The breakout in the precious metals mining stocks has just been invalidated (they have moved sharply below their previous highs) and we believe it's a good idea to bet on lower values of PM miners in the short term. We believe that there is a 70% probability that mining stocks will move lower this week and we believe that this makes the risk/reward ratio favorable enough to justify shorting the precious metals sector. Gold and silver are likely to move lower as well - however since they have not invalidated a breakout today in such a profound way as miners did, we view the probability of a decline in metals as slightly lower (65%).

While the markets are still opened, it seems that invalidation of the breakout in miners will hold based on the closing prices and at the same time it is likely that tomorrow's session could be just as volatile, so it appears to be a good idea to open the short position today.

The breakout in the USD Index has been well confirmed by both: size and volume of on the corresponding ETFs (like UUP ETF) and it seems that this time European investors are not willing to exchange their euros for gold as a hedge against plunging euro - they are buying dollars. While we don't think this makes much sense from the very long-term perspective (fiat currencies are not a good long-term investment), it does make sense from a short-term point of view. Simply put, those who were inclined to purchase gold, might have already done so, and the remaining part of investors prefers to hedge their currency risk with dollars.

The move in the USD Index was significant and appears to be an early part of a bigger move up - as we indicated in the previous Premium Updates. This is where medium- and long-term correlations come into play and these are negative for the dollar and precious metals sector. Consequently, the precious metals sector is likely to move lower in the following days and perhaps weeks.

The risk factor here is the general stock market which moved lower today, which may be viewed as an (unconfirmed) breakdown below a flag formation, which would be a bearish signal. However, as mentioned above, this move has not been verified, and additionally, the short-term correlation between stocks and gold has weakened in the past days, so the risk to the short position in the metals is not as big as it would seem at the first sight.

Our interpretation of the above is that the main factor currently in play is the strong rally in the USD Index. This affects not only metals, but also the main US stock indices. After all, stronger dollar makes US exports less competitive, which is generally bad news for the US economy. So, dollar's rally has not only impacted metals in a negative way, but the same was the case with stocks. Consequently, Traders should focus on the signal from the USD Index (the "true igniter" here), not on stocks' decline.

There are no changes as far as long-term positions are concerned.

As always, we'll keep you updated if anything changes.

Thank you.

Sincerely,
Przemyslaw Radomski

PS. It's a bit too early to provide detailed targets for this decline (we want to send this to you as soon as possible). We will provide you with a follow-up shortly (perhaps tomorrow or even later today).