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

Quite a lot happened in the currency markets last week, but at the first sight there is not much to comment on as far as the precious metals sector is concerned. One part of the market, however, seems to provide clues as to what’s most likely to happen next. Let’s take a look at the charts (charts courtesy of http://stockcharts.com.)

We will once again start off with the currency sector, because it seems to give us one of the most visible clues that tell us something about the future price moves in gold, silver and mining stocks.

The USD Index pulled back a little o Friday and it did so right before the cyclical turning point. This action is – unfortunately – perplexing. Was the small decline "the decline" that was likely to be seen based on the turning point? It’s possible, but we don’t view it as likely. It seems to us that the USD Index will need to correct some more, because the previous rally was so big. We won’t be surprised to see a move a bit below the 81 level before the rally continues.

The price action in the Euro Index was even more significant – we saw a weekly reversal, which suggests that the index will move higher in the short term. We don’t expect it to move much higher because the breakdown below the rising support/resistance line has already been confirmed. It seems to us that the most likely scenario is the one in which the Euro Index moves close to the declining resistance line and the Feb. 2014 low.

The situation in the gold market is rather similar to the one that we saw last week. The volume on which gold rallied on Friday was smaller than the one on which it had declined on Thursday, which is a bearish sign. At the same time, however, gold corrected much more than the USD Index did, so gold is once again showing some strength. Overall, the situation remains rather unclear.

From the long-term perspective, nothing changed in the silver market. The white metal declined last week without any meaningful signs. Something very specific is visible on the short-term chart.

The current situation is similar to what we saw in March. Silver declined after a local top was formed close to the turning point, then bounced a bit and then it moved a bit below the previous low. Back in March it rallied for a few days only to disappoint and plunge shortly thereafter. This scenario seems quite probable at this time, not only because of the similarity on the above SLV ETF chart but also because of the situation in the currency markets.

The GDX ETF that serves as a proxy for mining stocks tried to rally on Friday but all it managed to do was to form a big reversal. This type of intraday price action is a bearish sign on its own, but it’s only moderately strong as it wasn’t accompanied by significant volume.

Before we summarize, we would like to draw your attention to one of the charts that we feature from time to time – the one comparing the performance of junior mining stocks with other stocks.

We previously commented on the above relationship in the July 10th alert and our comments remain up-to-date. We wrote the following:

The spike in the ratio of volumes (juniors vs. other stocks) has been usually seen when the precious metals sector was at a local top, or slightly before the top. In other words, when the volume accompanying the move in the GDXJ ETF, which serves as a proxy for the juniors, was high on a relative basis, it suggested an extreme situation in terms of the precious metals investors’ sentiment, and this is something that accompanies local extremes. At this time, we’ve seen a huge spike and the implications are bearish.

We already saw a decline in gold and the rest of the sector, but taking into account the sizes of the previous post-signal declines, it seems that the move lower is not over yet, and the bearish implications remain in place. Please note that the above-mentioned signal doesn’t necessarily work on a very short-term basis, so we could see some appreciation in the following days and it would not invalidate the signal.

Summing up, it seems that even though the next big move in the precious metals sector is still likely to be to the downside (we have not yet seen actions that are usually seen at important bottoms, like huge underperformance of silver, and gold is not actively hated in the mass media), the odds for a corrective rally are relatively high. We plan to re-enter short positions when we see either a small rally an some kind of confirmation that the next local top is in (more likely scenario in our view) or a confirmation that there will be no visible correction (for example a continuation of the dollar’s rally despite the current turning point). At this time, we prefer to say out of the market.

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.

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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