Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in silver is justified from the risk/reward perspective at the moment of publishing this Alert.

Precious metals bearish reactions toward this week’s USD Index movement continued this week. The USD Index did almost nothing while gold, silver, and mining stocks declined. And the latter confirmed their recent underperformance of gold that we discussed yesterday. Gold stocks also broke below their rising support line, but gold didn’t. Miners seem to be leading gold lower, but can’t since yesterday’s breakdown was relatively small. The question is, can it be trusted?

Let’s start with looking at what happened in the USD Index.

The Cues from the USD Index

This will be a very quick look, because almost nothing happened – the USD Index moved higher after forming an intraday low. The shape of the move is bullish, but the size thereof is very small (the USDX ended the session only 0.17 higher). Interestingly, this makes the implications of yesterday’s session more bearish. Why? Because a tiny move in the USDX was the only thing that it took for the whole precious metals complex to move considerably lower on a daily basis.

In yesterday’s analysis, we wrote the following:

The intraday performance looks like the miners really wanted to move and break lower, but the declining USD Index simply didn’t let them do so.

The tiny move higher in the USDX allowed for the decline in the PMs and the latter definitely took advantage of it. This is something profoundly bearish.

The Gold Miners: Breakdown in the Making

The breakdown below the rising support line and the previous extremes is now a fact. The gold miners moved below the key levels just a bit, so the move hasn’t been confirmed yet.

The previous extremes, below which the HUI Index moved, are not only the January and early-February 2019 highs, but also last year’s early lows. Consequently, the combination of the support levels, below which gold miners just broke is quite significant to say the least. The breakdown hasn’t been confirmed yet though, so the implications are only a little more bearish than they had already been based on Tuesday’s closing prices.

The miners didn’t invalidate the breakout above the declining medium-term resistance line, so there is no change with regard to this factor yet. However, if the USDX keeps moving higher, gold stocks are likely to break below the red line shortly.

With just a little more weakness down the road, we’ll get a very important bearish confirmation for the short term. And when the bearish short-term and powerful medium-term signals align, we’re likely to see something breathtaking.

Update on Both Gold and Silver

The price of gold has definitely reversed at its cyclical turning point and we saw a daily close back below the January high and the mid-May high. However, there was still no breakdown below the rising support line – just a move to it, and then a small comeback higher. Consequently, the short-term outlook is more bearish than it was yesterday, but not strongly so.

The volume accompanying this gold decline was higher than what we saw in early February, and thus the bearish case appears stronger, especially when we bring the current gold-USD perspective into the picture.

Silver moved lower, but it didn’t reach any specific support level. It’s still likely to decline, though, because nothing changed its strongly bearish outlook in the recent weeks.

We previously emphasized that silver may break above its very long-term declining resistance line, but it’s not likely that this move will be significant. And that’s what we see right now – we recently saw two weekly reversals and this week looks like it’s going to be the third one. Silver can ignore the general technical rules for a short period, but it will still follow them over time. This is what beginning silver investors and traders fail to grasp. The flagship example is that they are very often following silver “breakouts” instead of using them as sell signals if they are not accompanied by the same level of strength in gold and miners. Moving back to the current picture, it seems that silver rally ended and that we will not have to wait long for the sharp drop in the silver prices to happen.

Summary

Summing up, the precious metals sector seems to have reversed its course, but it’s too early to say that this is definitely the case right now. A lot will depend on this week’s signals with regard to short-term developments. The long-term charts continue to point to much lower gold, silver, and mining stock prices in the upcoming weeks and months. The short-term outlook is deteriorating, but it didn’t become bearish enough for us to resume the short positions in gold and miners just yet. Based on the short-term indications, it seems too early to reopen the short positions in case of gold and mining stocks at this time, but it also seems that we are not far from the moment of doing so.

Please note that since the medium-term trend remains unaffected by the recent developments and the downside target remains intact (about $890 for gold), the precious metals market is likely to erase everything that it had gained in the last several days, weeks, and months, before THE bottom is in.

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 silver are justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

• Gold: no position, but be prepared to enter the following position: profit-take exit price: $1,062; stop-loss: $1,357; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $39.87
• 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 $23.68
• Mining stocks (price levels for the GDX ETF): no position, but be prepared to enter the following position: profit-take exit price: $13.12; stop-loss: $24.17; initial target price for the DUST ETF: $76.87; stop-loss for the DUST ETF $15.47

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: $35.67
• JDST ETF: initial target price: $143.87 stop-loss: $30.97

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