Briefly: in our opinion, full (300% of the regular position size) speculative short positions in mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

In yesterday's analysis, we told you that what we saw earlier this week could have been the final pre-plunge top in case of the mining stocks. The market appears to have confirmed our analysis. Miners declined along with the rest of the precious metals sector. Gold - while not plunging as much as it did earlier this month - still declined quite visibly.

We also wrote that it was relatively unclear if gold will move to new highs after all given all the bearish indications from the miners. Right now, based on what we saw yesterday, the odds no longer favor a move to new highs. And the key reasons don't come from the precious metals market, but from the related markets: the USD Index, and the general stock market.

Let's start with the former.

Ladies and gentlemen... The bottom in the USD Index appears to be finally in. The U.S. currency invalidated the breakdown below its previous lows and right now its testing the declining resistance line. The invalidation of the breakdown itself is a huge deal - we haven't seen anything like that in months. It's likely the short-term game-changer, especially that the USD Index at the same time invalidated the breakdown below the long-term rising support line visible on the below chart.

It seems that we will see a clear weekly reversal candlestick based on tomorrow's closing prices, which would then bode very well for the following week(s). And it would be very bearish for gold.

Then again, miners could bottom before gold does, just like they have done in March.

On numerous occasions in the previous days, we wrote that the thing that triggers the turnaround in the USD Index and thus PMs, might be the invalidation of a breakout in the general stock market. And we have seen exactly that. The S&P 500 closed below the highest closing price of February, which means that the breakout was invalidated in both: intraday and closing price terms. This is a strongly bearish signal for the stock market in my opinion, and I expect to see more weakness in the following days.

More weakness in the general stock market is likely to translate into accelerating decline in the mining stocks which would likely get bearish push from both: gold and stocks. That's what happened in March, and you know very well how far miners plunged.

The sizable daily rally in the USD Index is particularly notable, because that's what started gold's final decline in March. And it happened shortly after the miners had topped.

In other words, our yesterday's comments remain up-to-date:

The vertical, black line shows the day right after the top (we didn't want the line to cover the daily performance at the top), and it clearly shows that while gold was one day after the top, miners were already 2 days after the top.

The top in the mining stocks (in terms of the daily closing prices) took place on March 5, which we marked with red, vertical line.

On March 5, gold was still below its initial February high and the USD Index was just starting to move lower after briefly pausing. In other words, miners decline started earlier than what we saw in gold or the USD Index.

One could say that the reason for it is was the situation in the general stock market. Indeed, the latter was already declining in early March. However, the fact that miners declined yesterday despite a daily rally in stocks makes the current case even more bearish for the miners. Besides, the invalidation of the intraday breakout in stocks is a sign that miners are likely to get a bearish push from other stocks.

What does that all lead to? To the likelihood that we saw the final top in the mining stocks, which might be the right shoulder of a head-and-shoulders top pattern (the red line on the HUI chart would be the neck thereof). At the same time, it could be the case that gold will make another attempt to rally above the previous 2020 highs. They key word here is "could" - it's not something that is carved in stone. In fact, back in March, silver was weaker, and gold was stronger. We're seeing the opposite right now - overall, the situation is already similar to what happened when the PMs were topping in March. Therefore, if gold moves slightly the previous highs - just like it did in 2011 - it could trigger the sell-off, but at the same time we would like to stress that this kind of move is not required for the sell-off to start. Especially in case of the mining stocks.

Naturally, the sell-off would be a temporary event and PMs and miners would be likely to soar in the following months.

If the final pre-plunge top is already behind us, and gold declines similarly to how it had declined in March, then we could see the bottom as early as next week.

Also, moving back to the previous chart, please note that while miners declined quite visibly in the last two trading days, silver didn't. This is in perfect tune with what happened in March - silver's initial decline was relatively insignificant, and then silver caught up with vengeance, while miners' slide slowed down. We expect this to take place once again, and we plan to switch from our short positions in miners to short positions in silver - perhaps as early as this or next week.

The situation in mining stocks is developing practically exactly as we had outlined it previously, so it seems that quoting our thoughts from the preceding analyses is appropriate:

Since miners already reached the $43 level on Monday, yesterday we wrote that we wouldn't be surprised to see GDX at $44 or even $45 at the top.

In short, miners - and the general stock market - did exactly what we have outlined above.

The GDX ETF moved to $44.09 yesterday, but then declined on an intraday basis, and ended the session lower, despite gold's daily gain.

This means that at the same time, we saw:

• Miners' extreme weakness relative to gold and general stock market, which serves as the perfect "sign of weakness" that we previously wrote about
• Small breakout to new highs in the S&P 500 Index (and in the most popular ETF on it: SPY) that was then invalidated in case of the intraday terms
• Miners' had formed a top in terms of the daily closing prices 4 days after the recent bottom, and they formed a top in intraday terms 5 days after the recent bottom - exactly the same thing that we saw in March, right before THE slide
• The shape of yesterday's candlestick in the mining stocks is very similar to what we saw on March 6 - right before THE slide.

The above is a profoundly bearish combination for the next few days - weeks.

Overview of the Upcoming Decline

As far as the current overview of the upcoming decline is concerned, I think that it has already begun, at least in case of the mining stocks. It's still relatively unclear if gold makes another attempt to move to new highs before plunging below $1,800, but it now appears more likely that it won't.

During the final part of the slide, we expect silver to decline more than miners. That would be in tune with how the markets initially reacted to the Covid-19 threat.

The impact of all the new rounds of money printing in the U.S. and Europe on the precious metals prices is very positive in the long run, but it doesn't make the short-term decline unlikely. In the very near term, markets can and do get ahead of themselves and then need to decline - sometimes very profoundly - before continuing their upward march.

Summary

Summing up, it seems that after reversing $4 above our upside target, gold has finally topped. The opposite appears likely in case of the USD Index, which just invalidated its breakdown below the previous lows. This, plus the invalidation of the breakout in the S&P 500 Index creates a very bearish environment for the precious metals market, especially for the mining stocks.

Naturally, everyone's trading is their responsibility, but in our opinion, if there ever was a time to either enter a short position in the miners or to increase its size if it wasn't already sizable, it's now. We made money on the March decline and on the March rebound, and it seems that another massive slide is about to start. When everyone is on one side of the boat, it's a good idea to be on the other side, and the Gold Miners Bullish Percent Index literally indicates that this is the case with mining stocks.

After the sell-off (that takes gold to about $1,700 or lower), we expect the precious metals to rally significantly. The final decline might take as little as 1-6 weeks, so it's important to stay alert to any changes.

Most importantly - stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely make much more in the following weeks and months), but you have to be healthy to really enjoy the results.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (300% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:

Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $32.02; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $28.73; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $42.72; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $21.22; stop-loss for the JDST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway. In our view, silver has greater potential than gold does):

Silver futures downside profit-take exit price: unclear at this time - initially, it might be a good idea to exit, when gold moves to $1,703.

Gold futures downside profit-take exit price: $1,703

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

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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
Editor-in-chief, Gold & Silver Fund Manager