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.

It looks like the precious metals charts want to lull us to sleep. How nice. But this is not the time to lose vigilance. There is a key development many investors have likely missed. It will have repercussion further down the road. What do we mean by that? This Alert’s title doesn’t really reveal it in its entirety. Let’s take a look under the hood.

We wrote quite a lot about the gold-USD link recently and it will once again be the key topic of today’s analysis. The reason is that nothing particularly interesting took place yesterday regarding individual gold, silver, and mining stock charts, but what happened in relation to the USD Index, was indeed noteworthy.

The USD Index moved briefly above the declining red resistance line and it declined below it before the end of the session.

This is a bearish sign, and it would have been a very important factor if it wasn’t for one key detail.

The biggest (over 50% weight) component of the USD Index – the EUR/USD currency pair, had already moved below the rising support line that corresponds to the declining resistance line on the USDX chart. The index can only move as its individual components lead it to move, therefore viewing USD’s breakout invalidation as an important bearish signal doesn’t seem appropriate.

There is also the second most important component of the USD Index – the USD/JPY pair. We have analyzed it recently, and the key takeout is that neither there the situation looks bullish for the non-USD currency.

These facts are critical for the gold market, because the yellow metal appears to be waiting for the final decision from the USD Index.

Gold was about to break below $1,300 yesterday, when the USD Index was breaking above the resistance line. But as the USDX reversed, so did gold. The latter only touched the lower border of its rising trend channel, without breaking it. But, when the USDX breaks above its resistance line in earnest, gold is likely to break below the trading channel as well. And – based on what we see in the euro, this is indeed a likely outcome.

Moreover, please note that the next turning point for gold is very close, so it might be the case that gold will postpone the breakdown and the big post-breakdown decline until the turning point is reached. Of course, this is not mandatory. We are mentioning this, because you might be concerned by the lack of action – the turning point suggests that we will see more decisive price moves soon.

Summary

Summing up, the recent rally and kind of resilience in the PMs complex may appear encouraging, but it doesn’t change the medium-term trend and outlook, which remain bearish. It seems that gold’s reaction to the strength in the USD Index is simply delayed. The USD Index breakout above the declining red resistance line is the likely catalyst that gold is waiting for.

The upside is quite limited, while the downside remains enormous. The reversals have been reached last week. As PMs, miners, and the USD Index move beyond their reversal dates, the chance for any meaningful upswing in the former before the medium-term decline’s continuation, is decreasing with the time passing.

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: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
• Silver: profit-take exit price: $12.32; stop-loss: $16.44; 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: $23.27; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $16.27

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: $34.62
• JDST ETF: initial target price: $154.97 stop-loss: $35.87

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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Have you even wanted to travel in time? You can, at least when reading about the gold market. Many analysts claim that this year is like 2016 for the gold market. We invite you to read our today’s article about the similarities and differences between the precious metals market then and today and find out what do they imply for the gold prices.

Is 2019 Like 2016 for the Gold Market?

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager