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

Mining stocks held up relatively well, but we wrote that this was likely a temporary phenomenon and that the downtrend was the thing that we should’ve focused on – we didn’t have to wait long for this to be confirmed. Miners plunged yesterday and they didn’t even need a trigger in the form of a major slide in gold or silver and it was accompanied by only a very small move lower in the main stock indices. What’s next?

A continuation of the decline is the most likely outcome, in our opinion. Since not much happened in metals, in today’s alert we’ll focus on what happened in the mining stocks sector and in the USD Index.

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

In yesterday’s alert, we wrote the following:

The gold stocks’ performance can be viewed as strength, but the above chart clearly shows that the current pace at which miners decline is actually in tune with what we saw at the previous decline, so it’s not really alarming or particularly bullish.

Gold stocks continue to slide in tune with the previous decline and the outlook remains bearish.

Please note that unless miners rally strongly today, we will see a sell signal from the weekly Stochastic indicator and this indicator has proved to be very reliable in the past years. In other words, the situation is likely to deteriorate further shortly.

Before moving to the short-term charts, let’s take a look at another long-term chart.

The XAU Index (includes both gold stocks and silver stocks) clearly shows that the major trend remains down and that the fact that we saw a counter-trend bounce is something rather natural as the index had previously moved to its major support level – the 2000 low.

The self-similar pattern in the HUI Index remains up-to-date. The local top is very likely behind us and the implications for the following days are bearish.

In yesterday’s alert, we wrote the following regarding mining stocks:

What’s the other reason for the possible miners’ strength other than the mentioned technical factors? The rally in the general stock market. The rally in the main stock indices is likely to end relatively soon and once that happens, miners are likely to catch up with gold by declining quite sharply.

All it took for mining stocks to slide was just a little weakness in other stocks – no significant slide was required. Mining stocks had not been really showing strength previously – it was likely just a pause triggered by reaching 2 technical support levels. With those out of the way (plus, we just saw a breakdown below the rising support line), the road is clear for lower prices.

The important detail seen on the above chart is the size of the volume – it was big, so the breakdown is very meaningful, especially that it wasn’t triggered by major events in other markets.

As a reminder, we covered multiple other bearish signs on Monday and they remain up-to-date. Having said that, let’s take a look at one additional chart – the USD Index.

In yesterday’s alert, we wrote the following:

The outlook for the USD Index is bullish (and our short positions in EUR/USD are likely to become even more profitable in the coming weeks) and this has important bearish implications for the precious metals market. We previously wrote that metals and miners reacted mostly to breakouts and breakdowns in the USD Index and it was true also this time – the precious metals sector hesitated while the USD was rallying (but not breaking higher) only to decline when the USD indeed declined and verified the breakout. The USD Index is now right after a cyclical turning point and the small, short-term move preceding it was down, so the implications are bullish for the USD – and bearish for metals and miners.

The resistance line that was just broken is significant and the USD Index can now rally at least to the previous 2015 high. If that happens, metals and miners will be likely affected very negatively. Even without considering multiple bearish signs covered on Monday, this factor alone is something that makes us stick to our short positions despite the risk of a temporary upswing.

The USD Index rallied visibly once again yesterday (moving above the Oct. high) and the above comments remain up-to-date. The implications remain bearish for the precious metals sector.

All in all, not much changed yesterday (as far as the outlook is concerned) – the outlook was bearish and it still is – we saw additional confirmations thereof. Consequently, we will summarize today’s alert just as we summarized yesterday’s issue:

Summing up, the medium-term decline in the precious metals sector continues and there are multiple signs that confirm this bearish outlook. This week we saw some signs that could indicate a possible temporary upswing in the coming days, but – even if it materializes – it doesn’t seem that this move would be significant or worth betting on. In our opinion, the current short position continues to be justified from the risk to reward point of view and it seems likely that it will further increase our profitability.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

• Gold: initial target price: $1,050; stop-loss: $1,167, initial target price for the DGLD ETN: $98.37; stop-loss for the DGLD ETN $71.04
• Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop-loss for DSLV ETN $40.28
• Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $18.13, initial target price for the DUST ETF: $26.61; stop-loss for the DUST ETF $9.22

In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

• GDXJ ETF: initial target price: $16.27; stop-loss: $25.23
• JDST ETF: initial target price: $46.47; stop-loss: $15.58

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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 a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.

Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.

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 Tools and Indicators.

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.

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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