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. We are moving the stop-loss levels for gold and silver insignificantly (but still) higher. Gold may move higher temporarily, but $1,315 provides very strong resistance.

In yesterday’s session we got a bit more of what we received on Friday. Gold, silver, and mining stocks moved a bit higher, while the USD Index moved a bit lower. Gold has almost confirmed the breakout above the previous highs. Consequently, the more bullish of the scenarios that we outlined previously just became more probable.

It’s the one in which the precious metals sector and the USD Index postpone their rally and decline (respectively) for several days and start them closer to the combination of multiple long-term triangle-based reversals. It’s not entirely clear, though, but it’s not much more likely than it was that gold will move to about $1,315 before plunging.

Let’s take a look at gold’s price performance for the first portion of details.

Gold’s Short-term Strength and Its Implications

Gold managed to stay above the previous 2019 high for the second day in a row and if it manages to do the same thing today, the breakout will be confirmed. This will have bullish implications for the short term.

In yesterday’s analysis, we wrote that the current situation is quite similar to what happened in June 2018. Given the second daily close above the triangle, this is still the case, much less so. There is another analogy, though. Several weeks earlier, in May 2018, gold also rallied above the previous pattern and then stayed there for a second day. It declined shortly thereafter, though. Will we see the same thing this time? It’s quite possible that gold will reverse today, but – especially in light of the pre-market rally - it’s definitely not inevitable.

The thing that will differentiate a bullish outlook for the very short term from a bearish one, will be today’s closing price. So far gold is up in today’s pre-market trading ($1,307), so the indications are bullish.

Based on the above chart, the next short-term target is the June 2018 high, which is a bit below $1,315. That’s not why we’re expecting this level to stop gold’s rally, though.

Please keep in mind that the only thing that we are debating here is the very short-term outlook – none of the above has implications for the medium term, so it doesn’t change the multiple bearish factors that point to much lower gold and silver prices in the following months.

Silver’s Resistance Remains Intact

As far as silver is concerned, nothing really changed (no breakout and only a $0.07 rally), so our yesterday’s description of the above silver chart remains up-to-date:

The white metal moved higher, but – unlike gold – it didn’t exceed its previous short-term highs. There’s a good reason for it – the declining long-term resistance line (marked with green) is just above and since it is declining, it means that unless it is broken, the following local highs should be lower. Moreover, the recent breakout in the gold to silver ratio continues to support silver’s underperformance of gold.

This underperformance doesn’t have to take place on a very short-term basis, though, as silver tends to outperform gold at the end of a given rally, but overall, we the above-mentioned breakout in the ratio is a reason to expect silver to decline faster than gold.

Silver moved $0.13 higher in today’s pre-market trading, which is more visible, but still nothing to call home about.

What about gold miners?

Gold Miners: Visible Rally, Invisible Changes

Just like in case of gold, they moved higher, but just like in case of silver, it didn’t change anything from the technical point of view. Consequently, what we wrote yesterday, remains up-to-date:

The above gold stocks’ chart doesn’t feature any breakout or invalidation of the previous breakdown. Gold just made a new short-term high, but miners didn’t, which is yet another proof of the underperformance of the latter. Technically nothing changed on the above chart and since miners are after several confirmed breakdowns, the implications thereof remain bearish.

Let’s take a look at the USD Index chart.

The USD Index and Its Support Line

In short, the USD Index appears to be verifying its breakout above the rising purple support line. The breakout that was already verified by three consecutive daily closes above this line, so it’s is likely to hold and serve as support. And that’s exactly what happened last Friday and yesterday.

If the USD Index was moving the support line in a slow manner, gold and silver might have reacted differently, but since the daily decline was rather quick, so was the PMs’ reaction. The emotionality of the sudden moves makes their implications less clear than if the move was decisive and based on several days of data. That’s the key reason why it’s useful to wait for a confirmation of a given breakout. Gold might have moved a bit above the previous resistance, but the USD didn’t move below the previous support. If USD reverses and moves higher, gold will likely invalidate its breakout thus flashing a strong sell signal on its own.

We have an interesting situation, in which the USD Index remains above its support and refuses to move lower, but at the same time gold is moving higher. Why would it be the case? There is no specific fundamental explanation – it’s quite likely a technical issue. Breaking above the previous high in gold generated additional demand from speculators, which can push the price higher until the next resistance level is reached. Do we have a nearby resistance level that would be strong enough to very likely stop any short-term rally?

Yes, an extremely strong one that’s based on two very strong resistance lines. In order to see it, we need to zoom out of the short-term gold price fluctuations.

Gold: THE Resistance and THE Reversal

The most important declining resistance line that we see on the above chart and one of the most important rising resistance lines are just above the current gold value. Only one of these lines would be strong enough to stop the rally and trigger a major reversal. We have both of them crossing each other for several days. This makes the resistance extremely strong.

This is not only a resistance – it’s the most important of the triangles that we see in gold and gold is just below its vertex. We can’t stress this enough, how important and strong both: the triangle and the resistance lines are. If one was wondering what justifies the position size that’s bigger than usual, the above serves as a critical indication that it is indeed justified.

Let’s take a more detailed look at the above-mentioned resistance levels and the vertex.

The intersection of the two above-mentioned lines is approximately at the level of the June 2018 high – at about $1,315, which is where gold is most likely heading.

Let’s keep in mind that the above-mentioned critical vertex is just one of the 8 vertexes that point to a powerful nearby reversal, which further emphasizes the strength of this signal.

Based on yesterday’s strength in gold, another quick move higher became more likely, but in light of how strong the nearby resistance is and how confirmed the upcoming reversal is, it practically changed nothing with regard to the really big moves in the precious metals sector.

Summary

Summing up, the very short-term outlook for gold improved based on yesterday’s second close above the 2019 high and today’s pre-market upswing, but this didn’t change the medium-term outlook at all. In fact, the only thing that became more likely based on yesterday’s and today’s early strength, is gold’s move to about $1,315 before the huge decline starts. That’s less than $8 above today’s pre-market high, so it doesn’t seem that adjusting the position now makes sense based on the possibility of seeking gold at $1,315 temporarily, especially that this move could really be very brief and can take place overnight.

The upside remains limited, while the downside remains enormous. The key thing remains to be that 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 to the general stock market, gold getting Cramerized, and many more. 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, especially compared to the very limited upside for the possible corrective upswing. 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.

Also, we are moving the stop-loss level for gold a few dollars higher and for silver several cents higher, so that a move to the June 2018 high in gold and very brief outperformance of silver don’t trigger them. Neither of the above (on its own) would invalidate the bearish reasons based on which we expect the short positions to be extremely profitable in the upcoming weeks and months.

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: $1,326; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $43.47
• Silver: profit-take exit price: $12.32; stop-loss: $16.34; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.18
• 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