Briefly: in our opinion, full (150% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert. We are increasing the size of our trading position.

The precious metals market declined yesterday, and at first sight, this move appeared to be relatively boring. We saw notable daily declines several times in the past several weeks, but they were then followed by daily rallies, and little changed overall. Was there anything special about the way PMs declined yesterday?

Yes. The important detail that most people have probably missed is that silver declined barely, while mining stocks declined profoundly. This - combined with the last few days of silver and miners' performance. only confirms what we wrote yesterday. Namely, that we are seeing a classic topping pattern.

Consequently, our yesterday's comments on the relative performance of gold, silver and mining stocks remain up-to-date:

Interestingly, while gold showed weakness, silver showed daily strength by rallying higher despite a move lower in gold. That's exactly what we quite often see right before big declines in the precious metals market.

On Thursday, miners moved higher, but compared to silver, their upswing was not even similarly profound. On Friday, miners reversed and declined, while silver moved higher. Taking the last three trading days into account, miners are barely up (by just 0.2%), while silver is up significantly (3.66% in the SLV ETF). This could mean that silver is up, precisely because it's the final part of the upswing.

Taking the last four trading days int account, miners are down by about 2.6%, while silver (the SLV ETF) is up by about 3.7%.

With decreased volatility, the times are becoming "more normal" and with this, "more normal" trading techniques become more useful. Looking at miners and silver's relative performance is one of them.

And what about mining stocks' big picture?

We previously described the above HUI Index chart in the following way:

The HUI Index declined significantly, and then it rebounded significantly.

Both are likely linked. Miners first declined more sharply than they did in 2008, so the rebound was also sharper. Based on the stimulus and gold reaching new yearly highs, miners also rallied and tried to move to new yearly highs. It's not surprising.

However, if the general stock market is going to decline significantly one more time, and so will gold - and as you have read above, it is very likely - then miners are likely to slide once again as well. This would be in tune with what happened in 2008.

At this time, it may seem impossible or ridiculous that miners could slide below their 2015 lows, but that's exactly what could take place in the following weeks. With gold below their recent lows and the general stock market at new lows, we would be surprised not to see miners even below their 2020 lows. And once they break below those, their next strong resistance is at the 2016 low. However, please note that miners didn't bottom at their previous lows in 2008 - they moved slightly lower before soaring back up.

Please note that the HUI Index just moved to its 2016 high which serves as a very strong resistance. Given the likelihood of a very short-term (1-2 days?) upswing in stocks and perhaps also in gold (to a rather small extent, but still), it could be the case that gold miners attempt to rally above their 2016 high and... Spectacularly fail, invalidating the move. This would be a great way to start the next huge move lower.

The gold miners have indeed moved slightly above the 2016 highs in intraday terms, and on Friday, they closed below the highest intraday price of 2016. They did close above the highest 2016 daily and weekly close, though. This breakout is not yet confirmed, but if it gets confirmed, the implications might be bullish. We doubt that this will be the case and we expect to see a clear invalidation of the breakdown instead. And as we wrote previously - it would be an excellent way for the final slide to start.

And that's exactly what we saw yesterday. HUI's highest daily close of 2016 is 284.14, and it closed at 275.34 yesterday. The HUI's breakout was invalidated shortly after gold invalidated its own breakout above the declining resistance line. The implications are bearish.

We have no other news to report today, as we covered other major factors yesterday.

From the Readers' Mailbag

Q: From the 2008 gold chart you provided I noticed the following: A triple top was formed after its 1st low at 740.

It took 7td between the 1st and 2nd high and 9td between the 2nd and 3rd high. Each high was slightly higher than the previous one. It then declined for 10td to its final low at 680.

Fast forward to now. We have a triple top that topped out on Friday 5/8 from its March low at 1450. There was also 7td between the 1st and 2nd high and 11td between the 2nd and 3rd high on May 8th. Each high was slightly lower than the previous one.

If this is it, then it should decline for 10td to its final low just like it did in 2008. What are your thoughts on all of this?

A: Indeed, that's exactly how it could play out.

Since the differences between highs are only similar, and not identical, we wouldn't count on the identical decline time - but a similar one. So, gold could decline for about 10 trading days or a bit longer - for about 2-3 weeks. This means that the bottom could form close to the end of the month. It seems that USD's breakout from the recent consolidation could be what triggers the breakdown in gold.

Summary

Summing up, the outlook for the precious metals market remains bearish for the next few weeks, and based on HUI's invalidation and miners' weak performance, especially relative to silver, the outlook has just become more bearish for the next few weeks. Consequently, we are increasing the size of the current position. Please note that 150% of the regular position size doesn't mean using more capital than you have, but only more than you usually use for a trade. You will find details in our gold portfolio report in the "Position Sizes" and "Predefined Portfolios" sections.

After the sell-off (that takes gold below $1,400), we expect the precious metals to rally significantly. The final decline might take as little as 1-3 weeks, so it's important to stay alert to any changes.

Most importantly - stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely make much more in the following weeks and months), but you have to be healthy to really enjoy the results.

By the way, we recently opened a possibility to extend one's subscription for a year with a 10% discount in the yearly subscription fee (the profits that you took have probably covered decades of subscription fees...). It also applies to our All-Inclusive Package (if you didn't know - we just made huge gains shorting crude oil and are also making money on both the decline and temporary rebound in stocks). The boring time in the PMs is over and the time to pay close attention to the market is here - it might be a good idea to secure more access while saving 10% at the same time.

Important: If your subscription got renewed recently, but you'd like to secure more access at a discount - please let us know, we'll make sure that the discount applies right away, while it's still active. Moreover, please note that you can secure more access than a year - if you secured a yearly access, and add more years to your subscription, each following year will be rewarded with an additional 10% discount (20% discount total). We would apply this discount manually - please contact us for details.

Secure more access at a discount.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (150% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:

Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $10.32; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $231.75; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $9.57; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $284.25; stop-loss for the JDST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway. In our view, silver has greater potential than gold does):

Silver futures downside profit-take exit price: $8.58 (the downside potential for silver is significant, but likely not as big as the one in the mining stocks)

Gold futures downside profit-take exit price: $1,382 (the target for gold is least clear; it might drop to even $1,170 or so; the downside potential for gold is significant, but likely not as big as the one in the mining stocks or silver)

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