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.

While everyone was busy looking at the rallying mining stocks, quite a few just as important developments took place. Therefore, in today’s Alert, we will examine the critical things that might have gone under the radar. After all, partially informed investors can be as effective as partially trained surgeons – can easily hurt themselves and those around them.

In yesterday’s Alert, we discussed the situation in the mining stocks in great detail and since all points that we made yesterday on that sector, remain up-to-date, in today’s analysis we will mostly focus on other important issues.

Still, let’s start with a quick look at what happened yesterday (charts courtesy of http://stockcharts.com).

Gold and silver continued to trade back and forth without a bigger move in any direction and the HUI Index closed the day a bit lower.

Practically nothing changed except for HUI’s Stochastic indicator, which moved to about 80. This level quite often meant that the local top is either in or at hand. For instance, we saw moves to approximately 80 in late October 2016, several days before the big November slide, and in early July 2018 – before the current decline started.

But, just because not much has changed in case of gold’s, silver’s and HUI’s values in terms of the USD, it doesn’t mean that nothing important happened at all.

First of all, we saw a breakdown to new lows in gold in terms of the euro.

Yesterday’s close in gold in terms of the euro was the lowest one in years. While the breakdown was not verified and it’s not huge, it’s a notable bearish development that seems to have gone under most investors’ radars.

The same was the most likely case with gold to S&P 500 ratio.

This ratio is useful as it averages out the smaller price moves, thanks to which it’s easier to focus on the big price moves and stick to the main trend. The current implications from this ratio are exactly as what we discussed on Wednesday.

Namely, it’s 2013 all over again.

There are striking similarities between April 2013 and what we are seeing right now. It’s not only what preceded it (initial breakdown below key support, followed by a zigzag-like upswing and then the final, decisive breakdown), or the shape of the small consolidation. It’s also visible in case of both indicators: RSI and Stochastic. We marked the similarities with red ellipses on the above chart.

And, as a reminder, we have the same indications from the very long-term HUI Index chart:

Back in April, 2013, the Stochastic indicator was right after the buy signal from extremely oversold levels (but below 20) and the RSI was just after a comeback above the 30 level.

During RSI’s brief comeback above the 30 level, gold stocks moved higher, but not back above the previously broken medium-term bottom. The only similarly strong resistance right now is provided by the 2008 bottom. And indeed – miners have moved higher recently, but not back to (let alone above) this important price level.

The 2013-now link remains in place and the implications are very bearish.

Platinum’s Breakdown

In yesterday’s analysis, we wrote the following:

Moreover, the price of platinum is moving to its critical resistance created by the 2016 lows, below which it broke earlier this year. To be precise, platinum already moved above the intraday lows of 2016, but the intraday moves are not as important as the ones based on the closing prices. This means that platinum is still likely to reverse as the long-term resistance is both: at hand, and unbroken.

The week is ending today and it will be interesting to see where platinum closes it. The lowest weekly close of 2016 was $830.90 and at the moment of writing these words, platinum is trading at $836, so it’s almost right at this important resistance level. Precisely, it’s above it, but since resistance is based on the weekly closing prices and we have a full session ahead of us, there are no meaningful implications yet.

If we see a weekly close above the $830.90, this might change the short-term outlook for platinum, but without meaningful bullish confirmations from other parts of the PM sector, it would be unlikely to trigger a sizable rally in gold or silver.

Currency Comments

In yesterday’s Alert, we commented on the situation in the currency markets in the following way:

The USD Index moved substantially lower today, most likely as a result of what goes on in the UK. Remember when – in 2016 – we wrote that there will probably be no Brexit as The Powers That Be still have some aces up their sleeves not to let it happen? It was only a matter of figuring out how to do it so that it doesn’t look like it was artificially changed and without any prevailing politician looking stupid. And here we are. We don’t want to get into details as they are not that important – the point is that there are first signs that there will be no Brexit after all. It’s very far from being certain and it’s not even spoken about loudly, but the signs are everywhere (for instance on the sign that’s visible on the picture in the above-linked article).

What does it mean for us – precious metals traders and investors? Shortly after the results of the Brexit vote were announced, gold soared by about $100 and the euro declined. While the impact on the currency market can be different this time as the interest rates are on the rise in the US, the impact on the gold price should be very negative.

Based on today’s lack of real action on the gold market (gold is up by $3, while the USD Index is down by 0.63), the above implications are not clear for investors and traders, but they will be getting clearer. And gold will most likely take a dive. It’s likely based on multiple technical factors, but we now also have a good fundamental trigger (it was not required, though).

The above remains up-to-date, the regular link between the USD and gold could be less informative due to all the comments that will involve Brexit, but still, let’s take a look at the technical changes in the USDX.

In short, the USDX moved to one of the rising support lines and at the same time it seems to have completed a zigzag correction. Interestingly, the rally that started in the first quarter of this year is symmetrical to the decline that preceded it. The April – May 2018 rally is similar to the December 2017 decline and the same goes for the rest of the move. The October – December 2017 top took form of a head-and-shoulders pattern and it seems that we have also seen a similar pattern in the USDX (July high being the left shoulder, and the early September top being the right shoulder). And, just like the September – October 2017 zigzag started the previous correction, the August – September 2018 zigzag might be ending the current one. The implications of this specific symmetry are bullish for the USDX and bearish for the precious metals sector.

But, even if the gold-USDX link weakened and its predictive strength is currently not as what it used to be, then we are still likely to get meaningful signals from the analysis of the Japanese yen, as the situation in the latter should be relatively unaffected by the UK-EU dilemma.

The yen simply points to lower values of both: the currency and the price of gold. Last week, we saw a major breakdown below the rising long-term support line. Since the yen declined also this week, the move is getting confirmed and the implications are getting increasingly more bearish.

Research, Investment, and Results

We recently received quite a few questions about the use of specific financial instruments and what should one do if they owned them (for instance, specific type of options). We cannot provide investment advice, and unfortunately telling someone (specifically) what they should do with a given financial instrument falls under the definition of such advice. Consequently, instead of providing the above, we planned to discuss some of the issues through this publication that is not directed to just one person, but that is used to present our opinions in general terms. However, during the process of writing our reply, we digressed so much that the comments turned into something else – perhaps even more useful to you.

What we ended up creating, is the list of key factors that determine whether a given trade is successful or not. It may appear that the success of a given trade depends on just one factor – being correct about a given price move or not. But the reality is not that simple.

1. The first thing is thorough research and this is what we are helping you with through our Alerts as this is something objective. The same research is useful for many investors and traders.
2. The second thing is timing and that is also what we are helping you with. We’re keeping you up-to-date through our regular Alerts and through the occasional intraday follow-ups. Again, the timing-related Alerts are useful for many investors and traders.
3. The third thing is the choice of investment / trading vehicles. This is not something objective and thus this is not something that we can choose for you. At least not through a newsletter arrangement. Some investors will be able to take on leverage as they are experienced in trading and know that they are using capital that they can afford to lose. And some – beginning investors and those who are using capital that they cannot lose – should think at least twice before applying leverage. Some people will prefer options because of the flexibility they provide, but some will stick to traditional stock market purchases and sales. It all depends on investor-specific factors. The key thing is that we can’t tell you what you should choose, because that would be an investment advice – which we can’t provide.
   
   Naturally, in case of other arrangements, for instance through private investment fund or through managed futures trading and through private investment fund, we are able to manage the investment vehicles directly, but this is not possible through a newsletter.
   
   Consequently, the choice of the investment / trading vehicle is yours to make. We can provide the information regarding various choices and we strive to explain their details etc., but the final call is up to you. For instance, we do the above by providing you with a list of investment / trading choices in general, an extensive list of ETFs, ETNs, several tools for choosing options: Position Size Calculator helps in choosing the expiration dates, the Pyramid Optimizer helps to choose the strike price, and the Option Calculator can help you make quick option pricing simulations. Speaking of options, in our opinion, it’s a good rule to give yourself at least (!) an extra month to any price/time prediction in order to lower the risk of options expiring before the price managed to move to its target.
4. The fourth thing is choosing the correct position size. Like above, this is something that we can do for our clients in case of the private investment fund and in case of the managed futures trading, but it’s not something that we can do through a newsletter. We strive to provide our thoughts in a way that makes it easier for you to make the decision regarding the position size (discussing the percentages of a regular size of a given position), but it will need to be you, who decides what the default position size can be. In this report you can read how important it is not to bet too much, and in this essay, you’ll see a simple simulation of what could happen if the position sizes are too big (it might be better to start with this one, and read the detailed pdf report later on). For general guidelines regarding the “trading capita”, and “investment capital”, please refer to our Gold & Silver Portfolio analysis. In the final part of that analysis, you’ll find pictures with sample portfolio structures for long-term investors, traders, and beginners. The rule of thumb is that if you can’t sleep well because of how big your position is, then it should be decreased by at least 30%. The same applies if you’re getting emotional about a given trade. For instance, we just saw a relatively small setback in profitability in case of the current short position - the profits on this single trade are multiple times greater than this year’s S&P 500 profits. If you got scared or emotional because of the above, it might be a good idea to limit the size of the position. Or have the trades managed professionally for you.
5. The fifth thing is keeping in mind that trading and investment are processes that go well beyond a single trade. Moreover, there are developments of random nature and if one wants to make any money over time, one needs to accept that. Making all the research in the world, will not give you 100% certainty that something is going to happen or that it will happen exactly as you think. At times we will do everything correctly (points 1 and 2) and you will do everything correctly (points 3 and 4) and the trade will still end up being a losing trade. It’s natural and normal. For experienced investors and traders, it’s normal to the point that they are not even sad, angry, disappointed etc. by a trade that ended in the red. It’s just part of the process. As long as you’re making sure that all the previous points are taken care of and you’re striving to learn more about investments in general, it should all work out very well in the end. It’s important to keep that in mind as it should keep the emotions at bay, even during turbulent times. This, in turn is likely to lead to more objective, and thus better investment decisions. Not to mention better sleep and better health overall due to lower levels of stress.

Important Analyses

Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:

• Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
• Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
• Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
• Preparing for THE Bottom in Gold: Part 7 – Buy-and-hold on Steroids - description of a strategy dedicated to significantly boosting one’s long-term investment returns while staying invested in the PM sector.
• Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
• Gold: What Happened vs. What Changed - discussion of the latest extreme readings from gold’s CoT report
• Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.
• The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
• Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.

Summary

Summing up, the situation on the precious metals market remains very bearish, as it’s likely that we are right before a major plunge, similar to the one that we saw in April, 2013. This is confirmed not only by what we’re seeing in the gold market, but also by what’s happening in silver, mining stocks, USD Index and the general stock market. It seems that the big profits on our short positions will become much bigger before this trade is completely over.

At the same time however, it might be the case the HUI Index rallies back to 150 or so (analogous price levels for GDX and DUST $19.50, and about $34, respectively, before turning south with vengeance. The next cyclical turning point is on Monday, so any strength here is likely to be limited in terms of time as well. Since it’s likely that the possible short-term upside is limited, and the possible downside is huge, it’s still justified from the risk to reward point of view to keep the profitable speculative short positions intact.

As a reminder, we had taken profits from the previous long positions and had simultaneously opened short positions on July 10, 2018 and we increased the size of the position in the following days. On July 10, the GDX ETF closed at $22.60, and the DUST ETF closed at $23.29. Gold closed at $1,255.40, and silver closed at $16.09. The DGLD and DSLV ETFs closed at $49.18, and $26.15, respectively. Positions in all of the above remain very profitable, especially the position in the DUST. Naturally, the above doesn’t mean what encourage using leverage to everyone – it’s usually better to keep the positions too small than too big, as you can read in the second half of this essay.

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: $1,226; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $53.67
• Silver: profit-take exit price: $12.72; stop-loss: $15.16; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $31.37
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $19.61; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $33.37

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: $29.43
• JDST ETF: initial target price: $154.97 stop-loss: $64.88

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.

=====

Thank you.

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

Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts