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.

People’s opinions on trading and investment vary. Some say that it’s very easy, as all you need to do is to buy and sell. Some say that it’s very difficult because so many things determine if one should be buying or selling. But the thing that both approaches miss and what makes investments and trading really difficult is not buying or selling – it’s the waiting.

The past few months were difficult, not because price moved significantly. They were difficult because it didn’t. It was easy to get bored, to get thrown out of very short-term options (if one chose to use such a risky instrument), to get frustrated with lack of new profits or even with some losses. But that’s the entire point of corrections, they are there in order to get some people out of the market – at the end of the correction, only those who are really convinced stay. This means that once the price moves back in tune with its main trend, there are many people who are not in the market and who were waiting on the sidelines and that can enter the market and then contribute to move’s continuation. It’s easier to imagine how it works for price rallies and long positions, but it works in both ways: up and down.

Based on several specific non-chart signals (the correspondence that we get, our sales, statistics regarding our website), we see that the emotions are getting very high even though the price of gold is not doing much, when one looks at it from a medium- or long-term perspective. Silver and miners are doing even less. Over many previous years, we’ve experienced the above multiple times and we saw the follow-up action. It was usually the very end of a correction when the above-mentioned indications were as they are right now.

The above specific signals serve as an important bearish sign. They are rather unclear, because we don’t have hard data to show you, but still, it’s something that plays an important, supplementary role. While we wouldn’t open any position based on just the above, it’s not just the above that is in place right now. The above is just an addition to multiple long-term factors. Combination of both creates a very powerful base for a strong decline, but it doesn’t tell us that the decline should start right now.

The good news is that what we saw in the last few days provides us with such confirmation. In addition to all the strongly bearish, long- and medium-term signals that we’ve been seeing previously, we finally see a combination of very short-term factors pointing to the huge decline in the near future. Perhaps the top is already in. If not, then it’s very likely days, not weeks away.

Before moving to the most recent signs, let’s discuss how the situation developed in the USD Index.

USD Index: Self-similarity and Link with Gold

In the previous analyses, we wrote the following:

The outlook for the USD Index did not change based on Friday’s relatively small decline. Yes, that was the lowest daily close in 2 weeks, but the thing that matters is that we saw a breakdown below only one support line and it was just one daily close below it. This means that it’s not confirmed and thus not particularly meaningful at this time. The breakdown was below the rising red dashed line. The more short-term, solid, black line and the more long-term, dashed, blue line were not touched, let alone broken.

(…)

The situation in the USD Index has been developing in a very interesting manner recently. The USD Index has been following reflective pattern, where the 2017-2018 decline was reflected in the shape of the 2018 rally. The areas marked with red and green show similar patterns (head-and-shoulders and inverse head-and-shoulders patterns).

However, in the last few weeks, the pattern is somewhat unclear. While the move preceding the entire pattern (the decline up to July 2017) was an almost a straight line lower, the current price moves take form of a consolidation. The start of the pattern was quick, but the end of the pattern is prolonged. Why would that be?

It looks like if someone (or several investors / institutions / central banks) really doesn’t want to let the USDX to break above the neck level of the inverse head-and-shoulders pattern. The pattern is big and clear, and it’s quite obvious that breaking above the neck level thereof would very likely result in much higher USDX values. We have no proof that this is indeed the case, but it certainly looks that way – whenever the price moves close to the neckline, the USD gets pushed lower. It rallies again, and it gets hammered again. And again. The situation becomes very tense, like a coiled spring, and once the USDX finally breaks out, it’s likely to rally fast. After all, the market forces always prevail in the end.

Putting the “why” behind the price moves aside, let’s take a look at something that would be important even if the “why” behind the recent back-and-forth trading was entirely different.

The shape of the recent sideways trading is very similar to what we saw in the first half of the year, when the USD Index was bottoming. We marked the subsequent tops and bottoms with numbers from 1 to 6. The top number 3 was the highest one in both cases and all lows were higher than the previous ones.

The most interesting thing is that the similarity doesn’t end with the USD Index. It was the time when gold moved a bit above its previous high in intraday terms, while silver didn’t. It was also the time when the mining stocks underperformed gold in a visible way. We have exactly the same thing right now. The implications are bullish for the USD Index, and they are even more bearish for the PMs than they are bullish for the USDX.

(…) the highs #3 and #5 along with lows #2 and #6 form a triangle that has vertex in the first half of January, 2019. Consequently, we’re quite likely to see some kind of reversal close to January 7th, 2019.

We would like to supplement the above with another detail that further confirms the similarity between the recent back-and-forth trading and the early 2018 bottom. Please take a look at the shapes of each of the #2, #4, and #6 bottoms.

In both cases #2 bottom was volatile, the price ended above the intraday low, and the daily reversal was followed by a sharp upswing.

In both cases #4 bottom was characterized by a daily close near the intraday low and it was followed by a quick rally that was not as big as the one that followed the #2 bottom.

In both cases #6 bottom took form of a double bottom.

The similarity is undeniable. The implications are very bullish for the USD Index.

However, the implications are even more bearish for the precious metals market because of the paragraph that we put in bold above. Gold moved higher in the recent weeks despite the back-and-forth trading in the USDX. This appears bullish at the first sight, but it’s important to note that this was also the case between mid-March and mid-April. This would have not been so important if it wasn’t for the clear self-similarity in the USD Index. It’s not only in the USD – it’s also in the way gold reacts to USD’s changes.

And you know what? Gold mostly ignored USD’s strength after the #6 bottom in April, so it’s not surprising or bearish that it didn’t plunge yesterday despite a decent upswing in the US currency. It took a few days for the precious metals investors to catch up with the new reality, which was rallying USD Index. And it was THE rally of the year (at least so far). It was also what preceded THE decline of the year (at least so far) in the precious metals. Is the gold-USD link at this time really bullish for the yellow metal? No, it’s not. The investors and traders are likely to catch up with their reaction once it becomes apparent that the USD Index is really moving higher, and not topping here. Good news is that this should take place right now or shortly.

Yesterday’s session was in perfect tune with what we saw in the second half of April – we saw another daily rally, to which gold and silver didn’t respond yet. But, we also saw something else that makes the similarity to April even clearer.

Silver outperformed gold, which is a classic top-is-in confirmation - at least for those, who have been following this market and our analyses for some time. It did so only on an intraday basis, but that’s enough for the signal to be important. And for it to be similar to what happened in April. It was the white metal’s outperformance that marked the very end of the consolidation and the beginning of the biggest decline of the year.

Precious Metals’ Relative Signal

Gold moved higher on an intraday basis as well, but it didn’t move to new December highs.

Silver, on the other hand, rallied visibly to new intraday high and then erased practically the entire daily gain. The volume was not huge per se, but it was big on a relative basis, which is enough to confirm the reversal. The implications are very bearish.

They are even more bearish given that silver just reversed at one of its triangle-vertex-based reversals. It was likely to reverse – and it did. Will this be anything more than just a few-day-long decline? That’s likely. The situation in the USD Index as well as the sell signal from the mining stocks certainly suggest so.

Miners’ Reversal and the Following Weakness

The signal that we mean is the simple fact that the mining stocks underperformed right after their daily reversal. It seems that the rally has burned itself out, the sellers overwhelmed the buyers, and now it’s back to business. And the main trend has been down.

Also, let’s keep in mind the recent signal from the silver stocks.

Additional Silver Signs

Our Monday’s comments on silver miners’ volume and their implications remain up-to-date:

It was the volume on which silver stocks (the SIL ETF) rallied that was so extreme. It was the highest – ever – volume on which it moved higher during the day. There were higher volume readings during the declines, but never during the upswings. However, it is not that important that it was the record. It’s the fact that the volume was extremely high that makes it an extremely important signal.

The importance comes from the efficiency with which it signaled the same outcome, from the frequency, and from the fact that these signals were not all concentrated in the same period, but that they were spread over the course of the past years.

In 10 out of 12 previous cases when we saw extremely high volume during daily upswings, it was the end of a rally or very close to its end and in all these 10 cases it was a great shorting opportunity. Out of these 10 cases, the one that was followed by the biggest declines in the following months, was the one in late 2012. It was also the only case when we saw this signal after a consolidation. The only other time when we saw the spike in the daily volume during an upswing after a consolidation was… On Friday. The implications are very bearish.

The important analytical detail here is that we are considering the huge-volume sessions that were not preceded by volume that was similarly big. The reason is that if the volume is high in general, a single day’s high value is not as meaningful as if it’s a single huge-volume session among the low-volume days. In case of the former, the high volume is close to normal, while in case of the latter, it’s extreme. If you’re going 50 miles per hour and accelerate in 4 seconds to 60 miles per hour it’s nowhere close to being as extreme as if you increase to 60 miles per hour in 4 seconds starting from 0.

Finally, silver’s performance relative to gold was particularly interesting in light of what we wrote about the gold to silver ratio yesterday:

The latter is not surprising, because of the recent breakout in the gold to silver ratio. The breakout is confirmed, so we should expect more strength in it. This means more weakness in silver relative to gold. There may be exceptions to this rule at the very end of short-term upswings, but they don’t have to take place at all.

It turned out that silver found a way to do both: outperform and not invalidate the breakout in the gold to silver ratio. It outperformed on an intraday basis, but there was no invalidation of the breakout in gold to silver ratio in terms of the daily closes. No matter how we look at silver’s recent performance, it still provides us with bearish implications.

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.

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: $1,272; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $47.17
• Silver: profit-take exit price: $12.32; stop-loss: $15.11; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $28.37
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.83; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $24.87

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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