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 lowering the stop-loss level for silver, effectively locking in bigger part of the silver profits, while simultaneously letting them grow.

And so it happened. Gold stocks closed the week below the neck of their inverse head-and-shoulders pattern, while the USD Index closed it above its own inverse H&S. The implications thereof are strongly bearish for gold, silver, and mining stocks and we can say the same about gold’s shooting star candlestick that formed on Friday... And that’s not even close to being everything that happened and changed in the last few trading days. There are myriads of factors that are in place right now and if one wants to trade and invest in the precious metals market successfully, they should definitely not be ignored.

We have quite a lot to show you today, so let’s jump right into the charts, starting with the gold stocks.

The Inverse Head-and-Shoulder Patterns

The HUI Index moved higher initially on Friday, but almost the entire daily rally was erased as the gold miners reversed and closed a bit below the opening price. This is a profound bearish sign, because of three things:

1. We saw a weekly closing price below the neck level of the formation, which makes it crystal clear that the pattern was invalidated.
2. The invalidation was clearly confirmed even though bulls had the early gains on their side. All miners had to do was to hold on to their early gains. And they failed to do so nonetheless.
3. It all happened during the session on which the USD Index moved lower – it should have caused the PMs and miners to rally and the strength of reaction was very weak.

In Friday’s analysis, we showed that this invalidation was seen also in case of the gold stocks to gold ratio. Today, we’ll show you that it is also present in case of silver mining stocks.

As you can see on the above chart, silver miners closed the week well below the neck level of the inverse H&S formation. The implications are clearly bearish.

Naturally, it’s nothing unexpected – last Monday, we wrote the following regarding the huge volume spikes in the SIL ETF (proxy for the silver stocks):

We just saw a spike in the volume of silver stocks during their daily decline. Why is this important? Because in the recent past it almost always meant lower PM prices.

In 8 out of 10 cases, huge volume spikes during silver stocks' declines meant that a big decline has just begun. In one remaining case (mid-July 2018), a big decline still followed, but not immediately, and in one case (early September 2018), the silver stocks moved higher, while gold continued to move mostly sideways. The implications of the volume spike during silver stocks' decline are very bearish.

We saw yet another decline after the previous spike, so the up-to-date statistic is 9 out of 11.

Let’s stay with the inverse head-and-shoulders pattern for a while, while changing the sector.

For three consecutive days, the USD Index closed the day visibly above the neck level of its inverse head-and-shoulders pattern. We got additional confirmation from the weekly closing price. The breakout above the local (marked with green) neck level of the inverse head-and-shoulders pattern is now complete and confirmed.

The fully-confirmed breakout in the USD Index is particularly bullish given the fact that it took place on very bearish news (Trump’s criticism of the Fed’s interest rate decisions). The USDX should have declined on it, and instead it moved to new short-term highs. This is a very bullish combination for the US currency, and since the precious metals market generally moves in the opposite direction to the USD Index, the implications are very bearish for the PMs and mining stocks.

To be clear, the USDX reversed on Friday and closed the day lower, thus forming a bearish shooting star candlestick, so it could move lower today, but it’s not likely to move much lower. The neck level of the inverse H&S is now support and it’s likely to keep the declines in check.

The target based on the inverse H&S formation is about 98.3, which means that the USD Index is now likely to complete the breakout above the much bigger (August 2017 – now) inverse H&S formation, which would (when completed) have target at about 105.

But the inverse H&S in miners was invalidated – can’t it be invalidated also in case of the USDX, thus making precious metals rally?

Of course it can be. But it’s not likely to be. The rally in the mining stocks was not in tune with the long-term signals, so it was likely to be reversed. The rally in the USD Index is in tune with the long-term signals, so it’s likely to continue.

The Long-term Context for the Inverse H&S Patterns

In our previous analyses, we emphasized that the current situation (including the short-term upswing) remained similar to what happened in 2013 before the biggest part of the decline. In both cases, miners corrected, but failed to rally above the previously broken lows. In 2013, it was the 2012 low that was not broken, and this year, it was the December 2016 low. The  strength of last week’s decline makes is likely that the corrective upswing is over and that the corrective upswing is over without invalidation of the breakdown below the December 2016 low. In other words, both cases remain very similar and the outlook remains very bearish for the following weeks.

On the other hand, in case of the USD Index, this year’s rally is still similar to what we saw in 2008, 2010 and to the 2014-2015 upswing. The current consolidation is bigger, but still similar to the one that we saw in 2010. Please note that based on the above chart, the USD Index is likely to move above the 2017 high, perhaps significantly so – to the 108 level, or even higher.

Since the bigger pictures and their implications are completely different for the mining stocks and for the USD Index, it’s likely that the inverse H&S pattern in case of the latter will result in higher USD values, while the one in the miners was invalidated.

The final mining-stock-related chart is its ratio with the general stock market.

Last week, the HUI to S&P 500 Index moved to declining red resistance and declined practically immediately. In this way, the small breakout above the declining black resistance line was quickly invalidated. The implications and outlook remain bearish.

Having said that, let’s move to a different part of the precious metals sector. To the one that didn’t provide us with any exciting signals recently, which is what makes the situation particularly exciting. Yes, you read that right.

Enter silver.

Silver’s Exciting Pause

Silver has been moving back and forth recently with lower intraday highs. This seems like nothing special, until you notice that almost exactly the same thing happened in late July and early August. Right before the sharp $1+ decline.

And it’s not only the shape that’s alike. We can see similarity also in terms of the price level around which both consolidations took place. It was a major bottom in terms of the daily closing prices. In July and August silver moved back and forth around the July 2017 bottom. In this case, silver is moving around the mid-August bottom.

Moreover, this time, silver is consolidating after breaking below a very important long-term support line.

There are two major implications of the above:

1. Once silver moves lower, it’s likely to move sharply and significantly.
2. Silver is likely to move lower soon, perhaps very soon (most likely it's a matter of days rather than weeks).

To summarize what we wrote so far, the outlook is bullish for the USD Index, bearish for the mining stocks, and bearish for silver. What about gold?

Gold’s Short-term Sell Signals

Looking at the gold price in terms of the euro provides us with a very effective sell signal. In practically all cases when the RSI moved above 70, it meant that the local top is in or about to be in (marked with vertical red lines on the above chart). That’s exactly what we just saw and the implications are bearish.

In terms of the US dollar, we also saw a sell sign even though gold closed Friday’s session $3.40 higher. The reason was the shape of the session along with the corresponding volume. The daily candlestick was a shooting star, which is a classic reversal pattern. It’s quite reliable if it’s confirmed by strong volume and this is the kind of volume that accompanied the reversal. The implications are bearish and our previous comments on the above chart remain up-to-date. Last Monday, we wrote the following:

What is important, is that despite all the bearish factors, gold could still move a little higher before the reversal. It moved very close to our target area, so the top could be in, but we should not be surprised by a move to about $1,240 once again. The target area is based on the declining medium-term resistance line, the upper border of the rising flag pattern, the early July low and the December 2017 low. There are also two Fibonacci retracement levels, including the 38.2% retracement (about $1,245) based on the most recent decline. Reaching this level would also not change the outlook and it’s also something that could happen before the reversal and before the big decline resumes.

Friday’s intraday high of $1,246 definitely fits the above-mentioned target of approximately $1,245. But, since gold reversed despite a move lower in the USD Index (thus invalidating the small breakouts above the declining resistance line and the 38.2% Fibonacci retracement), it seems that we will not see higher gold values anytime soon. Naturally, a move a bit higher, would not invalidate the bearish case automatically, but it seems that we won’t see higher gold prices for a few months. Today’s pre-market decline to about $1,230 fits the above gold forecast.

The short- and medium-term signals point to much lower gold values. However, as you may remember, we quite often emphasized the link between the current situation in gold and what we saw in 2013. Because of the recent upswing in the yellow metal, one might have thought that this link is no longer up-to-date. The reality, however, is entirely different as the 2013-now analogy is even more valid than it was before.

Gold’s Big Picture and the 2013 – Now Analogy

Without going into details, please focus on the blue rectangle that we drew on the above chart for 2012 and 2013. It starts at the final pre-decline top (in terms of both: price and time) and it ends at the final pre-slide bottom (in terms of price) and the end of the final corrective upswing (in terms of time). Nothing special about it so far.

We copied it (100% copy without any adjustments) to the current situation based on just one thing: the starting point of the current medium-term decline – the April 2018 top.

The special thing about it is that it almost perfectly fits what we just saw. Both initial declines took different shapes (the 2012 – 2013 decline was interrupted by two bigger corrective upswings, while the current one wasn’t), but both moves are extremely similar in terms of the price levels that were reached and in terms of the amount of time that it took for gold to move to them. The size of the corrective upswings is also quite similar. The current one is a bit bigger, but not significantly so.

Consequently, both declines remain very similar and if the similarity is to continue (and it’s very likely) then we can expect a huge and volatile price drop any day now.

By the way, do you recall how everyone and their brother were cheering for gold based on the increase in the volume during 2017 and in early 2018? We wrote multiple times that it was not a bullish factor and that we saw something similar in 2007 and 2008 (as marked with red rectangles) – which preceded an important decline. Several months later gold is indeed lower, not higher.

How Low is Gold Likely to Decline?

Initially the most likely target is the December 2015 bottom of approximately $1,050 and we have been prepared for this kind of decline with our exit prices for the current short position for some time now. Next, we expect some kind of corrective upswing (probably to the December 2016 bottom of approximately $1,125) – similar to what we saw in the middle of the 2013 slide and then the final part of the decline, likely to approximately $890.

The final bottom target is based on the 61.8% Fibonacci retracement that’s based on the entire bull market, the lower border of the declining trend channel (marked with blue) and the red line that’s based on the 2013 and 2015 bottoms. It may be difficult to see both lines as they are so close to each other. The additional confirmation comes from the analysis of the 2012 – 2013 decline. The blue dotted line shows how low gold should decline if the link to that decline was to remain in place. It may not be a strong signal on its own, but it’s very useful as a confirmation.

The other targets – December 2015 and December 2016 bottoms are not as precise, but they are approximately in tune with the price levels that stopped the gold price in 2013 and – most importantly – they are the support/resistance levels that appear strong enough to stop a very volatile move. At the same time, they are far enough from the current price levels and each other in order to leave room for the price swings of the size that would be natural given the significance and distance to the final bottoming price.

When is Gold Likely to Decline, Bottom, Correct, and Decline Again?

Several months ago, we featured the triangle-apex-based (a.k.a. triangle-vertex-based) reversals and it turned out that practically all the turning points marked with this technique worked in one way or another. Sometimes, the tops were important and sometimes they were very brief. But in practically all cases, the technique was useful. The vertical lines that are from the recent past were black as their implications were unclear in the past and – without moving them - we just changed their color depending on what implications they had. Please take a moment to check how well this technique worked. The consequence is that we will attribute even greater weight to these signals in the future.

However, the main reason that we mention the above is that we updated the calculations based on the most recent price extremes and that the outlook itself changed a bit as the current decline takes longer than we had originally expected it to take. When the underlying facts change, the analysis should be adjusted based on them, so that it’s always up-to-date. Basing one’s outlook and trading positions on previous signals that are no longer in place (for instance holding on to a long position in the precious metals sector because of the inverse head-and-shoulders in the mining stocks that was already invalidated) is one of the ways to lose capital over time. Staying objective and up-to-date is a way to grow it.

Moving back to the point, we have four triangle-based reversals ahead. The first one is on December 6th, the second one on December 20th, third one on December 31st, and the final one between February 4th and 6th.

The reason for two dates in case of the latter is that it’s actually based on three separate triangles. One of them is based on the December 2015 and August 2018 bottoms, and the April 2018 and October 2018 tops. The remaining two ones are of long-term nature. They are based on the rising line that’s based on the December 2015 and December 2016 bottom and the declining long-term lines that are (both) based on the April 2018 high, the late-2012 high and the 2011 high.

The last time we saw a reversal that was based on more than one triangle was the early October bottom and it was indeed followed by a sharp rally. This makes it even more likely that the early February 2019 reversal will be a very important reversal. Perhaps it will be THE final bottom for the current decline – with gold at about $890.

If so, then the previous 3 reversals might correspond to the initial bounce (move to the $1,050 level or so in gold in early December) and the end of the corrective upswing close to the end of the month (either close to 20th or 31st).

Naturally, that’s what seems likely based on the information that we have available right now. Once more details become available, we will adjust our analysis and report to you accordingly.

Important Analyses

Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:

• Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
• Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
• Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
• Preparing for THE Bottom in Gold: Part 7 – Buy-and-hold on Steroids - description of a strategy dedicated to significantly boosting one’s long-term investment returns while staying invested in the PM sector.
• Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
• Gold: What Happened vs. What Changed - discussion of the latest extreme readings from gold’s CoT report
• Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.
• The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
• Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.
• Changing One's Mind - Why, When, and How – discussing the way of analyzing the market that helps to stay focused on the growing one’s capital while not being influenced by the loss aversion bias. This essay might be particularly useful in light of the recent upswing in the PMs.

Summary

Summing up, there are multiple factors in place that point to much lower precious metals and mining stock prices in the coming days and weeks and the enormously bearish analogy to 2013 remains in place. All in all, it seems that the profits on our short positions will increase significantly very soon.

Moreover, we are moving the stop-loss for silver lower to make it more in tune with the one for gold.

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: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
• Silver: profit-take exit price: $12.72; stop-loss: $15.26; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $28.87
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67

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

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