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.

Yesterday’s session was very boring in gold and silver, just like it was supposed to be based on the analogy to 2013. But, what’s likely to follow is far from being boring, especially that the mining stocks just underperformed once again. Are you prepared?

In yesterday’s Alert, we wrote the following on gold:

Here’s what happened in 2013 right before the $200+ plunge.

Gold’s Key Analogy

And here’s what happened recently:

After the initial (mid-February 2013; mid-August 2018) bottom, the price of gold moved sharply higher and started a consolidation that took about 1.5 months to complete. There was an initial breakdown below the consolidation and there was a temporary low (early April 2013, late September 2018), which was then followed by a sharp rally that did not take gold to new highs. The top that formed at that time (first half of April 2013, early October 2018) was the final top before the decline and higher prices were not seen since that time.

The decline started with a daily slide that took gold about 1.5% lower (gold had declined by 1.63% on April 10th, 2013 and gold declined 1.41% yesterday). Then we had just one day of pause (April 11, 2013 and – perhaps – today) before all hell broke loose.

Just one day.

If the analogy remains intact, then we may have a fake pause today that makes most investors think that the decline is over. And then it might start – THE decline.

Of course, we don’t have to see a 1:1 repeat of what happened over 5 years ago, but since the similarity has been so extreme, it appears to be justified to expect the big declines in the near future.

Yesterday’s session was definitely a pause. Despite the back and forth movement, the price of the yellow metal ended the session only $2.90 higher. That’s next to nothing, so overall nothing changed. The situation is therefore remarkably similar to what we saw exactly before the big, $200+ slide in gold.

At this point you may be wondering, if silver and mining stocks also performed in a similar manner they did right before THE April 2013 decline.

They did.

Silver in 2013 and Silver in 2018

Shortly before the big decline silver rallied strongly, then it declined for a day and then we saw a daily pause – just like the one in gold.

We can say pretty much the same thing about the current situation. The shape of the rally in silver was different this time, but it’s not really surprising given the long-term breakout in the gold to silver ratio and the follow-up action. Once the rally started, it took the full form of a short-term silver rally with an exceptional – and fake – outperformance in its final part. We are now after the follow-up daily slide and after the daily pause. The situation is alike, and silver looks ready to plunge.

Gold Stocks in 2013 and Gold Stocks in 2018

In 2013, gold stocks underperformed gold right before the decline. And what’s happening right now?

Gold stocks underperformed gold yesterday. In yesterday’s Alert, we emphasized that the daily turnaround and a daily (Monday’s) show of strength is not yet reliable as something very similar took place a few times in the past right after the major tops. Today, we see that the bullish reversal was indeed a fake signal as gold miners declined and invalidated any bullish implications that Monday’s session might have had.

All in all, the situation in the precious metals market is like it was right before THE $200+ decline in gold. The implications are extremely bearish.

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.

Summary

Summing up, the outlook for the precious metals sector remains extremely bearish and based on the similarity to the 2013 decline, it seems that gold could truly plunge shortly – perhaps as early as this week. Theoretically, the decline should start today, but the history may not repeat in 100%, so it’s better to be prepared right away and to also be prepared to wait for additional few days for the decline’s start. All in all, it seems that the huge profits on our short positions will soon become enormous.

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: $1,226; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $53.67
• Silver: profit-take exit price: $12.72; stop-loss: $15.16; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $31.37
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $19.61; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $33.37

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: $29.43
• JDST ETF: initial target price: $154.97 stop-loss: $64.88

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.

Thank you.

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

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