In the summary of the latest Premium Update we wrote the following:

"We may soon suggest closing short positions and going long as our Extreme and Extreme #2 Indicators suggested. We will continue to monitor this situation and keep you informed as necessary."

We also stated that our target levels for gold, silver and mining stocks (HUI Index) were $1,680 - $1,700, $30 - $31, and 450 - 460, respectively and that only the short position in gold and silver (not mining stocks) was justified. The reasons were that miners have performed remarkably well relative to metals and that the SP Extreme indicators suggested a bottom. Consequently, the probability for HUI moving to 460 or lower was not very significant. 

What we saw was indeed a decline in gold and silver, but not really in the mining stocks. Mining stocks have been declining today as well, but their overall performance in the last few days was not weak.

The USD Index has just moved above its declining resistance line (the one that we marked with a red line on the short-term USD chart in the latest Premium Update) and this is the most probable reason for today's decline in the precious metals market. 

If the recent strength of reaction in gold and silver relative to moves in the dollar is upheld, then dollar's rally to 81 (which will become likely if today's breakout is confirmed) could mean gold close to $1,650 and silver close to $30. At this time it's difficult to estimate an analogous target for mining stocks using this methodology, because they have actually not declined in the last 2 days.

The next support for the S&P 500 is approximately at the 1400 level and we doubt that stocks will move below this level (and stay there for more than 2 days) before the November elections. 

But, as you may recall from the past alerts, our indicators showed that today is likely the beginning of another rally in the precious metals sector. The buy signal was invalidated in case of gold and silver by continuation of the decline, but it was not invalidated in case of the mining stocks. 

Consequently, at this time we suggest hedging the speculative short position in gold and silver by going speculatively long mining stocks or mining stock ETFs/ETNs.

If the correction in the precious metals continues, we expect miners to hold relatively well, meaning that the long position in the miners will bring only limited declines. They will be most likely only temporary because we expect to see another rally in the precious metals sector shortly. Since these temporary declines will likely be smaller than the declines in gold and silver, profit on the short positions in the metals will likely exceed the loss on the long position in miners.

If the correction in the precious metals is ending right now, we also expect miners to outperform the metals. This means that if miners rally higher than metals (like it has been the case recently), profits on the long position in miners will be higher than the losses on the short position even in case we don't exit the short positions.

At the same time, we suggest placing a stop-loss order for the short positions in the precious metals market at $1,750 for gold and $33 for silver. 

We also suggest placing a stop loss order for the long position in mining stocks at 480 in case of the HUI Index and $50 in case of the GDX ETF.

Thanks to the above combination of orders you are very likely to make a profit in the coming days and weeks. If the situation develops as it was the case recently (metals decline and miners don't), the short position will become even more profitable, while the long position in miners does more or less nothing. If anything changes - miners plunge along with metals or the whole precious metals sector starts to rally, one of the stop-loss orders will be triggered and you will automatically be pushed to the right side of the market - so you will be on the correct side of the market after making a profit anyway.

To summarize:

Long-term investments: remain in the market with your precious metals holdings
Trading – PR: Short position in gold and silver (not in mining stocks),
Trading – SP Indicators: long position in the mining stocks.

Our targets for the coming decline in the precious metals sector have been adjusted (mainly based on miner's strength and today's - unconfirmed, but still - breakout in the USD Index) to the following values:

Gold - $1,650 - $1,680

Silver - $30

At this time we don't have a downside target for the mining stocks. The next upside target (after the correction is over) is approximately 600 in case of the HUI Index.

As always, we'll keep you updated should our views on the market change - even if it means sending another message in several minutes.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA