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

Heraclitus of Ephesus, an ancient Greek philosopher, said that "no man ever steps in the same river twice, for it's not the same river and he's not the same man". If he lived today and monitored the comments and actions taken by the US Treasury Secretary, Steven Mnuchin, he might have formulated his thoughts differently. Mnuchin just disrupted the markets once again after having done so in January, when he said that the US would welcome a lower US dollar.

On Monday, Mnuchin held a conference call with the US regulators to discuss plunging stock market and it was made publicly known. Of course, that was just as effective as a mid-flight announcement that starts with "Don't panic". People panicked. They also ran for the hills, leaving their stock holdings behind.

We previously discussed that the situation in the US stocks was already extreme and Mnuchin's comments made it even worse. The front page of finance.yahoo.com now states in one of the key headlines that "We are now in a Bear Market". Interestingly, another headline states that "Despite volatility, wealthy investors plan no money moves: CNBC survey". In the previous Alerts, we discussed that gold got Cramerized, which means that the investment public (the part of the market that buys close to the tops and sells close to bottoms) most likely bought gold. Jim Cramer also said that "the odds simply do not favor stockholders".

All the above paints a coherent picture. We saw a medium-term correction in the stock market, which is normal from time to time. The investor's sentiment is extremely bearish, which implies the end of the decline unless some major event takes place (e.g. liquidity drying up like in 2008), which is very unlikely. We see this based on the RSI plotted on the DIA ETF chart. The RSI moved below 22 and it was just as extreme in 2011 (when gold formed THE top) and in mid-2015 (gold formed a local bottom). This is a reading that shows just how excessive the situation was before Mnuchin could make things worse for the very short term. He scared investors even more and the situation became even more excessive. But, since all bad that could have happened, has already happened (again, a major event that could impact the markets is unlikely), things can only get better - and this means that the prices are stock prices very likely to move higher, if not immediately, then shortly.

Every investor has probably heard about the need to be buying when there's blood on the streets. It's hard to execute, but it is exactly this very moment, the final days of 2018, when we have plenty of blood on the streets. And that's not all. We have signs that the wealthy investors are sticking to their stock investments, while the investment public sells and buys gold. This is a perfect confirmation of how excessive the decline in the stock market has become and how bullish the outlook for the medium-term became. And how bearish it is for gold. The wealthy investors don't panic because they know that the popular news on which inexperienced investors panic are not that important and that it's sticking to one's well-researched strategy that generates value. In fact, in case of many investors that's the reason they became wealthy in the first place.

Why are we putting so much emphasis on the situation on the stock market in a message that is part of the Gold & Silver Trading Alerts? Because the panic on the stock market is most likely the key driver of gold's recent gains, especially after the latter got Cramerized.

Gold ended Monday's session less than $4 above its previous December high. Silver didn't reach, let alone break, the previous December high. The HUI Index closed 1.45 index point above the previous high in terms of the daily closing prices, but there was no new intraday high. There was no new high even in case of the closing prices in case of the XAU Index.

What does the above paragraph mean? That practically nothing happened on the precious metals market despite the huge daily decline in stocks. Looking at the past few weeks it's obvious that gold is moving higher along with lower stocks and as we discussed in the previous several Alerts, this link has very bearish implications for gold right now. The decline in the strength of gold's reaction shows that the upside for gold is very limited. If the stocks keep declining, gold might move higher, but not likely in a meaningful way. But, when stocks finally rally, gold is likely to respond with a huge decline as people run back from the hills and try to get back into the stock market at prices that were better than the previous exit prices (of course, most of the investment public will most likely end up buying back higher than when they sold as that's what happens when people act emotionally in their investments instead of executing a well-researched plan).

Summing up, the situation in the stock market combined with gold's strength of reaction, Mnuchin's recent actions and multiple technical factors that we discussed in the previous Alerts, make the outlook for the precious metals market very bearish for the following weeks and months. As always, sticking to a well-researched plan, instead of acting on short-term emotions is likely to produce great returns. And - also as always - it is difficult to execute, but let's keep in mind that in case of investing and trading, what's easy is rarely profitable. We care about you and your success and we'll keep you informed, and even though it's impossible to make the profitable path easy in its entirety, we'll do our best to make making money as convenient for you as possible. As you read on Friday's analysis, we didn't plan to write an Alert today, but we didn't want to keep you waiting until tomorrow given how emotional the situation got in case of the stock market and given gold's (small, but still) move a few dollars above the previous December highs.

To summarize:

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

• Gold: profit-take exit price: $1,062; stop-loss: $1,303; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $45.87
• Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $21.82; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $21.97

Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find a more detailed explanation in our August 1 Alert. 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 target prices:

• GDXJ ETF: profit-take exit price: $17.52; stop-loss: $31.23
• JDST ETF: initial target price: $154.97 stop-loss: $51.78

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

Important Details for New Subscribers

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.

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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