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.

In yesterday’s session we saw a repeat of what happened very recently. The key difference is that the gold and silver prices that we previously saw as intraday highs, we now approximately see as the closing prices. And this difference doesn’t make the charts or their implications really distinct. The reason is that the dynamics in the change were just like the dynamics of the Wednesday’s session that we described yesterday. However, gold’s negative link with the general stock market appears to be broken as both rallied yesterday. Did the outlook become bullish because of that? Are we seeing a repeat of 2016 after all?

Before discussing these questions, let’s take a look at the implications of the repeat of the previous signals. Please note that in the above paragraph we wrote about gold and silver only – we didn’t discuss mining stocks. The miners didn’t manage to reach their previous intraday highs, let alone close anywhere near them. Let’s take a look at the details.
 

Gold vs. Silver vs. Mining Stocks

Here’s what precisely happened: the GLD ETF closed a bit higher, but there was no new intraday high, the SLV ETF closed at a new high and mining stocks didn’t even close above the December 18th high.

In other words, we saw yet another example of silver’s daily outperformance and miners’ daily underperformance. Except for being a bearish confirmation on its own, do you know what this signifies? That the current situation is very different from what we saw at the beginning of 2016. Back then, miners lead the way and they continued to outperform and soar for weeks. The reality now is completely different – we have miners that are clearly underperforming while silver outperformed gold on a very short-term basis. That’s simply a counter-trend, zig-zag-shaped correction – not the beginning of a major new uptrend.

Gold – Stocks Link

The general stock market moved higher once again yesterday. This time, however, the PMs didn’t decline based on this move and thus one might be wondering if the negative link between stocks and the precious metals sector is really in place.

In yesterday’s Alert, we wrote the following about this link:

Stocks reversed and soared almost 5% in just one day. That’s exactly the kind of action that we’ve been expecting to see based i.a. on the extreme oversold situation in the DIA-based RSI indicator. The RSI rallied back above 30, confirming that the bottom is in. In all cases from the last few years, such action was followed by higher prices. At times, there was also a second bottom after a few weeks, but in all cases higher prices followed initially. Moreover, the second bottom – if it followed at all – wasn’t visibly lower than the first bottom. Consequently, the first bottom, confirmed by the RSI was a great buying opportunity.

Since gold has been moving in the inverse direction to the one of the main stock indices, the above is very likely a great shorting opportunity for the precious metals sector.

The most important thing here is that the market has not only confirmed our analysis of the stock market, but that it confirmed the shape of the link between stocks and gold.

The chart that we supplemented with the above was relatively small so it might have not been clear what the relationship looked like at and right after the signals from the RSI. Let’s take a look at its bigger version (note: you can click on the charts to enlarge them).

The link is just as we described it earlier, but the level of precision that this signal includes is not as great as it might have appeared on a smaller chart. It’s best visible in case of the 2011 bottom in stocks and the corresponding top in gold, which turned out to be THE top.

In general, the bottom in stocks corresponded to the top in gold, but not in 100% precise manner. DIA bottomed on August 9th, 2011, the RSI based on it moved above 40 (like what we see today) on August 15th, 2011 and gold topped (the initial top) on August 23rd. The exact day count is not important because the size of the preceding rally in gold and the stage of the bull market in it were very different from what we have now, and thus it’s normal that it took longer for the rally to burn itself out in 2011 than it’s likely to take right now. The relative approach should be much more useful. If it took about a week after the stock bottom in 2011 for the RSI to move above 40 and then another week for gold to top, then if it took just one day between the bottom in the DIA and the RSI above 40, then perhaps it will take just another day for gold to reach its top. This would imply a topping action today.

The above prediction is not the point of this analysis, though. The point is that the exact bottom in stocks doesn’t have to correspond to the exact top in gold, and thus that just because gold didn’t drop immediately after stocks’ bottom does not invalidate the above negative link and its critical – and bearish – implications.

There’s also one additional important factor that needs to be considered – the USD Index.

USD’s Bottoming Pattern

The USDX didn’t rally in a decisive manner and thus many investors and traders view its performance as something bearish. In yesterday’s analysis, we commented on the above chart in the following way:

The USD Index seems to have formed a very short-term double bottom mostly below the 50-day moving average. That’s exactly what happened in April, right before the biggest upswing. The last few months of USD’s performance are similar in shape to the bottom that formed in the first half of this year and that ended in April.

There are even more similarities. Back in April we saw a new intraday high in gold, and we saw silver’s clear outperformance. We saw exactly the same thing yesterday. The history tends to repeat itself to a considerable degree and it’s likely to do so once again. In case of the USD Index, it means higher prices while in case of the precious metals, it heralds a substantial decline.

The above remains up-to-date. We are seeing another move lower in today’s pre-market trading, which appears similar to what we saw in mid-April. The final short-term bottom was slightly below the most recent bottom and this might be what we are seeing today. At the moment of writing these words today’s low is just 0.116 above the previous December low. The dollar’s bottom may already be in, and if not, it seems to be at hand.

While the gold – stock market link suggests that a big decline is just around the corner, the PM market may be looking at the USD for more immediate-term guidance. And it seems that the PMs’ decline is about to get a powerful USD-based kickstart.

Summary

Summing up, this prolonged correction within the big downtrend has been very tiring, but based on the long-term factors being patient was very well worth it, and based on the short-term signs it seems that the waiting is over or about to be over. The outlook for the precious metals market remains very bearish for the following weeks and months and short position remains justified from the risk to reward point of view, even if we see a few extra days of back and forth trading or even a small brief upswing. There is a very high probability of a huge downswing that makes the short position justified, not the outlook for the next few days. It's confirmed by multiple factors, i.a. gold’s reversal, silver’s extreme outperformance and miners’ underperformance, gold’s performance link with the general stock market, gold getting Cramerized, and the bullish outlook for the USD Index.

A setback has often cleared the way for greater prosperity. Many things have fallen only to rise to more exalted heights.

- Seneca, Letters from a Stoic

It's always hardest to hold onto a correct position right before it becomes greatly profitable. It was the same in June after silver’s rally. Those who were able to stay patient and focused on the outlook and strategy instead of being influenced by market’s emotionality profited greatly in the following weeks and months. This history is likely to repeat itself, and your patience is likely to be very well rewarded. Riding the likely move and counting profits is pleasurable and it may feel like “winning”. But it’s not – it’s just a consequence thereof. The real winning is staying in the justified position despite the emotional influence of the market and emotion-following analysts – that’s difficult and that’s what makes money over time. If you’re doing the difficult thing and are following what’s justified from the logical point of view while ignoring the prevailing emotions on the market, you’re already winning.

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: $1,303; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $45.87
• Silver: profit-take exit price: $12.32; stop-loss: $15.63; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $27.78
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $21.82; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $21.97

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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