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.

Gold miners were the first to break lower this week, but they were not alone for long. Silver joined in, by breaking below its rising support line and the breakdown was accompanied by a relatively significant volume. But not gold. The yellow metal moved to its rising support line and refused to decline below it even despite intraday move lower. Why is gold holding up so well and what does it tell us?

It simply tells us that things are developing quite normally. Mining stocks’ decline is nothing odd, because the miners tend to underperform around the tops in the precious metals sector. And they have been underperforming recently, so the fact that their breakdown was the first that we saw is quite natural.

Silver is also underperforming gold. To be precise, it still outperforms gold very close to the tops, but in general it magnifies gold’s declines and (unless it’s the final part of the upswing) it somewhat ignores gold’s upswings. Why? Because of the uptrend in the gold to silver ratio that we commented on many times in the previous weeks.

Gold to Silver Ratio on the Rise

The ratio moved to the lower border of the rising long-term trend channel and rallied back up. The fact that the trend is up is only one of the bullish factors. The other one is that silver is still close to the lower border of the trade channel, so the upside is huge, while the downside is very limited. Moreover, the ratio tends to spike up right before major bottoms, so we’re likely to see a huge rally in the following months.

This does not bode well for the white metal in the following weeks and months and the very recent weakness and breakdown in silver fits the above picture very well.

What about the metals’ charts? Let’s take a closer look at them. Today, we will use the ETFs, because the decline that we saw in the final part of yesterday’s session is not fully visible on the continuous futures charts that we usually use – and it’s definitely too important to ignore.

Precious Metals: Silver Takes the Lead

As mentioned earlier, there was no breakdown in gold. It doesn’t mean that nothing bearish took place on the gold chart at all. Conversely, the shape of yesterday’s session was very bearish. Despite the early gains, gold reversed and ended the session visibly lower – at a new monthly low. This reversal took place on a relatively significant volume, thus creating a shooting star reversal candlestick. The implications are bearish – gold is likely to break below its rising support line shortly.

Silver’s breakdown was accompanied by a significant volume, which confirms that it was indeed the direction in which silver wants to move next. Moreover, silver formed a shooting star candlestick as well, which further adds to the bearishness of yesterday’s session.

Miners’ Underperformance Continues

Mining stocks declined and even temporarily moved below the December 2018 high. Our comments on the mining stocks from yesterday’s Gold & Silver Trading Alert, remain up-to-date:

Gold miners’ decline was important as it was the lowest closing price of the month and at the same time, it was the first daily close that was visibly below all the rising short-term support lines. The breakdown presented on the above gold stock chart is now much clearer than it was before and the implications of the above chart more bearish.

USDX – Before the Breakout

The situation in the USD Index is quite specific, because it practically erased Tuesday’s decline and moved back to Monday’s closing prices. Since gold, silver, and mining stocks closed lower than on Monday, we see a direct confirmation from the market that the precious-metals-USD link has turned bearish. In yesterday’s Alert, we wrote the following:

The USD Index has indeed corrected after moving to the declining resistance line. The key thing about this decline is that it didn’t take gold todamoon. Gold and silver mostly ignored USD’s decline despite early gains and mining stocks even declined. If gold’s previous lack of decline despite USD’s strength was really a sign of strength, it would have rallied strongly yesterday. It didn’t and miners even declined, which shows that it was not the factor behind the recent gold-USD dynamics. This further increases the chance that gold’s decline was simply delayed.

The above continues very bearish implications for the following days and weeks, because it appears that the USDX is about to break above the declining red resistance line any day now.

Summary

Summing up, the recent rally and kind of resilience in the PMs complex may appear encouraging, but it doesn’t change the medium-term trend and outlook, which remain bearish. It seems that gold’s reaction to the strength in the USD Index is simply delayed.

The upside is quite limited, while the downside remains enormous. The reversals have been reached last week. As PMs, miners, and the USD Index move beyond their reversal dates, the chance for any meaningful upswing in the former before medium-term decline’s continuation, is declining with the time passing.

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: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
• 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: $23.27; 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: $34.62
• JDST ETF: initial target price: $154.97 stop-loss: $35.87

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