Briefly: in our opinion, no speculative positions in gold, silver, or mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

Gold moved a few dollars above the January record-volume high, just like we had indicated previously. But does this mean that the top is already in? Not necessarily, because the USD Index has not yet corrected, and mining stocks are still showing strength.

Miners should be lagging gold before the top and silver should be outperforming gold. Silver should be outperforming mining stocks as well, and we didn't see that yet.

Let's get back to the USD Index.

USDX Examination

In yesterday's analysis, we wrote the following:

If the USD Index is most likely repeating its 2010-2015 performance since 2017, which means that it's likely to perform relatively similarly right now to how it performed in 2014 when it had broken above its previous highs. We marked those cases with red ellipses. Back in 2014, the USDX just pulled back sharply and then continued its massive upswing.

If that happens also shortly, the precious metals market will be likely to jump up quickly, but to plunge shortly thereafter.

This means that what we're looking at right now (gold's test of its January high), is very far from being an obvious buying opportunity. Conversely, it looks like the red light for gold's decline is turning yellow and it will become green very soon.

On a short-term basis, this doesn't tell us if the USDX is going to top immediately or after another index-point-or-so rally. But, the short-term, the 4-hour chart is providing us with some very interesting details.

The USDX rally accelerated once US currency broke above the rising trend channel. Once a breakout above a trend channel takes place, one can expect the market to rally by as much as the height of the channel. If we applied the height of the channel to the moment of breakout, the target would be already surpassed. But, if we apply it to the channel at any given time, we see that the distance between the USDX and its previous trend channel only now (!) equals the height of the latter. This might mean that the top was just reached.

If not, then the proximity of the 100 level used to stop short-term rallies many times in the past - also in 2003.

So, while the USD Index is likely to top either right now or shortly, the precious metals market might still move higher on a very short-term basis.

How high?

PMs in the Now

During the final part of the ebola scare, gold moved higher by about 6% temporarily, before declining. Applying this to the latest local low ($1,536.40) provides us with $1,628.58 - about $1,630 as the next likely target.

The viruses are not identical, but the way people are afraid of them is similar. Thus, the way in which they aim to protect themselves may be similar as well. Still, that's more of a ballpark estimate than a precise target.

The targets are more precise in case of silver and mining stocks. They are simply likely to move to the previous 2020 highs. Since both broke above their late-January highs in terms of the closing prices, it the 2020 highs become the next strong resistance that would stop the rally. And it's approximately far enough to be around the level that corresponds to USDX's 1 - 1.5 index-point decline.

Taking into account the distance between this year's lows and this year's high, gold miners moved higher more than silver did. This means that for silver to reach its 2020 highs along with miners, it would have to outperform them. And this is exactly what silver is likely to do close to the top.

It seems that traders view this week's upswing as something different from the previous weeks' rally, and the cycle of miners' strength at the beginning and silver strength at the end of the rally started from the scratch. Either way, since silver is not outperforming miners, it seems that the PMs might still move higher in the very short term instead of declining.

Ok, if it's so certain that the PMs are going to rally, why not enter long positions here?

Well, one could do that depending on their approach to trading and investment. In our view, the situation here is too risky (it's definitely not set in stone that PMs will rally - it's only likely), because of two reasons. First, gold already moved a few dollars above the previous high and it moved back below it in today's pre-market trading. This means that the breakout was already invalidated. It also means that gold had already rallied as far as it should have rallied based on the analogy to the previous post-huge-volume tops (as we outlined yesterday).

Also, the self-similar pattern in silver was just completed.

Based on how silver performed previously (analogous price extremes are marked with analogous colors), silver rallied slightly above the previous (marked with blue) high. That's when it topped in September 2019, so it might have also topped right now.

Summary

Summing up, it seems that the precious metals market is about to form a major top soon, and the easier part of this rally is already over. During the final upswing, gold might move to about $1,630, and silver might even reach its January high of about $19. The same goes for the mining stocks - if gold and silver rally, miners could test their 2020 highs as well.

We are preparing to enter short positions in gold, silver, and mining stocks. We will let you know manually once we want to proceed.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions in gold, silver, and mining stocks are justified from the risk/reward perspective.

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