Briefly: In our opinion, full (150% 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.

The precious metals sector moved higher in the first days of this year, but based on yesterday’s decline and the current price levels, 2018 is already a down year for silver and mining stocks. Gold is almost flat. This is a subtle clue that the rally may have already ran its course. The confirmation comes from what happened yesterday. Miners continued their decline, invalidating the previous breakout, while gold finally joined the rest of the sector and started its own decline as well. Is the rally indeed over?

Most likely – yes. Let’s start today’s analysis with a look at gold’s performance (chart courtesy of http://stockcharts.com).

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

On the above chart, we see that gold is almost at its short-term turning point. This has bearish implications as the preceding move has definitely been up. Both useful indicators: RSI and Stochastic, point to lower gold prices in the upcoming weeks.

Let’s take a look at the RSI’s performance in greater detail. It had been trading above 70 for over a week, even moving temporarily to about 80, but then it moved visibly down. There were only two similar cases in the recent past: the April 2017 top and the September 2017 top. If the following action is going to be similar to the April slide, we can expect gold to move below $1,250. If the following action is going to be similar to the slide following the September top, we can expect gold to move to about $1,210. Either way, the implications are bearish.

The increase in volume during yesterday’s downswing also has bearish implications.

Today’s comeback to $1,325 or so doesn’t invalidate the above. Both: April and June tops in 2017 were followed by a quick rally that didn’t change the overall trend. Consequently, today’s pre-market strength is not an anomaly – it can be viewed as something normal.

In yesterday’s alert, we wrote that silver had already erased the preceding 2018 gains and based on yesterday’s session we can add that we’re now witnessing the 2018 decline. Overall, silver is 13 cents lower so far this year. Not much, but it seems significant given that moving into a new year also meant moving into a new trend.

Of course, it’s not yet clear that a new trend has indeed emerged, but two daily declines after a series of daily upswings is something that shouldn’t be ignored.

Today’s comeback to $17.15 or so doesn’t invalidate the above – this year’s move lower is confirmed in terms of the closing prices, while today’s pre-market upswing doesn’t carry as much weight.

The Stochastic and RSI indicators continue to support lower silver prices in the coming days and weeks.

Please note that the volume increased during yesterday’s decline, further increasing the odds of a continuation of the decline.

The same goes for silver’s turning point – it was followed by only a relatively small decline, so it doesn’t seem that it’s already over.

What seems to be over, however, is the rally in the HUI Index. In the first alert of this year, we warned that the breakout in the HUI Index shouldn’t be trusted and we didn’t have to wait long for the market to agree with us.

The invalidations of breakouts are very bearish phenomena and we’ve just seen one. This, plus the sell signal from the RSI and plus the sell signal from Stochastic, make the gold stock picture bearish for the short term.

The similarity to the September top in terms of the RSI further adds to bearish outlook’s credibility and we can say the same about the increase in GDX’s volume.

The volume was visibly higher than the preceding ones, which confirms that the true direction in which the market wants to go is down. Interestingly, the volume readings that we saw this year were higher during daily downswings than during daily upswings. The only exception is the January 5 session, but that’s when the GDX declined by only 5 cents, so it was basically a flat session.

Before summarizing, we would like to give you a quick update on the situation in the Euro Index. It’s important for the precious metals investors and traders as the euro tends to move in the same direction as the PMs.

On January 3rd, we wrote the following about the above chart:

The double top in the Euro Index is also something that could trigger a reversal in the price of the yellow metal. After all, a yearly high is a very important resistance, especially if reaching it is combined with RSI’s move to the 70 level. Please note that the latter indicator was useful not only in case of the precious metals, but also in case of the Euro Index.

The yellow metal declined shortly thereafter and the question is if there are any more declines on the horizon. Most likely yes.

Quoting our Monday’s analysis:

(…) in terms of the weekly price performance we saw a specific kind of reversal. The Euro Index had opened the week higher than the previous close and higher than it closed the week. This specific situation is marked with black candlesticks. Interestingly, we saw only one similar situation in the past years. By “similar”, we mean the above kind of candlestick that takes place after a visible rally. The similar week started on September 26th, 2016. That was the week that was followed by substantial declines in the EUR/USD and in the precious metals sector. In fact, higher prices of silver and mining stocks were never seen (gold moved a bit higher in September 2017, but the move was only temporary). The implications for PMs are bearish for the following weeks.

The above remains up-to-date and the outlook remains bearish not only for the upcoming days, but also for the upcoming weeks.

Summing up, the medium-term outlook for the precious metals market remains bearish as confirmed by multiple factors, and based on the most recent short-term factors, it seems that the corrective upswing in gold, silver and mining stocks is already over. The mining stocks’ underperformance of gold, along with the fact that the GDX topped during the first session of the year, suggest that the decline is already underway.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full short positions (150% 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: $1,218; stop-loss: $1,343; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $40.28
• Silver: initial target price: $14.63; stop-loss: $17.62; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.78
• Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78

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 initial target prices:

• GDXJ ETF: initial target price: $27.82; stop-loss: $38.22
• JDST ETF: initial target price: $94.88 stop-loss: $37.78

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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Hand-picked precious-metals-related links:

PRECIOUS-Gold inches down on higher U.S. Treasury yields

Growth of European gold-backed ETFs outpaces U.S. funds in 2017 -WGC

BlackRock-Backed Gold Miner May Join Rush of Russian IPOs

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In other news:

Stock Rally Tested Amid Rise in Yields; Oil Jumps: Markets Wrap

Treasuries Traders Brace for the End of Three-Decade Bull Market

ECB Hawks Take the Lead on QE Debate as Doves Stay Quiet

Bill Gross Stokes Fear of Vicious Global Bear Market in Bonds

U.S. oil hits highest since 2014, worries grow of overheated market

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Thank you.

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

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