index, the breakdown below the rising support line is almost confirmed in the case of gold. Gold declined on higher volume yesterday than it did on Wednesday, so we have another (in addition to the breakdown) bearish sign.

All in all, the situation deteriorated further based on yesterday’s price/volume action.

In the previous weeks we have emphasized the predictive role that the gold priced in the Australian dollar might have in the current market environment, and it seems that the situation turned out as expected. We have been expecting to see a small breakout above the declining resistance line that would then be invalidated – just like it was the case earlier this year. This is exactly what we have just seen. Gold in terms of the Australian dollar is back below the declining resistance line, which serves as a (relatively weak, but still) confirmation that the top is in.

Naturally, history doesn’t have to repeat itself to the letter – it could simply by similar, so we can’t rule out another move higher here. However, if it does materialize, it doesn’t seem that it would be significant.

The situation in silver is still rather unclear and yesterday’s comments remain up-to-date:

Silver declined [recently] and it did so right before the turning point. Was this weeks high the local top? It could have been, but we could also see another sharp upswing right before the next big decline. Silver is known to perform very good in the very short term (often on an intra-day basis) right before the top.

Consequently, we have the same outlook for silver as we have for gold – the very short term is unclear, while the short term remains bearish.

The situation in gold stocks didn’t change much yesterday, so what we wrote yesterday remains up-to-date. Gold stocks moved a bit higher yesterday, which may seem bullish given gold’s decline, but we don’t view it as such, as we had a good reason for gold stocks to rally – an intra-day rally in the general stock market. Actually, miners underperformed other stocks, so we don’t think that yesterday’s “strength” is bullish.

We will quote the entire comment about gold stocks as it’s so important (in case someone missed yesterday’s alert):

Finally, let’s take a look at the gold stocks. Their underperformance relative to gold has been so significant that we decided to revisit our downside target. Think about it: gold declined about $8 yesterday and it was enough to trigger a decline in the HUI Index by about 6 index points. That was likely not a one-day event, as the HUI has been underperforming gold (regardless of the general stock market’s performance, which declined once again yesterday) for weeks now. If gold is about to move (initially) to it’s recent lows once again – to $1,180 or so, then we will see a $60 decline. If the HUI responded to gold’s $8 slide by moving 6 points lower, then if gold moves about $60 lower, then HUI could move – proportionately – about 45 index points lower. Even if it doesn’t decline as much, but moves lower by “only” 35 index points, it will already have moved to its 2008 low – the 150 level.

The 150 level was our original target for the HUI Index for the entire decline. However, it’s highly unlikely that gold stocks would stop declining after reaching this level if gold was about to move another $100 - $150 lower.

Consequently, the question is: if the final bottom would not be at 150 (HUI), then where?

The “problem” is that there is little technical support for the HUI Index above the 90 – 120 area (Unthinkable? Wasn’t 200 unthinkable when the HUI was above 600?). The targets are based on the 2002 and 2003 lows and the lower border of the declining trend channel. The target area is rather wide, so we will need to look at other markets for confirmation that the bottom is indeed in.

Do gold stocks have to decline as low (90-120)? No, we could see the bottom higher (or lower, but that seems unlikely), perhaps at our initial target of 150. It will be the other markets and signals that will tell us that a local bottom is in fact “the” bottom (naturally, we will keep you – our subscribers - informed). However, the odds that the final bottom will be below 150 have increased significantly based on the most recent extreme underperformance of the mining stock sector. The reason we are describing this is to make you prepared for the coming price swings ahead of time, which will help you remain unemotional if things get very volatile. Many investors will panic and sell close the bottom. We will aim to help you be on the other side of the trade at that time – as buyers.

All in all, we can summarize today’s alert in a very similar way to what we wrote yesterday:

Summing up, the situation in the precious metals market is rather complicated at this time. It wasn’t bullish enough to keep long positions on Wednesday (and it seems that closing them was a good idea) and based on Wednesday’s and yesterday’s sessions the outlook deteriorated further. Is the situation bearish enough to justify opening short positions? In our opinion – not yet, but we are getting close to this point [we are one step closer based on yesterday’s session]. The USD Index could still decline to our initial target area, which would likely result in a temporary upswing in metals and miners.

What could happen next (our best guesstimate) is that we would see a very temporary but sharp upswing in silver (temporary move above the declining resistance line that would be followed by an even bigger decline) while gold would move toward the $1,260 level. However, betting on this taking place seems too risky at this time [especially given Wednesday’s unconfirmed breakout in the USD Index and yesterday’s follow-up]. If that happens, we will most likely take advantage of it by opening short positions. Still, at this time we are not 100% certain that we will do so. It seems that we will be opening the next positions relatively soon, though. As always, we will keep monitoring the situation and report to you accordingly.

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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