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 point of view at the moment of publishing this Alert.

If there ever was a "bearish nothing" contest with regard to markets and sessions that changes a lot while leaving the closing prices unchanged, yesterday's moves in gold, silver, and the USD Index have a great chance of winning the first prize. But what is it that had changed and why can't we see it on the charts?

One of the techniques to use for successful trading and investing is checking if and how a given market reacts to its driving forces. The key question is if the market is reacting as it should. If it doesn't, something's up. This applies to both: short-term trades, and long-term investments. Gold miners don't want to go up even though gold does? Probably a short-term top is in the making. Gold doesn't fall anymore despite being bashed in the media for weeks? Probably a major bottom is in the making.

Some of these factors (like miners' out- or underperformance) can be clearly seen on the price charts, and some can't, as they are not directly traded on the market. The latter was the case yesterday.

The news that hit the market was a major dovish shift in the ECB. We commented on it in yesterday's intraday Alert in the following way:

This is just a quick note about today's upswing in gold along with the USD Index. You might be wondering why it's happening and what it changes. In short, today's pre-market action reflects significant monetary easing in the Eurozone. This is bearish for the euro (which pushes the USD Index higher) and at the same time it's bullish for gold as it makes the yellow metal more attractive for the European investors.

While this move appears encouraging, its lasting power is doubtful. Please note that there was a similar (fake) gold and silver rally on Sep 6 - it was erased within a few hours.

The most important thing is that it doesn't change any of the factors that we've been quoting in the recent Gold & Silver Trading Alerts. The USD Index is still likely in a massive uptrend, not just a short-term one and gold is likely to respond with a big decline, just like it did in the second half of the 90s.

There might be some temporary strength here, but it doesn't change the overall bearish picture for the precious metals sector.

And that's exactly what happened in the following hours. Gold and silver erased their gains and mining stocks even declined some more. At the same time, the USD Index initially rallied and then moved back down.

Yesterday's ECB, Precious Metals and the Dollar

The currency market reacted in a muted, but still visible, way. Precious metals market didn't.

Gold was up by 0.28%, silver was up by 0.04% (just one cent), and the HUI Index was down by 1.42%. The average of the above numbers is negative. Instead of moving up, the precious metals sector moved lower. And mining stocks underperformed gold once again, hinting at more downside than what we saw so far.

Gold was supposed to rally in light of the return of the European quantitative easing. And it failed to do so. Market's natural reaction was almost entirely overwhelmed by the bears. The precious metals market didn't move up even though it theoretically should - which is a strong bearish indication.

And the USD Index? In yesterday's Alert we wrote the following about it:

The USDX invalidated the breakdown below the rising support line, opening way to further strength in the upcoming days. The strength in the USD Index means that it's likely to make another attempt to break above the rising green line, which may be successful this time. The confirmed breakout above it would complete the inverse head-and-shoulders pattern, which would then likely trigger a move to about 102. That's quite a sizable rally from the current levels and the precious metals market is likely to react to it in a big way.

And what if the USDX doesn't manage to break above the green line and declines again? Then PMs are not likely to do much anyway, simply because they are already in the decline mode. They proved this by declining recently without USD's help in the previous week.

There's not much more that we can add to today's analysis, simply because nothing really happened yesterday, so the moves in the important ratios are negligible and the changes to the long-term charts offer even less to talk of.

The above remains up-to-date. The breakdown in the USD Index was invalidated and yesterday's move lower was yet another attempt to break below it. It would need to be confirmed to be really bearish and so far similar attempts have been failing.

Before summarizing, we would like to once again quote the section with links to most important bearish factors that are currently in play:

Key Factors to Keep in Mind

Critical factors:

• The USD Index broke above the very long-term resistance line and verified the breakout above it. Its huge upswing is already underway.
• The USD's long-term upswing is an extremely important and bearish factor for gold. There were only two similar cases in the past few decades, when USD Index was starting profound, long-term bull markets, and they were both accompanied by huge declines in gold and the rest of the precious metals market
• Out of these two similar cases, only one is very similar - the case when gold topped in February 1996. The similarity extends beyond gold's about a yearly delay in reaction to the USD's rally. Also the shape of gold price moves prior to the 1996 high and what we saw in the last couple of years is very similar, which confirm the analysis of the gold-USD link and the above-mentioned implications of USD Index's long-term breakout.
• The similarity between now and 1996 extends to silver and mining stocks - in other words, it goes beyond USD, gold-USD link, and gold itself. The white metal and its miners appear to be in a similar position as well, and the implications are particularly bearish for the miners. After their 1996 top, they erased more than 2/3rds of their prices.
• Many investors got excited by the gold-is-soaring theme in the last few months, but looking beyond the short-term moves, reveals that most of the precious metals sector didn't show substantial strength that would be really visible from the long-term perspective. Gold doesn't appear to be starting a new bull market here, but rather to be an exception from the rule.
• Gold's True Seasonality around the US Labor Day points to a big decline shortly.

Very important, but not as critical factors:

• Long-term technical signs for silver, i.a. the analogy in terms of price to what we saw in 2008, shows that silver could slide even below $10.
• Silver's very long-term cycles point to a major reversal taking place right now and since the most recent move was up, the implications are bearish (this is also silver's technical sign, but it's so important that it deserves its own point)
• Long-term technical signs for gold stocks point to this not being a new gold bull market beginning. Among others, it's their long-term underperformance relative to gold that hint this is rather a corrective upswing within a bear market that is not over yet.
• Record-breaking weekly volume in gold is a strong sign pointing to lower gold prices

Important factors:

• Extreme volume reading in the SIL ETF (proxy for silver stocks) is an effective indication that lower values of silver miners are to be expected
• Silver's short-term outperformance of gold, and gold stocks' short-term underperformance of gold both confirm that the precious metals sector is topping here
• Gold topped almost right at its cyclical turning point, which makes the trend reversal more likely
• Copper broke below its head-and-shoulders pattern and confirmed the breakdown. The last time we saw something similar was in April 2013, when the entire precious metals sector was on the verge of plunging lower.

Moreover, please note that while there may be a recession threat, it doesn't mean that gold has to rally immediately. Both: recession and gold's multi-year rally could be many months away - comparing what happened to bond yields in the 90s confirms that.

In particular, it's worth keeping in mind the enormous potential of the USD Index. It's after a major breakout in 2014/2015 and three verifications thereof. The 2017-2018 decline which seems huge on its own, was just a verification of a much bigger (and thus more important) pattern.

Summary

Summing up, the big decline in the precious metals sector appears to be finally underway as gold and silver are plunging even without a rallying USD Index. And the PMs' decline started right after the U.S. Labor Day, as we have described. Once the USDX takes off, it will likely serve as fuel to the fire-like decline that's already underway. The similarity to mid-90s continues to support much lower gold prices in the following months, and the True Seasonal patterns continues to favor lower gold prices in the following weeks. All in all, it seems that what we see right now is the beginning of the final stage of the prolonged decline in the precious metals sector that started in 2011. On a short-term basis, it seems that we might get some temporary strength once gold moves to about $1,330 - perhaps within the next few weeks.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative 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: $1,332; stop-loss: $1,583; initial target price for the DGLD ETN: $39.87; stop-loss for the DGLD ETN: $25.17
• Silver: profit-take exit price: $14,62; stop-loss: $20,16; initial target price for the DSLV ETN: $32.96; stop-loss for the DSLV ETN: $11.67
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $22.62; stop-loss: $32.37; initial target price for the DUST ETF: $17.28; stop-loss for the DUST ETF $5.48

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: $30.32; stop-loss: $45.42
• JDST ETF: profit-take exit price: $38.36 stop-loss: $11.26

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.

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Yesterday's session gave us a resolute follow-up to Tuesday's reversal. Price sliding like there is no tomorrow, the bears keep pushing even lower today. Not a bit lower, but very much so lower. As black gold is trading at around $54.20 as we speak, is it time to look for the exit door in our promising open short position?

Oil Reversed on Schedule. Then, Prices Just Collapsed

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Thank you.

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