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.

The US elections are over and since the markets were not surprised by their outcome, there was no significant reaction. It seems that the markets can now return to their previous trends. But… the USD Index is down significantly today, while gold and silver are rallying. Does it mean that the trend in the precious metals is currently up?

Not necessarily. The US-elections-driven volatility could extend beyond the very initial reaction and it’s not surprising to see the move higher in the PMs and miners today and along with a move lower in the USDX. What is interesting, however, is the subtle clue that the relative changes provide.

Gold and silver are practically where they were 24 hours ago, while the USD Index is considerably lower.

USD Index and Its Inverse H&S Pattern

Being about 0.50 lower today (at the moment of writing these words), the USD Index is already visibly below the previous November low. This is a clear sign of weakness of the precious metals sector. The PMs should be rallying, but they are not.

But doesn’t this move invalidate the recent inverse head-and-shoulders pattern?

In a way it does, and in a different – more important – way it doesn’t. The line that we’ve been featuring on the above chart and the one that’s being broken today (the rising red line) is based on the intraday highs. As you may recall, the closing prices are more important and thus the formations based on the closing prices of the USD Index can be viewed as more important as well. The neckline of the inverse head-and-shoulders pattern that’s based on the closing prices is currently at about 95.25. Today’s pre-market low (so far) is 95.68, so the USD Index didn’t invalidate the breakout above the inverse H&S pattern in terms of the closing prices. Consequently, even though we may see some short-term weakness in the USD Index (by the way, we cashed in our profits from USD-long forex positions yesterday, before today’s decline), the main trend remains up for the following weeks and months.

Moreover, please note that the reflective nature of the 2017 decline and 2018 upswing remains in place and back in 2017 the USDX moved a bit below the dashed, red line, relatively close to the dashed blue line. Even if the USD Index declines even to the neckline of the short-term inverse head-and-shoulders pattern (95.25), the above analogy will remain intact, and it will continue to favor higher prices in the following weeks and months. The outlook, therefore, remains bullish for the USDX and bearish for the precious metals market.

Since both: gold and silver are practically where they were when we published yesterday’s Alert, all the points that we made remain up-to-date, especially the one about the possible short-term volatility:

The implication is that this build-up in transactions that were not made but are planned may cause bigger volume today and in the rest of the week along with increased volatility. We saw something similar in late February 2018, when gold declined on very low volume. What followed was a quite sharp upswing that was invalidated before the end of the session. There are also bearish examples. For instance, in early August 2018, low volume readings were followed by a big decline.

There were also cases, when low volume was not followed by anything special, so the quality of the signal is not particularly high, but it’s important to keep the above in mind nonetheless. Why? So that any temporary price upswing doesn’t come as a surprise. Just like what we saw in February 2018, or like what we saw two years ago after Trump’s victory, the upswing would likely be very temporary. To be clear, even if we see a temporary upswing, we don’t expect it to be even close to the size of the upswing that followed Trump’s victory. The latter was a huge surprise to the markets and implications appeared very significant. We are unlikely to get a big surprise this time and the implications will not be as significant the previous ones.

The more important implication of the US elections is that they will be over soon. Sounds trivial, but it’s important that the tensions will subside. It’s likely one of the main factors that’s been preventing the precious metals market from declining.

In yesterday’s analysis we replied to the questions that we received from our subscribers about the inverse head-and-shoulders pattern, and in today’s analysis, we’ll reply to two more.

One of them was about the volume that accompanied the mid-October rally in gold. The question was if the size of the volume confirmed the bullish implications of that session and if we shouldn’t view the outlook as bullish because of that.

The Comment-based Analogy and Its Implications for USDX and Gold

Our reply is that, if possible, it’s always useful to look at the context of what happened and to take it into account while discussing implications. It’s not always the case that we see what was the likely reason behind a given rally, but it certainly was the case in mid-October. That was right after Trump publicly criticized the Fed for raising interest rates.

On October 15th, we wrote the following:

Besides, if yesterday’s action was indeed caused by Trump’s comments (which may not really represent his true opinion on the matter), we have a guideline from the past on how temporary the effect might be. In January 2018 Treasury Secretary Steven Mnuchin said that the U.S. would welcome a weaker dollar, which was something that anyone in his position should have never said, so that surprised the market. The USD Index declined and gold soared based on these comments. The next day, January 25th, 2018, gold formed its 2018 top in terms of the closing prices. In other words, in terms of the closing prices, higher gold prices were never seen since that time. The volume in gold was huge at that time. In fact, that was the only time from the recent past when gold’s volume was comparable to what we saw yesterday.

There are even more similarities. Gold stocks rallied above the previous highs just like they did yesterday. It all looked very bullish at the first sight and it generated a lot of feedback and questions. We received numerous questions recently as well, so the situation is similar also from this point of view.

The emotions were high in late January 2018 and they are high now. But, it’s our job to stick to the facts and logic and analyze the emotionality instead of being influenced by it. In the January 25th, 2018 regular Gold & Silver Trading Alert we wrote about 50% of the regular short position in gold, silver, and mining stocks, and in the intraday follow-up we increased this position to 150%. It was indeed an excellent time to enter, not exit a short position. And the same appears to be the case today. Surely, we may have temporarily (in the next several hours or so) higher prices, but the odds are that this is a shorting opportunity in disguise.

The January 2018 comments by Steven Mnuchin were followed by USDX’s bottom and the same was the case in October – the USD Index started another rally shortly after Trump’s “crazy comments”. The history repeated itself as we had indicated, and we saw a confirmation of the analogy between these two cases.

What about the precious metals market? Their performance is also somewhat similar to what happened in January and the following months. The key fact is that the rally was mostly over after the comments-based upswing. To be 100% clear: gold, silver and mining stocks did move above the closing price of the huge-volume session, but this move was not significant (and the same thing happened in January).

What happened next? In the first half of this year, we saw back and forth movement in gold and a more decisive (but nothing epic) decline in silver and mining stocks. What happened recently? Gold just closed more or less where it had closed on October 11th – the day of the huge-volume rally. At the same time silver and mining stocks closed visibly below their respective October 11th closing prices. The history is being repeated.

Consequently, huge volume that accompanied gold’s (and GLD’s) upswing in mid-October is not a bullish factor. It’s a confirmation of the analogy to the late-January 2018 situation where the price moves were triggered by comments from the US officials that shocked the markets.

This analogy has bearish implications for the following weeks. In the short-term, however, it means that the upside is very limited. This analogy doesn’t say anything about the starting date of the next big downswing, but based on other factors – for instance based on the situation in the USD Index and on the strength of gold’s and silver’s reaction to the weakness of the former – it seems that we will not have to wait much longer.

CoT Report and Its Declining Usefulness

There was also a question about the current position in the CoT report, but we have already discussed the usefulness of the CoT numbers. We commented on the CoT usefulness (and limitations) in late July, 2018. As many analysts reported, the numbers were very favorable and they were about to make gold shine again. Instead, gold declined in the following weeks. Of course, silver was supposed to soar to the moon based on its own CoT situation. It was over $15.50 back then. GDX was above $21.50. Higher silver and mining stock prices were not seen since that time. To be precise, there was a small upswing in silver on the day that followed our July 25th, 2018 analysis, but in terms of the closing prices, the July 25th 2018 session was not exceeded.

In short, the CoT report was a very useful tool about 15 years ago and its usefulness declined since that time. Moreover, it’s highly unlikely to indicate a major breakout, major breakdown or provide insights regarding the final bottoming targets and one of the reasons for it is because the commercials’ and non-commercials’ positions don’t have one set minimum or maximum at which the price reverses.

Some may say that it’s different with gold hedgers positions (in fact, the final question that we received was about these positions). But it’s not.

Please take a look at the chart below.

The above chart covers about 2 years. In the upper part of the chart you have the price of gold, and in the lower part you see the gold hedgers position. As you can see tops in the blue line correspond to bottoms in gold. Moreover, the blue line is just after a move to the previous highs and its resistance line (marked with green). Gold is also close to the previous bottoms. So, the bottom is in, right?

Let’s zoom out.

The previous chart showed you what appeared likely right before the April 2013 slide. The price of gold plunged, and the hedgers positions simply increased, well above the previous highs and above the green resistance line.

What’s the current situation? The blue line is just after a move to the previous highs and its resistance line (marked with green). Gold is also close to the previous bottoms. How can the implications be bullish, if the very similar situation from the past preceded the biggest slide of the decade?

Some may say that the position can’t increase further and thus gold can’t decline further.

But why should this be the case?

The volume level in gold futures (and in other futures contracts in general) increased substantially in the recent years. Consequently, the numbers in the CoT reports can be substantial and their swings can also be bigger than in the previous years. This further validates the point that we made earlier when discussing the declining usefulness of the CoT reports. If you look at the volume levels before 2006, they are quite stable. But, since 2007, their levels increased substantially, and we saw another big increase in 2017.

The change in the data regime is very important and every analyst should make sure that the tools that they are using remain useful in light of the change. The usefulness of the CoT-based signals declines and it’s very far from being the Holy Grail of signals that it’s portrayed to be.

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.
• The Upcoming Silver Surprise - two sets of price targets for gold, silver and mining stocks: the initial and the final one.
• Precious Metals Sector: It’s 2013 All Over Again - comparison between 2013 and 2018 throughout the precious metals sector, the general stock market and the USD Index. Multiple similarities point to the repeat of a 2013-style volatile decline in the PMs.
• Changing One's Mind - Why, When, and How – discussing the way of analyzing the market that helps to stay focused on growing one’s capital while not being influenced by the loss aversion bias. This essay might be particularly useful in light of the recent upswing in the PMs.
• Inverse H&S Patterns and Something Even More Extreme - gold targets for the current decline in terms of price and time.

Summary

Summing up, the outlook remains strongly bearish for the precious metals sector. The current back and forth trading is tiring, and/or boring depending on one’s perspective (tiring from the short-term perspective, and boring from the long-term one), but it’s very likely that the patience here will be well rewarded. Gold’s very weak reaction to today’s pre-market decline in the USD suggests that we will likely not have to wait much longer, especially that the US-elections-driven tensions are likely to subside shortly.

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: $1,257; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.27
• Silver: profit-take exit price: $12.72; stop-loss: $15.76; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $27.37
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $27.67

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: $31.23
• JDST ETF: initial target price: $154.97 stop-loss: $51.78

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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Thank you.

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

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