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

Gold and mining stocks just closed at a new yearly high. Silver is not even close to reaching such levels, and gold is already back below where it was trading 24 hours ago. Can these breakouts be trusted? Do they have a lasting power? To answer that, we better remember something important first. This changes the overall picture regarding gold and mining stocks entirely.

This key thing is the cyclical turning point. They often work even without additional factors strengthening them, but this time, we have the very rich week in terms of monetary announcements, which makes increased - and temporary - volatility even more likely.

Is Gold Seriously Pushing to New Highs?

While gold closed a bit higher than it did in February, it didn't make a new 2019 intraday high. In other words, gold attempted to move substantially higher, but it reversed before the end of the session. And it's already back below the February high at the moment of writing these words.

It was not only a tiny breakout that we saw - it was also yet another reversal. The implications of the former would be bullish (only once the breakout is confirmed, which it probably won't be), but the implications of the latter are clearly bearish.

Especially that we saw significant gold volume.

Also because it happened right after the cyclical turning point.

Bot factors confirm that the reversal interpretation of yesterday's price action in gold is the correct one.

What about mining stocks?

The Same Question Goes for Miners Too

We see more or less the same thing. Mining stocks broke above the February high in an insignificant manner right after the cyclical turning point. The RSI above 70 shows that they are overbought. This along suggests that miners should take a breather and invalidate the breakout. Based on multiple other gold trading techniques (especially the long-term-oriented ones), it's likely that the decline will be much more than just a correction of the recent upswing.

And silver?

No Breakout in Silver

Silver reversed for the third time, even though its rally in terms of the daily closing prices is more profound than the one of gold. Silver's outperformance at the tops is quite normal - it's definitely not a bullish sign.

Before summarizing, let's recall the big picture regarding the mining stocks and their under- and outperformance in the final parts of precious metals' rallies, as yesterday's comments remain very up-to-date right now. Today's charts are used to highlight the points of the below analysis.

The Issue of Miners' True Strength

We wrote that a move above this line is possible, but it's highly unlikely that it would be significant or sustainable. Conversely, it's very likely that we will see a reversal and a big decline shortly after the small breakout is invalidated - in line with what we saw earlier this year.

As a reminder, the more important tops are used to create a given line, the more important it is from the technical point of view. Also, the more of the tops are used, the stronger the line becomes. The above-mentioned resistance line is based on five important tops and an additional confirmation of its strength in the form of XAU's inability to hold above it earlier this year. These five tops are:

• the late 2011 top
• the mid-2012 top
• the 2016 top
• the early 2018 top
• the mid-2018 top

All of them are very important and there's quite a few of them - usually the resistance lines are created based on just two extremes, and this time we have five of them. The implication is that this line is very unlikely to be broken, especially given the massive reversals in gold and silver that we saw recently.

So why did the miners move higher yesterday despite these reversals?

That's indeed the key question to ask today. The reply may appear strange not only to those who have become interested in the precious metals market recently, but also to those, who have been in it for longer.

It is generally known that the mining stocks stop reacting to gold's movement before the move is reversed. Miners' usual outperformance wanes before tops, and the miners' dramatic decline becomes less dramatic or even stops altogether before gold bottoms.

However, what investors usually miss, is that in case of the really major turnarounds, there is also one additional stage of miners' relative performance. It's the part when miners fake the comeback of their regular strength. That's exactly how the early-2016 rally in the mining stocks started - with mining stocks' underperformance. Gold didn't make a new low in January 2016, but the HUI Index did. Of course, one swallow doesn't make a summer, and one exception from the rule is not enough to change the rule. The point is, however, that it was not the only exception - this phenomenon is actually quite common in case of major reversals. Please take a look at the chart below for details.

The early-2016 case is the most prominent one, but there were quite a few in the following months and years as well. Even the very end of the 2016 rally was accompanied by a small show of miners' strength.

The black rectangles mark the times when miners' reaction to gold's movement became weaker, and the red rectangles mark the cases when the strength was back right before the final reversal.

What does it mean? It means that if we are looking at a major top right now, this temporary strength in the mining stocks is very normal - it's not a game-changer, or a reason to ignore the huge reversals in gold and silver that we just saw.

Are we looking at a major top right now? Last week, gold reversed in a profound manner after reaching the resistance line based on the previous major tops and silver's intraday reversal was very volatile. Gold moved to new high in terms of the daily closing prices yesterday, but it's already back below it in today's pre-market trading. Gold miners reached their previous yearly highs. That's exactly what a major top should look like.

Summary

Summing up, the combination of gold's reaching the very long-term resistance line, the immediate invalidation of the breakout to new 2019 highs, huge volume, proximity of the cyclical turning point, and RSI almost at the 70 level all suggest that the 2019 top for gold is in, and silver's price action clearly confirms it. Yesterday's strength in the mining stocks and today's monetary-news-based upswing in gold seem temporary and don't change the overall outlook, which remains down.

Today is exceptionally rich in monetary news, with the Fed playing the main role, so we might see more intraday volatility in the following hours. The turning points and the preceding rally, however, make it clear that ultimately - after today's volatile price action - gold is likely to decline.

We know the last few weeks, months, and years have been exhausting because not that much happened on the precious metals market - but it is exactly this kind of boring action that usually precedes the biggest price moves and biggest opportunities. This was even made into a trading technique. Bollinger bands become narrow when a given market is calm and seasoned traders know that when they are narrow, it's time to prepare for a huge move. Most people don't know that, and they get caught by surprise and only join the move once it's mostly over. It seems that we have this kind of situation in the precious metals right now. The patience will be well rewarded, especially that our medium-term downside target for gold remain intact.

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

To summarize:

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

• Gold: profit-take exit price: $1,241; stop-loss: $1,382; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $38.67
• Silver: profit-take exit price: $13.81; stop-loss: $15.72; initial target price for the DSLV ETN: $39.38; stop-loss for the DSLV ETN $26.97
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $17.61; stop-loss: $24.37; initial target price for the DUST ETF: $34.28; stop-loss for the DUST ETF $13.37

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: $24.71; stop-loss: $35.67
• JDST ETF: profit-take exit price: $78.21 stop-loss: $30.97

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