Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

It's nothing to worry about, gold and silver will rally back up shortly - most analysts say right now and also said in the mid-90s.

...Only except that they won't - at least not for several months. Is anything different now than it was during other gold corrections in the past couple of months? Yes. There are three major details that prove that this time really is different. First, it's the fact that gold declined for two weeks in a row and it's the first time since April when this happened. Second, gold and silver declined even without USD's strength and the latter is refusing to decline even despite bearish news. Third, gold stocks just closed the week below their rising support line, and their August high. If anyone doubted whether mining stocks are underperforming, that's the final proof.

Let's take a closer look at what happened with the yellow metal.

Another Weekly Reversal in Gold

Gold has not only declined in the last two weeks. It has actually reversed, and it happened on significant volume. It also happened while the RSI indicator has been above 70, indicating overbought conditions.

This is a very powerful combination of bearish factors and the sell signal from the Stochastic indicator serves as yet another short-term confirmation. But, as you know, these are just short-term confirmations of much bigger signals that we outlined previously:

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.

In particular, it's worth keeping in mind enormous potential of the USD Index. It's after a major breakout in 2014/2015 and three verifications thereof. The 2017-2018 decline which seems huge on its own, was just a verification of a much bigger (and thus more important) pattern.

The USD Index Patterns

The USD Index may have not broken above the rising green neck line of the likely inverse head-and-shoulders pattern, but it managed to close the week without breaking below the rising support line. No political tweet was able to trigger a breakdown, or a visible comeback below the May highs.

Investors and analysts tend to forget about the big picture, while focusing on the short-term movement, which means that the more important development that last week's close meant, has gone under the radar.

And that was the fact that the USDX finally closed the week above the 61.8% Fibonacci retracement level based on the 2017 - 2018 decline. Technically, this means that the 2018 - now upswing should no longer be viewed as a correction within a downtrend, but rather as a new uptrend.

Please note that even though gold's upswing from the 2015 low was sizable, gold didn't move above the 61.8% Fibonacci retracement based on the 2011- 2015 decline. This upswing can be viewed as - big, but still - just a correction within a downtrend.

With the USD Index in a massive rally mode, and gold just having shown two major weekly reversals, the next several months look particularly unfavorable for the shiny metal.

The previous links include details of the analysis of the gold stocks to gold ratio and the situation in copper, but it seems it would be a good idea to show you how the situation developed recently.

The Copper and Miners-to-Gold Clues

In short, copper's huge head-and-shoulders formation is no longer "potential" - it's very real. The H&S pattern was completed and now the price is moving back to the neck level as the final verification. Such "goodbye kisses" are quite common and they are not bullish. They are the final chance to take advantage of the formation and get out of copper and anything that's likely to fall with it. This includes the precious metals market. The biggest decline in the latter took place right after copper completed its previous huge head-and-shoulders pattern in 2013.

The downtrend in the HUI to gold ratio clearly remains intact. The rally was a few times smaller than the one that we saw in 2016 and it appears to be over. It broke slightly above the declining resistance line based on the 2011 and 2016 tops and then it invalidated this breakout, thus flashing a sell sign.

This happened right after the sell signal from the RSI indicator. Please note that in the past decade, there were only three times when the RSI moved to the 70 level:

• in 2012 (right before the huge slide started)
• in 2016 (at the top)
• in 2019 at the end of the recent rally

The rally appears to be over and lower precious metals values are to be expected.

The Daily PMs Perspective

On a short-term basis, we see that silver is falling down even faster than it had previously rallied, and we see that gold stocks just broke below the rising support line. This means that our Friday's comments remain up-to-date:

Gold, silver, and mining stocks have all declined profoundly, and it seems to have been a very good decision to enter short positions in silver yesterday, while it was still trading at about $19.35. It's already more than $1 below this price.

However, as we wrote earlier, that's most likely nothing compared to what's to come.

Gold futures closed only a bit below the late-August lows and they are trading close to the mid-August lows so far today, so there was no major breakdown in gold just yet.

The same goes for silver - even though silver futures moved to about $18 in today's pre-market trading, there was no breakdown below the rising support line that currently provides support at about $17.50.

The HUI Index declined below the late August lows, but didn't slide below its rising support line so far either. Still, given today's pre-market slide in gold and silver, it appears that if even if gold and silver don't decline more today, the HUI will slide further. Gold moved below yesterday's lows, and silver's slide is even more profound. This means that the HUI is also likely to move below its yesterday's lows, perhaps significantly so. This, in turn, means a breakdown below the rising support line that's based on three previous lows. This breakdown will be an important confirmation of the bearish case in the short run.

The short-term breakdowns are not as important as what happened on the longer timeframes, though.

Mining stocks' weakness is being confirmed and the breakdown is its clear sign.

Summary

Summing up, the big decline in the precious metals sector appears to be finally underway as gold and silver are plunging even without a rallying USD Index. And PMs' decline started right after the U.S. Labor Day, as we have described. Once the USDX takes off, it will likely serve as fuel to the fire-like decline that's already underway. The similarity to mid-90s continues to support much lower gold prices in the following months, and the True Seasonal patterns continues to favor lower gold prices in the following weeks. All in all, it seems that what we see right now is the beginning of the final stage of the prolonged decline in the precious metals sector that started in 2011. On a short-term basis, it seems that we might get some temporary strength once gold moves to about $1,330 - perhaps within the next few weeks.

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

To summarize:

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

• Gold: profit-take exit price: $1,332; stop-loss: $1,583; initial target price for the DGLD ETN: $39.87; stop-loss for the DGLD ETN: $25.17
• Silver: profit-take exit price: $14,62; stop-loss: $20,16; initial target price for the DSLV ETN: $32.96; stop-loss for the DSLV ETN: $11.67
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $22.62; stop-loss: $32.37; initial target price for the DUST ETF: $17.28; stop-loss for the DUST ETF $5.48

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: $30.32; stop-loss: $45.42
• JDST ETF: profit-take exit price: $38.36 stop-loss: $11.26

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.

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Thank you.

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