Silver Shares? Nobody Cares.

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Briefly: in our opinion, full (200% 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.

Almost nothing happened on the precious metals market yesterday, or at least that may seem to be the case as the first sight. And that’s true if one doesn’t count the spike in GLD’s volume, but there was something else that actually should have caught one’s attention and it probably wasn’t the case for many gold traders. Silver stocks just broke to new monthly low. What does this tell us?

It’s a subtle clue that the next big move in the precious metals sector is going to be downside. Think about it – silver stocks had an excellent reason to rally – silver moved visibly higher in the past several days. Yet, instead of showing similar strength, the silver miners moved back and forth moving to new lows. That’s a clear sign of weakness. Let’s take a closer look at both markets.

Silver Stocks’ Underperformance

The recent move higher is clearly visible in case of silver and it’s clearly absent in case of silver stocks. Since the mining stocks often lead metals and are showing relative strength or weakness as a sign of what’s to come, one should currently be expecting a turnaround in silver rather than in the miners.

Of course, if the financial system was destroyed, WW3 broke out etc., then gold and silver would soar, but nothing like that is likely to happen shortly and the above technical rule for the precious metals is likely to apply.

As we mentioned earlier, the other noteworthy development was the spike in the GLD ETF volume that accompanied yesterday’s decline.

GLD’s Price-Volume Link

The above is a bearish development, especially that it was preceded by a move higher on low volume. The volume generally rises when the market is moving in tune with its true direction and declines when it moves in the opposite way. It’s currently clear that the price-volume link suggests that gold is in a downtrend and the last several days of pause is just that – it’s not a prolonged bottoming process.

Speaking of volume, let’s keep in mind that yesterday’s volume during the daily upswing was low enough to be a bearish sign on its own.

GLD SPDR Gold Shares

In yesterday’s Gold & Silver Trading Alert, we emphasized that GLD had rallied on what was the lowest daily volume in about 3 months. In the previous year there were only 3 similar cases and they were all followed by the same (or almost the same) kind of action. Declines.

In both: late February 2018 and mid-March 2018, gold moved lower immediately after the low-volume upswing and the remaining, October 2017 case was when GLD moved lower with a one-day delay. Overall, the implications were bearish yesterday and they continue to be bearish today as we only saw a small decline so far.

We can say the same thing about the implications of the volume-based signal from the mining stocks. The signal was based on the past two weeks, but its implications haven’t played out yet.

GDX Weekly Volume’s Implications

In other words, what we wrote yesterday, remains up-to-date:

The volume in the GDX was very low in the previous two weeks while the price moved insignificantly higher. There were only two similar cases in the recent past. And both were followed by declines in the following weeks. The November 2017 analogy resulted in about $2 decline, and the August 2014 analogy was followed by about a $10 downswing.

$10 decline from the current price levels would mean GDX at the 2016 low. This may seem unrealistic, but… Well, that’s what we already saw after similarly low volume. To be clear, the analogy is not perfect, because percentagewise the move to the 2016 low would be bigger, but still, any confirmed breakdown below the late2016 low is likely to result in a steep move down, as there’s no technical support all the way to the 2016 low. Just as people were buying like crazy in the early 2016, they are likely to sell like crazy later this year.

Before moving to the analysis of the currency sector, we’d like to get back to something that we discussed several weeks ago – the link between gold and stock market volatility.

Gold vs. VIX

Please feel free to use the above link to read the entire commentary, but in short, quite a few commentators said that gold was about to soar because of the increased volatility in stocks. This seemed believable at the first sight, as gold is seen as a safe-haven asset and thus people could be buying it when the stock market’s movement becomes chaotic, scary and/or unpredictable. Yet, after looking at similar cases in the past and investigating the correlation between gold and VIX (stock market volatility index) it appeared that there were absolutely no reasons to think that the increase in stock market volatility would trigger a rally in gold. Moreover, there were good reasons to think that it would be followed by lower gold prices. We had been short at that time and we closed these short positions at a profit later on.

We didn’t feature the above to boast how correct we were and how wrong many other gold analysts (mostly gold promoters, not analysts, though) were, but in order to show you how important it is to stick to cold logic and pre-determined methodology when things get hot. This applies to any market, but it’s going to be particularly important for us – gold and silver investors and traders, as we’re approaching the critical time of the year. When gold drops many tens of dollars in a short period, it will not mean that it is worthless or that it will then be time to enter short positions. The time for it is now – when things are boring before the move. When precious metals investors get scared and throw in the towel, it will be time to consider taking profits from the short positions and to open long ones. But, it will be impossible to do, if one simply follows “hot and emotional news” instead of analyzing the market. We’ll do the latter for you and report to you accordingly.

Forex Update

As far as the situation in the currency markets is concerned, we can say that it’s developing in tune with the technical patterns and with our expectations. However, at the same time, the risk that would be associated with having an open forex position right before monetary authorities’ meetings, seems too big.

US Dollar Index - Cash Settle

We previously wrote that the correction in the USD Index was most likely ending and that we could see some sideways trading this week before the rally really continues. The above was based on the analogy to the 2014 rally and on this week’s hot nature due to incoming news from monetary authorities. Once all is said and one and the dust settles, the markets are likely to resume their trends. This means another move higher in case of the USD Index.

Japanese Yen Philadelphia Index

Euro Philadelphia Index

The situations in both: the Japanese yen, and the euro continue to be similar to the previous pre-slide situations. In case of the former, the similar patterns are marked with red areas and in case of the latter, we see that the currency pair is still in tune with what happened in October 2014 right before one of the biggest declines of the past decade.

Just as we indicated previously, due to these analogies, the outlook for the USD Index is very bullish for the following weeks and possibly months, but in the light of the possible news-driven turmoil it seems best to stay on the sidelines for a few more days. We’ll likely position ourselves to profit from the increase in the value of the US currency, shortly.

Summary

Summing up, the increase in the GLD ETF’s volume during yesterday’s decline along with a new low in silver stocks confirm the bearish outlook for the precious metals market. Since the outlook had already been bearish, nothing really changed based on yesterday’s session.

While the decline may not start immediately due to the tension connected with this week’s monetary authorities’ meetings, the outlook remains bearish and once the dust settles, PMs are likely to decline. It doesn’t seem that we’ll have to wait much longer though as there are only 3 sessions left until the end of the week, including today’s one.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (200% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

Gold: initial target price: $1,251; stop-loss: $1,382; initial target price for the DGLD ETN: $48.88; stop-loss for the DGLD ETN $37.48
Silver: initial target price: $15.73; stop-loss: $18.06; initial target price for the DSLV ETN: $27.58; stop-loss for the DSLV ETN $19.17
Mining stocks (price levels for the GDX ETF): initial target price: $21.03; stop-loss: $23.54; initial target price for the DUST ETF: $28.88; stop-loss for the DUST ETF $21.16

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 – but if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:

GDXJ ETF: initial target price: $30.62; stop-loss: $36.14
JDST ETF: initial target price: $59.68 stop-loss: $40.86

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

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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Hand-picked precious-metals-related links:

PRECIOUS-Gold steady as markets cautious ahead of Fed statement

Gold imports may fall 18% in 2018 as price rise cuts demand

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In other news:

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