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

Gold, silver and – finally – mining stocks have declined strongly once again and it’s becoming clearer that Monday’s downswing was no accident. Is the situation bearish enough to bet on lower precious metals prices or is this the final chance to enter longs? Let’s take a closer look (charts courtesy of http://stockcharts.com).

From the long-term perspective, we see that the previous breakout has been more than invalidated. The bearish implications remain in place.

Yesterday, we wrote the following:

What makes the invalidation even more bearish is that it was not only the rising resistance line that was “unbroken.” The move above the 61.8% Fibonacci retracement and – most importantly – the move above the 300-day moving average were also invalidated. The latter was invalidated insignificantly, so as soon as gold declines some more, we will get a much more bearish signal.

The volume that accompanied Monday’s big downswing was significant, which confirms the direction of the move.

We saw another decline on big volume, and this time gold / GLD ETF are clearly below their 300-day moving averages. Ideally, we would like to see a third consecutive close below the 300-day moving average before saying that the situation has really deteriorated (as we outlined in the summary of yesterday’s alert), but it seems that at this time the volume during this week’s daily declines was high enough to confirm the move on its own.

Please note that the current decline is quite similar to the one that we saw in March. If the history is to rhyme this time, we could see some kind of a pause shortly. Unless the move higher is huge, it will not change the current short-term trend, which at this time is once again down.

It could be the case that this decline is shorter than the previous one and that we have already seen the major bottom... But we don’t think that it’s likely. We have been waiting for another big slide in gold because we haven’t seen developments that would confirm the true bottom. For instance, there was no strong underperformance of silver at the bottom, the major support levels in the HUI to gold ratio were not reached despite it being in a major downtrend, and gold was not hated in the mass media – there were even some bullish comments recently. Perhaps we have just seen the final local top before the big slide and this scenario seems more likely to us than the one in which gold really bottoms in a week or two.

The situation in silver didn’t change a lot yesterday, and it continues to support the bearish outlook. Having said that, let’s take a look at what changed in the case of mining stocks.

The following quote from yesterday’s alert is particularly important: if miners manage to close back below the declining support/resistance line – more or less below $26 – we will have a strong bearish sign. Even though the GDX ETF declined significantly, it didn’t move below the above-mentioned declining support/resistance line, so we have yet to see this bearish confirmation.

We have just seen the above-mentioned confirmation. In fact, the decline materialized on significant volume, which is another short-term bearish sign. Overall, the situation in mining stocks has just deteriorated.

The situation in the USD Index and the juniors sector continues to support the bearish outlook for the precious metals sector (what we wrote on Thursday about it remains up-to-date).

Basically, everything that we wrote about the USD Index yesterday remains up-to-date (in fact, it was somewhat confirmed by what actually happened yesterday):

The support lines and the psychologically important 80 level remain unbroken. The USD Index hasn’t rallied today (and hasn’t moved below the support lines either), which means that gold’s and silver’s decline materialized without the dollar’s help, which is a bearish sign, especially that they are likely to receive the dollar’s help (to decline more) sooner rather than later.

The precious metals sector “received help from the USD Index” as the latter rallied yesterday and metals reacted by declining – the USD-PMs link remains in place and it has bearish implications given the bullish outlook for the USD Index.

Before summarizing, let’s take a look at another important index in the forex market -the Euro Index.

There are 2 things on the above chart that are significant for precious metals investors. Firstly, it seems that the Euro Index is on a verge of breaking below a combination of strong support lines (having invalidated the breakout above the very long-term resistance line earlier this year). Such a breakdown – if it materializes - will like be followed by a substantial move lower. Secondly, the previous big downswings in the Euro Index were seen along with big declines in gold, silver and mining stocks. Naturally, the combination of the above points is bearish for the precious metals sector.

Summing up, the decline in gold took it well below the 300-day moving average, which made the situation even more bearish, and the same goes for mining stocks and the breakdown below the declining support line. Since the situation became more bearish, it seems that adding to the short positions is now justified from the risk/reward point of view. Please note that we might see a pause here, but it’s unlikely that it will change anything.

To summarize:

Trading capital (our opinion): Short (full) position in gold, silver and mining stocks with the following stop-loss levels:

• Gold: $1,353
• Silver: $21.73
• GDX ETF: $28.30

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.

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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