Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward point of view at the moment of publishing this Alert.

Gold rallied today and this rally happened most likely for two news-based reasons. One might be the regular pre-Fed-announcement volatility, and the other might be the thing that also caused crude oil to rally over $2. Namely: U.S. airstrike in Iraq ordered by President Donald Trump killed one of Iran's most powerful generals, sending global markets tumbling as Iran's Supreme Leader threatened "severe retaliation."

As far as the former reason is concerned, it seems that investors and traders are anxious and are more prone to act on volatile movements right before and after a certain fundamental piece of news is being released. In today's case, it's the release of Fed minutes.

Both factors could be responsible for today's sharp upswing and both are likely to be temporary.

As far as the latter is concerned, the geopolitical news in general tend to have only a temporary effect on gold prices. What happened in Iraq definitely fits the definition of a geopolitical event, which means that the news impact is likely to reverse.

As far as Fed's minutes are concerned, we can say something similar - gold's appeal is highest when the uncertainty is also at its peak. Once the news is released (here: Fed minutes), the uncertainty and tension will be gone, and the markets are likely to resume their previous moves lower. This wouldn't be the case immediately, if the precious metals' investors got positively surprised by what's in the Fed's report, but we doubt that this will happen.

In the short run, it's not clear how long the safe-haven rally will take place. It could end today, but it could end next week as well. Gold could reverse today, perhaps after the Fed's minutes are released and the market focuses on it instead of being in the grips of the U.S.-Iran tensions. Gold could also move even higher in the very short term - perhaps to the September high, and reverse from there. The clearest thing in this case is the temporary nature of the upswing.

Yesterday's performance of mining stocks and the lack of breakout to new intraday highs in silver serves as an early indication that it's a big decline that's around the corner, not a big rally.

Feeling the Short-Term Pulse in the PMs

Gold reversed once again yesterday, but it managed to close the session higher. Silver closed the day at a higher high, but there was no intraday high. Miners didn't manage to form a new intraday high and they closed lower despite a higher close in gold.

When gold is making new highs, but miners aren't, it's almost always (in the vast majority of cases) an indication that a top is being formed. Miners definitely didn't make a new high yesterday. Since gold moved up by over $10 in today's pre-market upswing, miners will probably be forced to rally above their previous highs, but this rally might not last long - perhaps not more than several hours.

But the HUI is above its August high - isn't this a sign of strength?

Not really, because the GDX ETF - another important proxy for the precious metals market - doesn't confirm this "strength".

The GDX ETF remains well below its August high, proving that it's far from being clear that mining stocks are indeed showing strength here.

But the USD Index and Gold...

Gold showed strength relative to the USD Index as well as it managed to move higher despite USD's rally and invalidation of its breakdown.

That's likely the impact of the news-based factors (likely mostly due to the Iraq news) that we described earlier today. The market's reaction was emotional and very quick. Once the atmosphere calms down, the factors that really matter will start to be visible - and USD's bottom is what really matters for gold now.

The RSI flashed a second buy signal about 2-3 weeks after flashing the previous one - that's what we saw in early November right before the early-November decline in gold.

Moreover, please note that gold remains below its September high, while the USD Index is about 3 index points below its September high. Overall, gold shrugged off USD's slide in the last 4 months and it's only rallying right now - likely at the end of USD's decline. That's what gold tends to do in smaller and bigger time-frames. In other words, gold bulls should be quick to enjoy this rally as it's not likely to last.

Summary

Summing up, based on multiple similarities present in gold, silver and mining stocks, as well as on the critical situation in the USD Index, the medium-term outlook for the precious metals market is very bearish. January is usually a positive month for gold, but this bullish impact disappears when one takes into account the likely bottom in the USD Index. Given the proximity of the triangle-based reversals in gold, silver stocks' big volume spike, and divergence between HUI and GDX, it seems that the short-term rally in gold, silver, and miners is now very close to being over. In other words, the profit potential of our trading positions remains intact. This is especially the case given the remarkable similarity to the final 2008, 2012, and 2016 highs where gold topped slightly above the 61.8% Fibonacci retracement.

It's possible that gold would move closer to its September high before the reversal takes place, but it's far from being certain or likely. The clearest thing about this rally is that it's likely of a very temporary nature.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

• Gold futures: profit-take exit price: $1,391; stop-loss: $1,573; initial target price for the DGLD ETN: $36.37; stop-loss for the DGLD ETN: $25.44
• Silver futures: profit-take exit price: $15.11; stop-loss: $19.06; initial target price for the DSLV ETN: $24.88; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $23.21; stop-loss: $31.12; initial target price for the DUST ETF: $14.69; stop-loss for the DUST ETF $4.59

In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:

• GDXJ ETF: profit-take exit price: $30.32; stop-loss: $44.22
• JDST ETF: profit-take exit price: $35.88 stop-loss: $8.28

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

Insurance capital (core part of the portfolio; our opinion): Full position

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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 signs 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 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
Editor-in-chief, Gold & Silver Fund Manager