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

In yesterday's analysis we wrote about platinum's recent strength, and how it should not be taken at its face value. The reason is that platinum has been the weakest part of the precious metals sector in the previous months (and years), which means that the recent show of strength was likely a strong indication that the investment public has entered the precious metals market. That's something that happens at the tops, so one should be prepared for lower, not higher prices.

We didn't have to wait long for the same kind of signal to be repeated on a smaller scale - it happened yesterday.

The rally that we saw yesterday was not as big as what we saw in late August as it was just one day. But, this one day amounted to more than platinum rallied in all previous days of October and it was the biggest daily gain since the beginning of September. Just as we wrote yesterday, this doesn't bode well for the entire precious metals market, for two reasons:

The first detail is that any market that is generally weak, but then acts strong at a certain time, might simply be rallying just because everything is rallying as the investment public (that enters the market last and buys close to the top) is buying everything without looking at its potential. And in particular if something looks cheaper than something else (e.g. because it was declining previously or precisely because it has unfavorable fundamentals). This means that just by looking at the performance of the weak parts of a given market one can detect the moment, when the investment public is entering the fray, and thus that the top is being formed.

The second detail is that platinum is currently the weakest part of the precious metals sector and this perfectly fits the above-mentioned type of reaction. The size of the platinum market is also relatively small. The fundamental situation for platinum is rather grim as it's being used as a catalyst for diesel car engines that are no longer as often produced as in the past. Gasoline engines are growing in popularity relative to the former and in their case, palladium is used. Both could be hit when electric cars start to take over the market, but that's something that will take many years. The fundamental outlook is one source of information and the technical situation is another one [and the decline in the platinum to gold ratio confirms the above].

The rally that we saw in platinum in August confirmed the end of a multi-week rally in the precious metals sector. Yesterday's upswing in la platina may not seem significant enough to matter, but let's keep in mind that gold, silver, and mining stocks are currently after a small rally that took several days, not after a several-month-long one. Consequently, just a daily - but significant - show of strength from platinum may be enough to confirm that the top is in, or very close to being in.

Mining stocks' yesterday's performance suggests the former as they reversed in a quite profound manner.

Miners and the Rest of PMs

Gold moved $8.20 higher and closed the session relatively close to its previous closes. Mining stocks, on the other hand, moved just a little higher, a bit above the declining dashed resistance line and reversed, finishing almost at previous day's closing price. In other words, they mostly ignored gold's rally.

And silver? It barely did anything, but this was enough to make it break above the declining green line. This would have been a big deal if it wasn't for two facts:

1. The breakout is tiny and not confirmed.
2. It's silver, and silver is known for fake breakouts - and neither gold, nor mining stocks confirm the breakout.

Consequently, the short-term outlook remains bearish.

Let's stay with the mining stocks for a while, but let's also take a look at a different angle. The GDX ETF is likely the most popular ETF for the mining stocks, but there is also it's little brother, the GDXJ ETF, which (as the letter J suggests) focuses on junior mining companies. Unlike the senior miners, juniors focus on exploration and early development of mining projects. And they tend to have a different investor base, as the big institutional investors often can't (for legal reasons and due to generally low liquidity and market depth) invest in junior miners. This makes juniors behave a bit differently than senior miners.

In short, they have been recently behaving in a more bearish way than the seniors.

For instance, the GDXJ declined 14.69% from the recent top, while the GDX (proxy for miners in general) declined 13.40% from its own top. The GDXJ to GDX ratio has also been declining since August.

Juniors are declining with lower lows and lower highs, but the pace at which new highs decline is steeper. This creates a declining wedge pattern. The implications of this pattern become clear only once the price breaks below or above it. Given the situation in the USD index, miners' weakness relative to gold and other short-term signs, the odds are that we'll see a breakdown from this pattern, not a breakout. This, in turn, means that we can expect lower junior mining stock values. Much lower.

The wedge pattern points to a decline a bit below $30, right to the rising support line. That's based on the size of the wedge and the likely place where GDXJ will break below it. The height of the pattern is likely to be similar to the move that follows the breakdown.

We saw something similar last year. GDXJ broke below a triangle pattern and both patterns have the same way of providing price targets after breakdowns. The green line pointed to a decline to about $27 and that's where GDXJ declined initially. It declined some more after correcting, but the vast majority of the rally was in tune with the triangle-based pattern.

Now, we don't think that the $30 level or so is the ultimate bottom for this decline, but it seems quite likely that junior miners will take a breather or correct in a more visible way from this level. Based on the above, we are adjusting our targets for the mining stocks - they seem too conservative in light of the above likelihood.

Miners' Earnings' Implications

Before summarizing, we would like to reply to the question that we received from one of our subscribers. The question was about mining stocks' Q3 earnings. Gold price was generally high during this period, which was - of course - beneficial for gold mining companies. As the quarterly earnings reports are released, shouldn't this make miners stronger and perhaps allow them not to decline despite declining gold prices?

In short, no. In more detail, it's a bit complicated. The prices of mining stocks depend on the price of gold as they determine miners' revenue. The investors will know how much revenue and profit a given mining company achieved during the quarter and should then react accordingly. That's what often happens in case of other (non-mining) companies. The prices can move dramatically during the earnings season as investors get surprised by either positive or negative reports. The important part of the above sentence is that investors have to be surprised by the earnings report to react to it. Actually, that's the case with any news announcement.

Is it surprising that gold miners' earnings and profits depend on gold? Not at all.

Is it surprising how many ounces of gold mining companies' have to sell each quarter and how big the costs are? To some extent yes, but this is not likely to vary much among quarters.

Finally, is it surprising how much revenue and profits can a company make given that gold prices are fully known for the past quarter? It's not surprising.

Consequently, it's unlikely that investors will get big surprises as the earnings reports are released.

Besides, the value of each company is based not only on the current earnings, but - most importantly - based on the expected value of future profits. In case of mining companies, the value of their properties is also important. Both the value of properties, and the expected value of future profits depend greatly on the price of the metal the miners are mining.

Those that aim to predict gold miners' prices need to take both the bearish and the bullish predictions regarding gold price into account and average them out in a way. Whatever way they do it, they will anchor their predictions based on the currently available gold price. This means that as soon as the current gold price changes, the predicted values will also change, the perceived value of miners' properties and their future cash flows will also change. And this is likely to have a much greater impact than just a release of an accounting statement such as earnings report - simply because the latter is unlikely to deliver the surprising effect.

Of course, there will be cases, when the reports include things that the investors didn't expect, but these will be exceptions and not the rule. In general, the mining stocks follow gold quite closely and we don't see particularly high volatility during the earnings season. Yes, there are exceptions in case of individual miners, but overall - taking the entire mining stock sector into account - the volatility and miners' prices are not affected.

Due to the above, and due to the general characteristic of the market being forward looking, we don't think that good earnings reports will prevent gold miners' slide, should gold decline significantly.

Naturally, the other 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 stocks appear to be repeating their performance from 20 years ago, which means that a bottom in the entire precious metals sector is quite likely to form at much lower prices, in about a year

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.

Summary

Summing up, it seems that the corrective upswing in gold is over and that the yellow metal's big decline is already underway (and that it had started in August as we had written previously), resuming shortly. The similarity to how gold stocks rallied and then declined about 20 years ago provides us with a specific time target for the decline in the entire precious metals sector - it's likely to take place for about 1 year from now. That's not particularly close, but the road lower that gold, silver, and miners are likely to take is not short either. The profits from the short position in gold, silver and mining stocks are likely to be legendary, but the difficult part is not to miss the decline. Fortunately, the slide's pace that we saw 20 years ago provides suggestions regarding when it might be worth to bet on the corrective upswing with one's trading capital and when it's better to wait it out. Based on the analogy to the above-mentioned decline, the next medium-term bottom might take place in about 2 months, in mid-December. There are additional indications pointing to a short-term reversal (likely a bottom) in early November.

At this time, it's unclear whether the target prices that we feature below are going to be reached in early November, mid-December or sometime between those dates. It seems much more likely than not that we won't have to wait beyond mid-December for the targets to be reached. The above-mentioned reversal dates are useful guidelines, but they are not clear-cut rules. For instance, the bottom could take place at another date, and the reversal might actually mark the end of the corrective post-local-bottom upswing.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): F speculative short position (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 binding 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: $15.11; stop-loss: $19.06; initial target price for the DSLV ETN: $24.88; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $23.21; stop-loss: $30.11; initial target price for the DUST ETF: $14.69; 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: $30.32; stop-loss: $41.22
• JDST ETF: profit-take exit price: $35.88 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.

=====

Latest Free Trading Alerts:

Gold is the most effective commodity investment, yet it is under-invested, the WGC reports. What makes it special and deserving of our focus? And how to translate that focus into an appropriate allocation within one's portfolio?

Gold, the Shining Star Among Commodities

=====

Thank you.

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