Soaring Gold? Not Yet and not Yen.

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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.

Once again not much happened on the precious metals market, but we have seen an important development in the USD Index and in one of its key components, the Japanese yen. Both can and are likely to impact the precious metals market in the following days and weeks, so let’s examine them closely, starting with the USDX.

US Dollar Index - Cash Settle

In yesterday’s Alert, we wrote the following about the situation in the USD Index:

(…) It’s reflecting what happened during the previous decline. The April – May rally is similar to the December 2017 – January 2018 decline (reflection thereof) and the November 2017 top appears analogous to the August 2018 top.

After we wrote about it for the first time a few weeks ago, the USD Index provided additional signs of this reflective pattern’s validity. The USD Index is now in a correction that takes it from the upper part (above the red line) of the trading channel to its lower part. In light of the above-mentioned pattern, this means that what we are seeing either the reflection of what happened in late August 2017 or in early August 2017. Or something in between – the analogy doesn’t have to be (and it wasn’t so far) extremely precise, only more or less so.

The important thing is that both August 2017 corrections started with intraday reversals. Since we have just seen one, it’s quite likely the case that the corrective decline in the USDX is over. The implications are bullish for the USD Index, which is, in turn, bearish for the precious metals sector.

What we saw yesterday was yet another confirmation of the above pattern. The USD Index rallied after the above-mentioned reversal and moved back to the middle of the rising channel marked with the red line. The technical road to the upper band of the channel is now open. The USDX may break above the channel (the current resistance is at 97 – 97.3) right away, or we may see an additional pause analogous to what we saw in the first half of August 2017. It could also be the case that the USDX moves sideways around the current levels and rallies then. The most important thing is that the reflective pattern remains in place and that it has very bullish implications for the following weeks. This means that the implications for the following weeks are very bearish for the precious metals sector.

The implications are bearish also because of what happened in the Japanese yen.

Japanese Yen Philadelphia Index

The yen corrected a bit after confirming the breakdown below the rising long-term support lines and it seems to have just completed this correction.

Japanese Yen Philadelphia Index

The small move above the declining resistance line was just invalidated and the implications of this invalidation are very bearish for the following days. This is especially the case since October has been on average the worst month for the Japanese yen. Out of the last 3 years, it declined every October in all of them.

The implications are bearish for the Japanese currency, and for the precious metals market, which tends to move in tune with it.

Gold - Continuous Contract

So far, the reaction has been dimmed, but let’s keep in mind that the implications of the currency movement can be delayed. It happened quite a few times in the past. The fact that gold, silver and mining stocks are closing lower despite the intraday attempts to rally appears to confirm the above bearish signals from the currency market.

There’s not much else to report today. We’re reviewing well over 100 charts along with their respective indicators on a daily basis (or more often, if the situation requires it) and if anything else becomes visible, we’ll let you know.

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 the 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.

Summary

Summing up, the breakout in gold is a bullish development for the short term, but the rally that was likely to be seen based on it, could have already taken place. This is especially the case given the shape of Monday’s session in mining stocks – a clear reversal, the intraday outperformance of silver, and in light of the recent intraday reversal in the USD Index that was followed by a rally. All in all, it seems that the huge profits on our short positions will soon become enormous, even if it takes a few more days before that happens.

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 exit profit-take price levels:

Gold: profit-take exit price: $1,062; stop-loss: $1,253; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $49.47
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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