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.

Precious metals moved strongly on Friday, and did so on significant volume. The reversals we have seen on Thursday got resolved, and there's little reason to doubt what's in store ahead. Let's dive into the many charts and perspectives and explore how well they support the upcoming move across the sector.

Last week's Alerts were relatively short, so we'll start this week with a bigger update on multiple gold charts. There are so many reasons due to which gold is likely to decline in the following months that we won't be able to cover all of them, but we will provide links with additional information. Let's start with last week's closing day.

PMs on Friday

Gold, silver, and mining stocks declined, and the way in which they did, was very informative. Gold closed both the day and the week below the $1,500 level and the volume increased as gold declined. In fact, Friday's volume was the highest one that we saw so far this month.

And gold stocks' strength that we saw on Thursday? Gone and invalidated. Friday's decline in the HUI Index erased almost the entire October upswing. Neither in silver nor in gold have we seen the same kind of weakness. The miners' underperformance is huge and it serves as a major bearish confirmation.

Of course, that's just the tip of the signal iceberg.

Let's consider what gold did in the previous cases when it topped while forming a few lower tops.

The Message of Gold's Lower Highs

The similar cases are characterized by the declining green lines and the thing that we would like you to focus on is the price of gold compared to the green lines and the 50-day moving average. The latter can be useful for many things, and in this case it's helpful in determining whether gold declined significantly enough for the move to be the start of a bigger downswing.

There was practically only one case when gold moved above one of its previous highs and it was in 2018. Back then, gold moved to a new high before starting the decline. But where did gold decline before this move? Only slightly below the 50-day moving average and the MA was far from the declining green resistance line.

In 2016 and earlier in 2019 when the declining resistance line moved to the 50-day moving average, and gold declined below the latter, there was no new high and gold's decline continued. In early 2019, it continued only for some time, but in 2016, it was followed by a major and sharp slide. The latter happened in October, by the way. All in all, it seems more likely than not that the counter-trend upswing is already over. And if it isn't, then it's very likely that gold won't rally to new highs before declining significantly.

This is particularly the case given gold's simultaneous decline with the USD Index. This caused a severe decline in the price of gold viewed from currencies other than the U.S. dollar. Let's take a look at gold from the European point of view. The biggest European political turmoil prize goes to UK and the Brexit scare, so let's start with gold priced in the British pound.

Gold in European Currencies

Gold just invalidated the breakout above the 2011 high. This may not seem like a big deal until one considers what happened when gold invalidated a less important breakdown over 3 years ago. Invalidated breakdown was shortly followed by a huge rally, even though the support that was broken back then was not based on THE bottom. Now, gold just invalidated a breakout above THE top. The implications are very bearish for the following months and weeks.

But maybe the British pound is just an exception and not the rule?

It isn't.

The gold price in terms of the euro is showing the same thing. The breakout was invalidated. The implications are immediate and very bearish.

And that's not a coincidence either.

Gold Priced in Greenbacks

Based on the regular, USD perspective, we had written that gold has likely topped in August as it moved up on huge volume. It was hard to believe, due to the same thing that caused the volume to be high in the first place - the extraordinary, emotional bullishness. The same thing accompanied the 2011 high and the 2018 high. Gold declined in September, but it's unlikely that the decline is over. Both above-mentioned highs were followed by $200+ declines in gold and it doesn't seem that this time is any different.

To be clear, it is different, but not in a way that would prevent gold from declining at least $200 from the recent high.

The move to which gold's top and the current decline are particularly similar are the 1996 top and the subsequent slide to the final lows.

Gold's Analogies

We wrote about it in mid-August, but it's worth bringing up the most interesting chart from that analysis:

The shape of the decline and the subsequent upswing is very similar to what we saw in previous years. However, that's not even the most important detail that makes the decline so likely. It's the USD Index and gold's link to it.

The 2014-2015 rally caused the USD Index to break above the declining very-long-term resistance line, which was verified as support three times. This is a textbook example of a breakout and we can't stress enough how important it is.

The most notable verification was the final one that we saw in 2018. Since the 2018 bottom, the USD Index is moving higher and the consolidation that it's been in for about a year now is just a pause after the very initial part of the likely massive rally that's coming.

If even the Fed and the U.S. President can't make the USD Index decline for long, just imagine how powerful the bulls really are here. The rally is likely to be huge and the short-term (here: several-month long) consolidation may already be over.

There are two cases on the above chart when the USD Index was just starting its massive rallies: in the early 1980s and in 1995. What happened in gold at that time?

These were the starting points of gold's most important declines of the past decades. The second example is much more in tune with the current situation as that's when gold was after years of prolonged consolidation. The early 1980s better compare to what happened after the 2011 top.

Please note that just as what we see right now, gold initially showed some strength - in February 1996 - by rallying a bit above the previous highs. The USD Index bottomed in April 1995, so there was almost a yearly delay in gold's reaction. But in the end, the USD - gold relationship worked as expected anyway.

The USD's most recent long-term bottom formed in February 2018 and gold [topped in August]. This time, it's a bit more than a year of delay, but it's unreasonable to expect just one situation to be repeated to the letter given different economic and geopolitical environments. The situations are not likely to be identical, but they are likely to be similar - and they are.

What happened after the February 1995 top? Gold declined and kept on declining until reaching the final bottom. Only after this bottom was reached, a new powerful bull market started.

• But gold just rallied so significantly in the last several months!

... And that's most likely what people were saying in early 1995, while they were buying at the top.

It's easy to get carried away by momentum and emotions that it generates. We're here for you to analyze the market as objectively and with as much cold logic as possible. And the key points in gold's supposedly bullish story simply don't add up.

Gold topped on extreme volume in August, just as it did in early 1996. The invalidation of breakouts above the 2011 high in case of gold priced in the euro and the British pound confirm how bearish the outlook really is for the following months. Gold is likely starting to decline hundreds of dollars. If it rallies a few or even $20 dollars right now, it doesn't matter much given the above. 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. That's why we were so quick to get back to the short position in Friday. It was much better to do so than to risk missing out of this epic move.

Before summarizing, let's take a quick look at what happened in silver and mining stocks.

Another Look at Silver and Miners

We previously commented on the above silver chart in the following way:

Every two years or so, silver tends to form a price extreme. Sometimes it's a major top, and sometimes it's a major bottom, but this indication is almost always correct. Please take a look at the chart above for details. The next turning point is right here, and silver is after a huge-volume rally. This is a classic combination that would indicate a major top. The most similar situation that we saw in the recent past with regard to both cyclicality and volume, was the 2008 top. Silver was after a sharp rally, and we saw a spike in silver's volume. The implications are strongly bearish for the following months.

The long-term turning point worked once again - silver reversed and the trend is now down.

Also, we previously wrote about miners' underperformance relative to gold. Let's see how this relationship changed over time.

If you thought that miners' weakness is just a recent phenomenon and that they are actually showing strength over time, it would have not been correct. This year's strength is actually a local correction within a bigger decline. That's also one of the major proofs that what we saw this year was not the start of a new powerful bull market in the precious metals sector, but rather a correction within a decline. Just look how strong gold miners were in 2001 and 2002 - that's how strong the gold miners should be at the start of a massive bull market. That's just not what has happened lately. Gold stocks were up, and they were up more than gold, but the true strength was lacking. What we saw was much more in tune with what happened in the second half of 2012 than in 2001. One should be prepared for a major decline here, not for a major rally. The latter will come eventually, but not before lower price levels are hit.

Naturally, the 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'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.

Copper moved above the neck level of its head-and-shoulders pattern that's based on the intraday lows, but it didn't invalidate the analogous level based on the weekly closing prices, so we don't think it's justified to say that this bearish formation was invalidated at this time.

Summary

Summing up, it seems that the corrective upswing in gold is over or almost over and that the big decline in gold is already underway (and that it had started in August as we had written previously). The invalidation of breakouts above the 2011 high in case of gold priced in the euro and the British pound confirm how bearish the outlook really is for the following months. Gold is likely starting to decline hundreds of dollars. If it rallies a few or even $20 dollars right now, it doesn't matter much given the above. 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. That's why we were so quick to get back to the short position in Friday. It was much better to do so than to risk missing out of this epic move.

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

• Gold: profit-take exit price: $1,391; 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: $16.41; stop-loss: $19.06; initial target price for the DSLV ETN: $20.96; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $24.62; stop-loss: $30.11; initial target price for the DUST ETF: $10.32; 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: $33.82; stop-loss: $41.22
• JDST ETF: profit-take exit price: $21.58 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.

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Latest Free Trading Alerts:

The markets basically ignored the Fed talk last week, as U.S. - China trade war developments stole investors' attention away from the scheduled news releases. But it was worth paying attention to our last week's News Calendar that highlighted U.K.'s economic data preceding end of week GBP rally. This week, we will have some potentially moving news releases too. So let's take a look at those events.

Important Economic News Calendar: October 14 - October 18, 2019

The USD Index is setting itself up for a sizable move that we won't watch disinterested. The charts have sent their message, upon which we have acted. Let's assess the outlook for the days ahead as it stands right now.

The USD Index: Having Reached Important Supports, It's Primed for Upswing Now

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Thank you.

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