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.

Silver soared, miners declined, and gold first rallied, and then declined. Which of them should one trust? Yesterday’s chaotic session might seem perplexing or scary at first, but it was actually a combination of several important signs that made it clear, which side of the market it’s critical to be on. Yesterday’s session was not a curse, but a late gift. Let’s unwrap it, starting with what happened on the stock market.

Soaring Stocks

Stocks reversed and soared almost 5% in just one day. That’s exactly the kind of action that we’ve been expecting to see based i.a. on the extreme oversold situation in the DIA-based RSI indicator. The RSI rallied back above 30, confirming that the bottom is in. In all cases from the last few years, such action was followed by higher prices. At times, there was also a second bottom after a few weeks, but in all cases higher prices followed initially. Moreover, the second bottom – if it followed at all – wasn’t visibly lower than the first bottom. Consequently, the first bottom, confirmed by the RSI was a great buying opportunity.

Since gold has been moving in the inverse direction to the one of the main stock indices, the above is very likely a great shorting opportunity for the precious metals sector.

The most important thing here is that the market has not only confirmed our analysis of the stock market, but that it confirmed the shape of the link between stocks and gold. Stocks rallied, but gold…

Precious Metals’ Reactions

Gold declined. The initial part of the session was characterized by higher prices, but when stocks rallied, gold turned south. Even though gold didn’t decline far yet, it’s very important that it reversed along with stocks as it perfectly confirms our stock-market-vs-gold analysis.

Gold reversed on significant volume, which is bearish on its own, but the fact that it happened while stocks reversed to the upside is even more important.

The above would be enough to view the bearish case as fully confirmed, but we saw even more confirmations. And they were both: clear and profound.

Silver soared and it outperformed gold on an intraday basis to enormous extent. At the same time, mining stocks underperformed gold by not moving to new highs in a visible way, even though gold did. This is a perfect bearish confirmation. It would also – on its own – be enough to confirm the bearish case.

Both: the relative valuations of different parts of the PM sector and gold’s link with stocks paint an extremely bearish picture for the PMs.

As far as gold stocks are concerned, please note how well the combination of resistance lines worked. The black declining line that’s based on the previous bottoms (weaker resistance) and the horizontal line, representing the late-2016 bottom (stronger resistance) both stopped the rally and triggered the reversal.

Before summarizing, let’s take a look at the USD Index.

USD’s Self-similar Bottom

The USD Index seems to have formed a very short-term double bottom mostly below the 50-day moving average. That’s exactly what happened in April, right before the biggest upswing. The last few months of USD’s performance are similar in shape to the bottom that formed in the first half of this year and that ended in April.

There are even more similarities. Back in April we saw a new intraday high in gold, and we saw silver’s clear outperformance. We saw exactly the same thing yesterday. The history tends to repeat itself to a considerable degree and it’s likely to do so once again. In case of the USD Index, it means higher prices while in case of the precious metals, it heralds a substantial decline.

Summary

Summing up, this prolonged correction within the big downtrend has been very tiring, but based on the long-term factors being patient was very well worth it, and based on the short-term signs it seems that the waiting is over or about to be over. The outlook for the precious metals market remains very bearish for the following weeks and months and short position remains justified from the risk to reward point of view, even if we see a few extra days of back and forth trading or even a small brief upswing. There is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. It's confirmed by multiple factors, i.a. gold’s reversal, silver’s extreme outperformance and miners’ underperformance, gold’s performance link with the general stock market, gold getting Cramerized, and the bullish outlook for the USD Index.

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: $1,303; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $45.87
• Silver: profit-take exit price: $12.32; stop-loss: $15.63; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $27.78
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $21.82; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $21.97

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
Editor-in-chief, Gold & Silver Fund Manager

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