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. We are increasing the size of the current short position.

The precious metals declined yesterday, and so did the mining stocks, but the move in the latter was not as significant as one might expect. Consequently, it seems that the mining stocks showed strength, and thus that the outlook is bullish. But is this really the case?

Mining Stocks’ Small Breakout Implications

Not really. There’s a thing about the mining stocks that we didn’t discuss in a while and that is that while they are likely to show strength during intermediate bottoms and weakness during intermediate tops, they are also likely to… Act in exactly the opposite way at the final reversal of a given medium-term move. In other words, the final move in the miners might be a fake one. This observation is important. This is what changes the implications of the most recent temporary strength in the mining stocks. Let’s take a look at HUI’s performance since late 2015.

In early 2016, the HUI Index broke below the previous lows. It was a bearish technical sign. And it was invalidated and followed by a major price increase in the following months. Based on the number of the reversals in gold, silver, mining, stocks, and the USD Index, it seems that we are in a similar place. The difference is that this time, we are seeing a small breakout in the gold stocks. Based on what’s happening in gold and silver right now, this breakout is likely to be invalidated shortly. Consequently, the breakout is definitely not as bullish as it may seem based on the initial view of the above chart. Please remember that mining stocks often provide a fake signal (here, of short-term relative strength) at the very end of a given move. And the current situation at THE reversal fits that description well.

Gold didn’t form anything special yesterday. Well, it did form a bullish reversal, but it was accompanied by weak volume, so there’s little reason to trust it. Indeed, the gold price moved lower in the overnight trading. This may not be particularly important based on the above chart as the pre-market moves are not visible in it, but it’s something that indicates that the top – and the reversal we are at – is already in.

Looking at the weekly chart, we see that gold is currently invalidating the breakout above both important resistance levels. We never expected the breakouts above them to be confirmed, and it indeed seems that they wouldn’t be.

USD Index Rising

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

In case of the US currency, we are already right after the triple-vertex-based reversal, which increases the odds that the bottom in the USD Index is already in. In fact, we have already made profits in the currency sector based on USD’s strength. The triple-vertex-based reversal (its implication of USD Index bottom being in) is one of the reasons why it’s not particularly surprising to see higher USDX values without much lower PM values. The former may already be after their reversal, while the latter are either at it or right before it.

In this case, it will likely be the difference in the dates of reversals that causes the delay in gold’s and silver’s reaction time. We previously wrote that at times, PMs’ reaction to USDX movement can be delayed – and at this time, we have a technical reason for that.

The above may continue to have impact on the USDX and the precious metal sector this week, but it seems that the odds for another sizable upswing in the PMs and the miners have declined substantially. PMs and the miners are moving beyond their reversal dates and this means that the chance for another upswing decreases with each passing day

Summary

Summing up, the recent rally in the precious metals may appear encouraging, but it didn’t change the medium-term trend. In fact, since gold, silver, and mining stocks rallied right before the very powerful combination of reversals, it means that the implications for the following weeks are bearish.

As PMs and miners move beyond their reversal dates, so does the USD Index, and it becomes increasingly likely that it was the dovish comment from the Fed that triggered the reversal earlier than it was likely to present itself based on technical factors alone.

With gold, silver, and – most likely given PMs decline – potential invalidation of the breakout in the mining stocks, it seems that increasing the size of the short position is now justified.

The upside is very limited, while the downside remains enormous. The turning points are being reached this week, so we may either see a very brief upswing in the metals before the huge decline starts, or the latter may start right away. The latter seems much more likely.

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: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
• Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.18
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.27; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $16.27

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 1st 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: $34.62
• JDST ETF: initial target price: $154.97 stop-loss: $35.87

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