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. We will likely increase the size of this position shortly.

Mining stocks made a run before the end of the session yesterday. The low volume the move was made on is a strong sign on its own. You were updated in yesterday’s intraday Alert. Two more facts became apparent since then, and it’s the time to share the implications.

Yesterday’s Gold Miners’ Rally Dissected

The last two hours thereof were where the entire intraday rally took place, and the upswing accelerated in the last 30 minutes. It was practically parabolic. And there was no correction before the end of the day.

And what about the volume?

It was very low not only in the mining stocks but also in both: gold and silver. Their prices were almost unchanged. What does it mean?

Making Sense of Yesterday’s GDX Move

It means that the investors and traders are not eager to participate in the price moves at this time. There are few buyers and few sellers, and thus it’s relatively easy to push the price in a given direction. Yesterday’s move in mining stocks shows how easy it was for traders to push the price higher, despite the lack of really positive developments in gold. Inexperienced traders would say that it was bullish. Indeed – in most cases, when miners outperform gold, it’s a clear bullish sign. But on very low-volume days, it’s not particularly informative. It can be a local technical move that’s driven by a specific technical formation that results in a visible price move. Normally – in case of regular or high volume – the market forces make sure that miners move in tune with gold and if they don’t, it tells us something (either bullish or bearish). But in light of a very low volume, we don’t have this kind of information. Or more precisely, we do, but the strength of the mechanism is too weak to be trusted.

In other words, miners outperformed, but given the lack of any confirmation from volume, this supposedly bullish signal should not be trusted to trigger any significant move higher. It may, however, be followed by a continuation of the upswing in today’s trading, especially in its initial part.

What does the above imply given the proximity to the critical reversal levels? It shows that we might see a little more strength before the decline starts, which is actually what we would like to see as a bearish confirmation. This may not sound right, but given how many reversals align in almost the same time frame, it is actually very right. The price needs to move higher first for the reversal to be bearish. And it’s extremely likely to be bearish because of all the medium-term factors that continue to point to much lower PM prices in the following weeks and months. Plus, gold moved to the combination of overbought (critical resistance) levels on RSI that’s above 70, which – even in the absence of any other factors – strongly suggests a decline from here down the road. Plus, if the prices move a bit higher, we will be able to increase the size of our short positions at better price levels.

In yesterday’s intraday Gold & Silver Trading Alert, we wrote the following:

The reversal dates for gold are Feb 4- 6 and the date for silver is Feb 7th. We expected the turnaround in the USDX to trigger reversals in both precious metals as well, but we saw no confirmation thereof so far. The major tops are likely already in for this rally and that’s why we are keeping the short position intact with a significant (150% of the regular position size) exposure. However, without seeing a confirmation first, we don’t want to increase the exposure further. We are likely to see it shortly, perhaps tomorrow, but it’s not here yet.

Indeed, the reversal process is still in progress.

The most likely final day for the reversal in gold is today.

And the most likely reversal day for silver is tomorrow.

Meanwhile, the most likely reversal period for gold stocks has just ended. This suggests that while gold and silver may rally shortly, miners should underperform. Based on the shape of the final part of yesterday’s session, it doesn’t seem that this will be the case at the beginning of today’s session, but this could certainly be so in the following part of the day or eventually in terms of the daily closing prices.

USD Index Update

Before summarizing, let’s take a look at the USD Index.

In case of the US currency, we are already right after the triple-vertex-based reversal, which increases the odds that the bottom in the USD Index is already in. In fact, we have already made profits in the currency sector based on USD’s strength. The triple-vertex-based reversal (its implication of USD Index bottom being in) is one of the reasons why it’s not particularly surprising to see higher USDX values without much lower PM values. The former may already be after its reversal and while the latter are either at it or right before it.

In this case, it will likely be the difference in the dates of reversals that causes the delay in gold’s and silver’s reaction time. We previously wrote that at times, PMs’ reaction to USDX movement can be delayed – and at this time, we have a technical reason for that.

Summary

The strong resistance levels in gold and mining stocks were reached and they stopped the rally in terms of the daily closing prices, so the medium-term outlook didn’t change. The strongly bearish outlook points to reversals being already here with us. When we see the reversal confirmations, we will send you an actionable intraday follow-up.

The very important detail about the most recent price moves is that they took place in light of the very positive news from the Fed. The thing is that the dovish comments from the Fed (“the case for raising rates has weakened somewhat”) should have caused a much more spectacular rally. Despite the intraday rallies that we saw on Thursday and Wednesday, gold moved just $2 higher, while it could have easily (based on the news alone) rallied $30 - $80 by now.

One of the most bullish situations in any market is when everything that could go wrong, actually does… It already did. The best confirmation of such bullishness is when the market doesn’t decline despite the facts that should make it decline. We seem to have just witnessed the exact opposite of the above. Gold doesn’t really want to move higher from here, and its technical situation is perfect for a start of a profound decline to the final lows of the prolonged slide that started in 2011.

The upside remains limited, while the downside remains enormous. The turning points are being reached this week, so we may either see a very brief upswing in the metals before the huge decline starts, or the latter may start right away.

Consequently, the short position remains justified, but given the level of volatility that we just saw, it’s possible that we will still see some short-term strength. We plan to add to our short positions shortly – we’ll aim to do so at the final short-term upswing at THE reversal.

As always, we’ll 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 exit profit-take price levels:

• Gold: profit-take exit price: $1,062; stop-loss: $1,337; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $41.27
• Silver: profit-take exit price: $12.32; stop-loss: $16.44; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.18
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $23.27; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $16.27

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 1st 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: $34.62
• JDST ETF: initial target price: $154.97 stop-loss: $35.87

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
Editor-in-chief, Gold & Silver Fund Manager