New Clues for the Next Big Move in Gold and Silver

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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.

There was no new intraday low in the USD Index yesterday, but we saw a new weekly low in terms of closing prices. The PMs reacted by moving higher, but the move was not spectacular. Moreover, both metals moved lower in today’s pre-market trading. What can we infer from this combination of factors? Quite a lot.

Let’s start with a look at the USD Index (charts courtesy of http://stockcharts.com).

USD’s Bullish Reversal

In yesterday’s Alert, we wrote the following:

Despite the intraday decline to 94.34, the USD Index reversed and ended the session almost unchanged, at 94.64. At the moment of writing these words, the USD Index is trading at 94.80. The reversal was likely to take place based on the triangle vertex reversal in the EUR/USD currency pair, as we outlined yesterday and in the August 22 Forex Trading Alert. And it did.

The reversal is most likely much more than just a single-day phenomenon. Given the situation on the long-term USD Index chart that we featured yesterday and the analogies to the previous big, medium-term rallies, the USD Index is likely to resume its upward trend shortly.

This makes the outlook for the precious metals market very bearish.

As we outlined in the first sentence of this Alert, there was no new intraday low, so the implications of the reversal remain in place – the USDX is likely to move higher, in tune with its long-term self-similar patterns that we discussed previously.

At the moment of writing these words, the USD Index is at 94.69.

And how did the PMs react to yesterday’s and today’s price movement?

Metals’ and Miners’ Reaction

Gold moved a bit higher yesterday, while silver’s and the mining stocks’ upswing was practically not visible. In today’s pre-market trading gold moved $5 lower, almost erasing yesterday’s gains, while silver declined by $0.14, moving well below Wednesday’s and Tuesday’s lows.

In other words, we see a continuation of silver’s underperformance relative to gold, and at the same time we have a situation in which the USD Index is still likely to move higher. This is a very bearish combination for the PMs. Naturally, there are multiple other reasons due to which gold, silver, and mining stocks are likely to move lower, but since we have covered them previously and we are linking to them in the analyses listed below, it doesn’t seem that quoting all of those reasons is necessary at this time.

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.

Summary

Summing up, it seems that the declines in the USD Index ended with Tuesday’s reversal and that the medium-term uptrend can now be resumed. The implications are very bearish for the precious metals sector, especially that they have already shown weakness even though the USDX has only reversed – not rallied. Mining stocks and silver displayed weakness. It appears that another big slide is likely just ahead. Based on what we can infer from the 2013 decline, it is the time that we should pay extra attention to the PMs as their decline is likely not close to being over since no meaningful support has been reached in the case of gold and mining stocks.

On an administrative and personal note, there will be no Alerts posted on Monday as the markets are closed in the U.S. (Labor Day) and as far as Friday (tomorrow) is concerned, there will be no regular Gold & Silver-, Oil-, and Forex Trading Alerts. The note is personal due to the reason behind tomorrow’s changes in our regular publication schedule. Nadia and I are getting married on Saturday and we’ll need more offline time tomorrow for the final preparations. Yet, if something major happens, you’ll still receive a quick message with the details, so while we’re not going to write regular Alerts, we will keep you informed if anything major changes.

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: $1,231; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $52.37
Silver: profit-take exit price: $12.72; stop-loss: $15.56; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $28.87
Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.81; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $30.87

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: $30.72
JDST ETF: initial target price: $154.97 stop-loss: $62.78

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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