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.

Gold finally broke below the triangle pattern and confirmed multiple medium-term bearish signals that we previously saw. Gold is the flagship metal of the precious metals sector, so the above is an important indication for the short term. However, the most important development for gold and silver investors happened somewhere else.

USD’s Breakout

The USD Index broke above the declining short-term resistance line that we marked with purple. Even though the breakout is not yet confirmed, this changes the short-term outlook for the USDX to bullish. The USD has been weak on a short-term basis, despite bullish medium-term outlook and Friday’s breakout suggesting that the short-term trend has finally changed and that – perhaps – the medium-term rally has already resumed.

This, plus the likelihood that gold is now going to magnify USD’s bearish signals (i.e. USD’s rallies), has very bearish short term implications for gold, silver, and mining stocks.

The next triangle-vertex-based reversal is in early February (marked with vertical, dashed line), which is in tune with what we wrote on Friday about the likelihood of the possible reversal in early February.

Gold’s Dramatic Pause is Over

We previously wrote the following about the situation in gold:

(…) Gold is moving back and forth within a triangular pattern and the fact that yesterday’s close was the second highest close of the year doesn’t change anything. The relatively low volume that accompanied the upswing (lowest daily volume of 2019) confirms it.

Gold received a lot of publicity and it was even Cramerized. And yet, the buying power appears to have almost dried up. Gold had a good reason to rally further, but it didn’t. If there are very few buyers left, who’s left to keep pushing the price higher?

Given positive news, gold was almost forced to rally and the fact that it was at its rising support level helped. But this rally was as weak as it gets. The volume was relatively low, there was no breakout and neither silver, nor mining stocks confirm the daily upswing.

The above lack of strength – unsurprisingly – resulted in price declines. Gold declined and broke below the triangle pattern and below the rising red support line. And it did so with only small help from the USD Index.

The volume was big in relative terms (bigger than what accompanied two previous days’ action), but not in absolute terms. The former suggests that the move was rather not accidental, and the latter suggests that the full strength of the bears is yet to come. The implications of Friday’s action are very bearish.

Before moving to silver, let’s take a look at the confirmations that we just saw from the MACD and PMO indicators.

They are both very useful for detecting major tops in gold. They were extremely effective in the previous years. There were two cases when they didn’t indicate a huge decline. One of those cases was in 2016 and the second one was in late 2018. This is interesting because of two reasons:

1. We just saw a double sell signal once again, which – being very effective in the previous years – is a strong bearish factor on its own
2. We saw the signal after a decent rally that followed a fake signal, just like in 2016. That was the only serious outlier from the otherwise extremely effective set of signals and even the analogy to this outlier has bearish implications. The moment when we saw the double sell signal in mid-2016 was the confirmation of the top of the year and it was an indication of one of the biggest medium-term declines of the past years.

Implications of both are bearish.

Having said that, let’s turn to gold’s sister metal – silver.

Silver’s Decline – Slowly, but Surely

At least for now.

Silver didn’t plunge yet, but it declined and closed the week below the 2017 bottom in terms of the daily closing prices. Our comments on the shape of silver’s post-topping action remain up-to-date:

(…) Taking the previous four important tops into account, we see that two of them were not followed by an immediate slide, but rather by a consolidation. Both: September 2017 and January 2018 tops were first followed by a rather steady decline. The slide accelerated only after several days of the less volatile movement.

If something like what we’re seeing right now happened in case of half of the recent tops, then one shouldn’t view it as something odd, or bullish. It’s one of the normal ways for silver to form major tops.

Silver declined in a more visible manner than gold, which is both: understandable, and likely to continue. Why?

Because of the rising trend channel in the gold to silver ratio. The ratio just bounced off the lower border of the channel while RSI touched the 30 level. That was likely a short-term bottom and a verification of the move above the previous tops. The medium-term rally can – and is likely to – continue. The upside target based on the very long-term resistance created by previous long-term tops is at about 100 level. At the moment of writing these words (gold: $1,283.60; silver: $15.28), the gold to silver ratio is at 84, so the upside potential is significant.

Silver is likely to decline in a profound way because of both: its own tendency to decline very fast either immediately after the top is formed or after several days of slower decline, and because of the situation in the gold to silver ratio.

Can mining stocks confirm the above bearish indications?

Mining Stocks Lead the Way to New Lows

In short, yes. All short-term breakdowns below rising and declining support lines are now confirmed, and we even saw a move below the 50-day moving average. Gold miners’ low that we saw on Friday was below the late August 2018 high. If anyone had any second thoughts about whether gold stocks underperform gold or not, they have their final proof – gold’s late-August high is $1,221.

No market moves up or down in a straight line, so there will be periodical corrections, and some of them will be tradable. The next quick target for the miners is at about 143 – 144 for the HUI Index, but it seems that betting on a rebound is not justified from the risk to reward point of view. The possible move higher is not likely to be significant, but the following decline is very likely to be significant. One of the reasons is visible on the below chart.

A week ago, we described the above chart in the following way:

[The recent upswing in the miners] probably doesn’t look familiar, but it actually should. We saw almost identical corrective upswing in mid-2015. The previous rally started from a bit lower levels and ended a bit lower as well (we used the blue rectangle on the above chart to make the comparison easier), but the differences were tiny. The entire size of the upswing was extremely similar, and we marked it with a blue dashed line. Copying the previous decline to the 2018 bottom shows that the current upswing’s end (assuming that it ended) is very much in tune with where the rally should have ended based on the 2015 - now similarity. Moreover, both rallies ended when GDX moved a little above its 200-day moving average.

Why is this similarity important? Because that was the final corrective upswing before the slide to the 2015 lows. The decline that followed was more than twice as big as the size of the corrective rally. That’s very bearish on its own, but let’s keep in mind that in 2015 the USD Index was after a multi-month rally and this time it seems that its medium-term rally is far from being over. Consequently, the potential for the decline in the miners is even greater this time.

Given the short-term breakdowns and – visible above – invalidation of the small breakout above declining red resistance line, it's now very likely that the rally has indeed ended. Please take a look at the shape of the mid-2015 decline. There were barely any corrective upswings and those that did materialize were tiny. Given the above-mentioned similarity between 2015 and now, we might see something similar here, especially that there’s practically no serious support between the 2018 bottom and the early 2016 bottom.

There’s also something else that indicates lower prices in gold – its ratio with palladium.

Is Palladium the New Gold?

Palladium is now more expensive than gold. Some of my friends joke: “of course it is, after all, your wedding ring is made from it, so you knew that this would happen”, but my take is that it was the increased demand for gasoline-powered cars over the diesel-powered ones that caused palladium to truly shine while platinum continues to disappoint. Moving back to palladium’s link with gold, the moment when both metals’ cost per ounce is similar is quite specific. It’s easy to notice it, it looks interesting, so it gets media coverage. This publicity makes is a strong support and resistance level. After all, some will say that there’s no way that palladium could be worth more than gold and buy the latter by selling the former.

The above chart shows that this was indeed the case in 1998 and in 2002, when the gold-palladium ratio was trading close to 1. It stayed close to this level for weeks, before moving further. In 1998 the ratio moved to 1 from above it, so this situation is more similar to what we’re seeing right now. That was the time when gold started its final decline to THE bottom that was then followed by a multi-year rally. Based on many other signals this is exactly where gold market is right now and this serves as yet another confirmation.

Moreover, looking at the RSI indicator we see that oversold levels in it usually were bearish signals for gold, at least in the past decade. The RSI is visibly below 30, which is the very definition of it being oversold. The implications for gold are bearish also from this perspective.

Before summarizing, let’s take a quick look at the very long-term charts for gold, silver and the HUI Index. There are almost no changes since we previously featured them last week, but we want to make sure that you know what the up-to-date price and time targets are. And we have three interesting things to show you: one for gold, one for silver, and one for gold stocks.

Long-term Update

In case of gold, the targets remain up-to-date and the change that we would like to emphasize is the weekly sell signal based on the Stochastic indicator. These signals were very effective in the previous years, so it’s a very important factor for the following weeks.

Silver bounced off the very long-term declining resistance line and it seems to be back in the decline mode. Knowing how fast silver usually erases gains that lead to medium-term tops, we expect to see silver close to its 2018 lows relatively soon (no later than in February). This time, we don’t think that the proximity of the $14 level will generate any substantial reaction. It seems more likely that silver will decline below the 2015 lows in a decisive manner. If there is a correction around the 2015 tops anyway, we don’t think it will be anything to call home about.

There’s one more thing that we would like to add with regard to the possible bottoming date for the precious metals sector.

Based on the long-term triangle-vertex-based reversals, it seems that we will see some kind of reversal close to the end of June. There is one additional confirmation of this time (mid-2019). Silver’s very long-term turning point.

The cyclical turning points are usually less precise than the apex-vertex-based ones and work more on a near-to basis. Consequently, since the cycle featured on the above chart shows that the next major top or bottom is likely to take place in the middle of the year and the vertex-based reversals point to the end of June, it seems that the former technique can be used to confirm the latter and make it more likely that a major turnaround in the precious metals sector will indeed take place at the end of June or close to it.

The interesting development for gold stocks is the analogous one to the above-mentioned interesting development for gold. Namely, we saw a major sell signal from the Stochastic indicator that’s based on weekly closing prices. His is exactly how major declines start, so it serves as a perfect confirmation.

Summary

Summing up, the bearish outlook for the following weeks has been confirmed by multiple factors, i.a. silver’s extreme outperformance and miners’ underperformance, gold’s performance link with the general stock market, gold getting Cramerized, and many more, but the above are now confirmed by also short-term signals. The USD Index broke above the short-term support line, gold broke below the triangle pattern and silver’s decline is gaining momentum. This all tells us that more weakness in the PM market is just around the corner. The number of signals confirming the above and the profit potential of this situation are enormous. It’s not the best time to prepare as the best time was many months ago. But it’s the final time when you can do something about this huge opportunity without regretting it in several weeks, months, and – perhaps – years.

As always, we’ll keep you – our subscribers – informed.

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: $1,313; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $44.97
• Silver: profit-take exit price: $12.32; stop-loss: $16.04; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.68
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $22.03; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $20.37

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 1st 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: $32.03
• JDST ETF: initial target price: $154.97 stop-loss: $42.17

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