Briefly: in our opinion, full (250% of the regular size of the position) speculative short positions in silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this Alert. The gold positions were closed yesterday and we are not re-opening them today.

Silver didn’t move above the previous highs yesterday, but gold and gold miners truly soared! Both moved to new yearly highs and miners even rallied above their declining resistance line. Silver’s volume was extraordinary. Something big is happening. The $64,000 question is what exactly it is.

Gold Rallying Yesterday

Let’s move right into charts, starting with gold.

Gold rallied above the previous highs and did so on high volume. That’s a bullish combination. The next resistance is at the 2018 high of about $1,370. But, does gold have to reach it before turning south? Absolutely not. The above would be the most likely outcome based on the classic interpretation of the chart and it would be applicable, if there was no turning point right now. And it’s a very clear one, as the RSI is above 70. This makes the picture entirely different.

Gold can still move to the 2018 highs, but it’s likely to reverse its course shortly nonetheless. It’s very unlikely to be a really major breakout that people expect to see based on yesterday’s session alone.

Silver Feeling Its Resistance

As far as silver is concerned, the situation is still as we described it earlier, with an additional signal. Let’s start with what we wrote yesterday:

Silver is practically right at the declining long-term resistance line, so it’s not likely to visibly break above it either. Surely, silver is known for fake breakouts, but it’s not likely to break out far above such an important line. The move higher – if we see one at all- is more likely to be similar to what we had already seen – a tiny and brief upswing. It could also be the case that silver moves higher by just a few cents and then reverses in a big way (as gold’s reversal is likely to affect silver as well) – after all, the gold to silver ratio is on the rise. The bottom line is that the upside for silver in the medium term is very, very limited, while the downside is huge.

Silver actually moved a little above the resistance line, but the move was not huge, so the above remains up-to-date.

On a short-term basis, however, we saw something drawing our attention.

We saw a daily rally on huge volume. This is profound, because it’s a major indication of the sharply increased interest in the white metal – something that takes place at the local tops. That’s a confirmation of the very short-term outperformance of silver that we’ve been discussing many times before. The above chart shows how it usually works.

The vertical lines represent days when silver moved up on huge volume. It is more important that the volume is huge on a relative basis (compared to the previous several days) than its absolute value, but it is usually significant also in absolute terms.

The red lines are the cases, when such occurrences were good shorting opportunities, the blue line was the case, when it was a good opportunity to go long, and the black lines are the cases, when the implications were unclear. Out of the 11 cases, we had only one blue line (buying opportunity), which is less than 10%. On the other hand, 8 cases were the great shorting opportunities, which is about 73%. Consequently, yesterday’s session for silver was actually bearish in its implications.

Gold Stocks Galloping

Gold miners soared above the declining resistance line in a profound manner. Unless this breakout is invalidated quickly, it could have very bullish implications. Right now, they are only moderately bullish due to the sudden nature of the move and lack of confirmation thereof.

We wrote that the current situation is unlike the 2016 one with regard to the direction of the price and that the similarity was only with regard to the fact that we saw fake moves in both years: in early 2016, there was a fake move to the downside, and right now we saw a fake move to the upside. However, yesterday’s rally might change that… Unless it’s invalidated. Invalidation – a comeback below the declining resistance line – would mean that the situation is similar to 2016 with regard to the fakeout, while continuation of the strength would mean that the situation is similar to 2016 with regard to the move itself.

The situation is similarly complicated with regard to the USD Index.

USD Index and the Third Daily Reversal

The USD Index did the classic thing it could do after failing to break above a resistance line twice in a row – it declined. And the precious metals investors responded with additional purchases. The strength of reaction was bullish.

But, there is something about the USD Index that doesn’t paint the picture to be as bullish for the precious metals sector.

The euro is after a breakdown and it didn’t invalidate it yesterday. It moved back up, to the previously broken resistance line and it closed right at it. So far it appears to be a verification of the breakdown – something normal, expected, not out of the ordinary.

Trading Implications Thereof

The situation in the euro suggests that the situation in the USD Index is likely to improve shortly. This, in turn, suggests that yesterday’s strength in the PMs and miners should not be trusted. However, we did see a strong breakout in gold and gold miners and we definitely don’t want to remain in a short speculative position if a big wave higher is starting, especially given the possible direct analogy to 2016. Consequently, the strategy to deal with the situation is that we will not have a position in gold, we will keep one in silver, and one in the mining stocks (these two will remain intact), but with a close stop-loss. Consequently, if the miners continue to show strength and the more direct link to 2016 becomes more probable, the short position will be closed relatively quickly. At the same time, we will maintain the ability to take advantage of an immediate reversal and the analogy to 2016 with regard to the fake moves right before big moves in the opposite directions.

The above strategy limits both: risk and opportunity, but it does so by limiting the part of position that appears particularly vulnerable due to technical developments. Gold broke higher, while silver didn’t. Silver provided a sell confirmation yesterday, while gold didn’t (except for rallying right at the turning point, which may be viewed as a bearish sign). Moreover, the gold to silver ratio is on the rise, suggesting that silver is likely to underperform in general (which it just did as it didn’t move to new highs).

The position in gold was automatically closed yesterday, and the ones in silver and miners remain intact. We are going to move the stop-loss level for miners higher, but only by a little, so that a simple retest of yesterday’s high doesn’t immediately close the position.

Summary

Summing up, gold showed a lot of strength yesterday and while it’s probably a fake move, it’s too big to ignore its direct implications. The medium-term outlook remains bearish, but the odds for the rally’s continuation in the very near term increased too much for us to continue featuring the full short position in gold, silver and mining stocks. Instead, we keep silver and mining stocks’ positions intact, while we keep out of the gold market at this time. At the same time, we move the stop-loss level for mining stocks close to the current price, and we keep the silver stop-loss level relatively far. This way, if miners continue to show strength – like in 2016 – we will be taken out of the market. However, if miners invalidate the breakout, showing that yesterday’s strength was a fakeout – also like in 2016 – we will keep the ability to benefit from it.

Overall, we limited our exposure here, as the situation became less bearish than it was previously (only for the short-term though), but we did so in a non-symmetrical way as the technical pictures for different parts of the precious metals market are quite different. The entire sector is still likely to move in the same direction in the end, but the strength of individual moves might vary, so the above seems to be the optimal way to approach the current countertrend upswing in the PMs. To be clear about the trends – we continue to think that the precious metals sector will move much higher in the coming years, but before the powerful rally starts, we’ll see a one additional big wave down, below the 2015 lows. The current upswing is a counter-trend move with regard to the above mentioned wave down.

Please note that since the medium-term trend remains unaffected by the recent developments and the downside target remains intact (about $890 for gold), the precious metals market is likely to erase everything that it had gained in the last several days, weeks, and months, before THE bottom is in.

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 silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

• Gold: no position
• 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: $23.43; 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: $34.82
• JDST ETF: initial target price: $154.97 stop-loss: $31.67

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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There is this pearl of wisdom in the trading world. Plan the trade and trade the plan. We have just seen the importance thereof in the EUR/USD pair. It had positive direct implications for us and you, the subscriber. Does the above influence our outlook on the other currency pairs? Is there any corresponding action to take?

Trade Management: The Importance of Being Prepared

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Thank you.

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