Briefly: in our opinion, small (50% of the regular size of the position) speculative long position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert. We are moving profit-take levels for the mining stocks higher.

The entire precious metals sector rallied yesterday, but the upswing was particularly visible in case of silver and (especially) mining stocks. Both: silver, and miners moved to new October highs. Silver's breakout was tiny, but miners rallied relatively significantly and that's the part of the current long trade that's particularly profitable. Of course, these profits are near to nothing compared to what's likely ahead in case of the big short trade that we plan to profit on in the following months, but they add their part to the overall results. Please note that a small long position here also means staying temporarily out of the short position, which brings the likelihood of re-entering them at higher prices.

Let's take a closer look at what happened.

The Miners' Upswing

Gold miners rallied almost to their 50-day moving average and well above the previous October highs. Neither the RSI, nor the Stochastic indicators suggest lower prices in the near term. Still, let's keep in mind how both indicators are supposed to work.

The RSI is likely to tell us when the HUI Index is overbought on the short-term basis, and the Stochastic indicator is likely to confirm the trend's reversal with its sell signal after it already takes place. In this case, we don't want to wait for the confirmation because of all the important factors that point to lower precious metals prices in the following weeks. Conversely, we want to cash in the profits from the long positions once the easy part of the rally is over. Is the easy part of the rally over? Almost, but not yet.

Why?

Because the resistance line in gold was not yet reached, and because of the move above $1,500 and the neck level of the previous head-and-shoulders pattern as more visible rally had been likely than what we've seen so far.

The recent back and forth trading seems to be a flag pattern. This in turn tells us that the move that follows the consolidation is likely to be relatively similar to the move that preceded the pattern. This suggests a moved to the late-September high. However, let's keep in mind that the declining resistance line also provides important resistance and gold might not be able to rally that far.

In other words, a move to about $1,540 or so is still possible, but it's not as likely as the move to the declining resistance line that's a bit below $1,530. The (hypothetical) part of the rally above $1,530 would no longer be "easy" - it would be risky. And it's usually better to stay out of the risky trades, while focusing on those that are confirmed by multiple signals instead.

Silver On the Rise

Yesterday's rally in silver was bigger than the one that we saw in gold, but not yet huge. This suggests that the rally might not be over just yet. The final days of the rally are often characterized by huge outperformance of silver and that's not what we saw yesterday. This outperformance is what usually makes people eagerly jump into the market, believing that the white metal is taking off. But it's not a rally bullish signal - it's an ambush after which silver price starts to decline - often in a dramatic manner. Consequently, it seems that we're going to see a day or a few days of higher prices before silver drops once again.

Naturally, the key bearish factors for the medium term remain intact.

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.

Copper moved above the neck level of its head-and-shoulders pattern that's based on the intraday lows, but it didn't invalidate the analogous level based on the weekly closing prices, so we don't think it's justified to say that this bearish formation was invalidated at this time.

Summary

Summing up, the big decline in the precious metals sector appears to be finally underway, but based on gold's invalidation of the breakdown below the head-and-shoulders pattern, a quick rally is more likely to take place in the very near term. Most likely, the rally will be short-lived and it will end this or the next week.

Due to miners' strength, we are moving the profit-take levels for them higher.

Once gold reaches $1,525, we think it best (from the risk to reward point of view) to take profits off the table in case of the long positions in gold, silver, and mining stocks, and open the big short position in them that are in tune with the main trend. You will find details below.

In other news, we are temporarily (until the end of this week) providing you with access to our Oil & Forex Trading Alerts - until the end of the week you will also receive notifications whenever they are posted.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Small speculative long position (50% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

• Gold: profit-take exit price: $1,524.80; stop-loss: $1,488; initial target price for the UGLD ETN: $144.67; stop-loss for the UGLD ETN: $133.82
• Silver: profit-take exit price: $18.17; stop-loss: $17.16; initial target price for the USLV ETN: $98.96; stop-loss for the USLV ETN: $82.16
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $29.28; stop-loss: $26.27; initial target price for the NUGT ETF: $34.16; stop-loss for the NUGT ETF $25.98

In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:

• GDXJ ETF: profit-take exit price: $39.87; stop-loss: $35.48
• JNUG ETF: profit-take exit price: $71.88 stop-loss: $51.96

Important: even if gold is the only part of the precious metals market that reaches its upside target, all above-mentioned trades should be closed, and the trades below should be (in our opinion) opened:

Trading capital (supplementary part of the portfolio; our opinion): Once gold reaches $1,524.80, full speculative short position (250% of the full position) in gold, silver, and mining stocks will be justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

• Gold: profit-take exit price: $1,391; stop-loss: $1,573; initial target price for the DGLD ETN: $36.37; stop-loss for the DGLD ETN: $25.44
• Silver: profit-take exit price: $16.41; stop-loss: $19.06; initial target price for the DSLV ETN: $20.96; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $24.62; stop-loss: $30.11; initial target price for the DUST ETF: $10.32; stop-loss for the DUST ETF $6.08

In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:

• GDXJ ETF: profit-take exit price: $33.82; stop-loss: $41.22
• JDST ETF: profit-take exit price: $21.58 stop-loss: $12.46

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.

Thank you.

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