Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

In yesterday's analysis, we emphasized that even though a big decline in gold is already underway, it's likely that it won't be a straight move down and there will be periodic corrections. Moreover, we provided price targets from which the bounce could start. Based on the circumstances, it might even be a tradable move. In today's analysis, we're going to show you that there are signals suggesting that the turnaround might start relatively soon - during this month.

But first, let's take a look at the most recent price changes.

Yesterday's Moves in PMs

In yesterday's analysis, we commented on Monday's performance in the following way:

The most important thing that happened on the gold market is the breakdown below the $1,500 level and below the neck level of the head-and-shoulders pattern. Earlier, both levels prevented gold from declining further and now this is no longer the case. Gold can slide.

The head and shoulders pattern suggests a move to at least $1,425 as that's the size of the head of the pattern. There are other factors that need to be considered as well. The Fibonacci retracements provide useful targets as well. The first one is relatively close, at about $1,450, the second is at about $1,416, which is relatively close to the above-mentioned $1425 level, and the third is at about $1,381.

The previous highs and lows also play a part. There are quite a few such extremes that formed in June and July, but they are more or less in tune with the Fibonacci retracements, so they don't add much to the above.

Taking both: the head-and-shoulders and the Fibonacci retracements into account, it seems that gold is more likely to bounce from about $1,420 than from other price levels. The $1,381 level might be the something that generates a rebound as well but it's not as likely as the $1,420 level. At least not based on the above chart.

As far as silver is concerned, the short-term outlook is simpler. We just saw a move right to the 50% Fibonacci retracement and now silver is likely to decline to at least the 61.8% retracement. This retracement approximately coincides with the rising red support line based on the previous lows and it's at $16.36. This level, or its proximity, could generate a temporary (!) rebound.

The mining stocks reached the neck level of their head-and-shoulders formation as well as the 38.2% Fibonacci retracement level. Are miners showing strength by not breaking below the neck level, even though gold did? No - please note that they are already at their 38.2% retracement, while gold didn't move to it yet.

As far as their next target is concerned, it's important to note that the downside target based on the (so far incomplete) head and shoulders pattern is even below the lowest of the classic retracements. The H&S indicates a decline to 170 or so. The early August low provides support as well and it's at about 195. It could be the case that the breakdown below the neck level of the H&S pattern takes the HUI Index to the 195 level, then back to the neck level at about 203 and then the decline would resume. The next "big" target is at about 180 because the support provided by the 61.8% Fibonacci retracement is strengthened by the June price gap.

All in all, the next short-term (!) downside target for mining stocks is quite unclear and if one wants to trade the rebound, it might be best to focus on other factors instead of price alone. It might actually be best not to trade the bounce at all, due to how many long-term factors point to lower precious metals prices in the following months.

Based on the long-term gold and silver charts that we featured in yesterday's Gold & Silver Trading Alert, we have indications that gold might bounce from about $1,420, and from the $1,360 - 1,380 area. This coincides very well with the above-mentioned price levels.

The most important take-away, though, is that gold is not likely bottoming right now. Sure, it moved higher yesterday, but it didn't rally back above the neck level of the head-and-shoulders pattern, which means that yesterday's rally was just a verification of the breakdown - nothing more. Consequently, it didn't change the bearish implications of the latter, and the short-term outlook remains bearish.

Please note that while gold moved visibly higher on a day-to-day basis, gold miners didn't. The HUI Index ended the session just 0.5% higher. This underperformance shows that the breakdown below the head and shoulders pattern was not accidental and that it's likely to slide further.

In the opening paragraph of today's analysis, we wrote that there are signs that we'll see a corrective upswing in the following weeks. Both signs come from applying the triangle-vertex-based reversal technique. Let's take a look at them.

Triangles, Trend and Reversals

Both silver and the HUI Index are very close to the point in time where two (silver) or four (HUI) previous resistance and support lines cross. These moments tend to mark important reversals for a given market. Of course, this is not always the case, but it is the case often enough to make this trading technique useful, especially if it's confirmed by more than one vertex. There are three vertexes (two in case of the HUI Index and one in silver) that point to a nearby reversal. And by nearby, we mean the middle of the month.

The entire precious metals sector is likely to correct more or less at the same time, so this implies also a correction in gold.

Does it mean that the gold, silver, and miners' decline is about to be over? Absolutely not. Gold probably has hundreds of dollars to go before the bottom is in, similarly to how it declined in the second part of the 90s or in late 80s. This does, however, mean that we might see a short-term turnaround after gold, silver, and mining stocks decline some more.

This month's seasonality chart for silver confirms the bearish indications.

Silver and Q4 Seasonality

You can read more detailed seasonal silver analysis over here, but the long story short is that the declines are likely to take place in the 3 weeks of the month, in particular at the very beginning of the month. Any strength is likely to be seen closer to the end of the month, and perhaps in early November.

All the above paints a quite coherent short-term picture: the precious metals sector declines shortly, but starts a corrective upswing from lower price levels close to the middle of the month.

Before summarizing, we would like to briefly reply to a boomerang question that we just received. "Boomerang" because it comes back every couple of weeks or months. The question is why is comparing the current price moves to a relatively distant past (like the mid-90s) useful, if the fundamental situation is different (e.g. interest rates, sovereign debt levels).

Surely, the fundamental situation differs. Not only interest rates, debt levels, but geopolitics in general. The presidents and prime ministers come and go, the monetary authorities change, and the world is developing in a non-linear way in general. However, fear and greed have been and will always be present and as long as the capital markets are available, their participants will make decisions based not only on logical fundamental factors, but also based on the emotional determinants. No geopolitical situation will make any free market (let's not debate the gold manipulation and silver manipulation theories here - they are definitely free to a major extent and at the same time no market is completely free as long as the interest rates are artificially set) price move up or down in a straight line continuously. People will always get ahead of themselves with their optimism and greed and then they will get ahead of themselves with their pessimism and desperation and hate toward a particular sector. And that's what makes bull markets and bear markets unfold in specific ways - where there are periodic corrections and where there are medium-term downtrends that are opposite of the very long-term uptrends.

The Western world's debt is ballooning, interest rates are ridiculously low and there are massive trade tensions. Monetary officials are determined to stimulate the economy even though it doesn't really want to respond to the stimuli in the way that it used to. And it's all very positive for gold... In the long run.

And in the long run, we don't expect gold to decline as low as it declined after the mid-90s top. As a reminder, gold bottomed several years later very close to $250. No, we don't expect anything like that. The fundamentals definitely justify much higher gold prices. Will gold's upcoming bottom be twice as high as the one that we saw about 20 years ago? Or three times as high? Or more? Please note that by saying that a medium-term slide is very likely, we are not telling anyone that gold should get back to its value from 20 years ago.

However, based on the way gold performed after parabolic upswings (when greed was at its extreme), it tends to perform relatively similarly. For instance, both the 1980 and 2011 price spikes were followed by very sharp declines. There are numerous other ways in which we can detect what kind of situation is similar to what we see right now and when more of them point to the same outcome, the latter becomes likely. There are numerous reasons for gold to decline right now, even though it's likely to rally in the long run. The massive breakout in the USD Index is one of the most important factors, but there are also many others. The fact that gold was the only part of the precious metals sector that really rallied this year serves as a perfect confirmation. Gold stocks should be rallying strongly in the early part of the bull market, just like they did in the early 2000s. The opposite has been happening in the previous months. Why? Because gold, silver, and mining stocks haven't fallen enough and need to decline some more before the investors enter the fear, desperation and hate stage. That's when true bottoms are formed, not when people continue to expect higher gold prices (which was the case based on the surveys conducted in the late 2015).

Key Factors to Keep in Mind

Critical factors:

• The USD Index broke above the very long-term resistance line and verified the breakout above it. Its huge upswing is already underway.
• The USD's long-term upswing is an extremely important and bearish factor for gold. There were only two similar cases in the past few decades, when USD Index was starting profound, long-term bull markets, and they were both accompanied by huge declines in gold and the rest of the precious metals market
• Out of these two similar cases, only one is very similar - the case when gold topped in February 1996. The similarity extends beyond gold's about a yearly delay in reaction to the USD's rally. Also the shape of gold price moves prior to the 1996 high and what we saw in the last couple of years is very similar, which confirm the analysis of the gold-USD link and the above-mentioned implications of USD Index's long-term breakout.
• The similarity between now and 1996 extends to silver and mining stocks - in other words, it goes beyond USD, gold-USD link, and gold itself. The white metal and its miners appear to be in a similar position as well, and the implications are particularly bearish for the miners. After their 1996 top, they erased more than 2/3rds of their prices.
• Many investors got excited by the gold-is-soaring theme in the last few months, but looking beyond the short-term moves, reveals that most of the precious metals sector didn't show substantial strength that would be really visible from the long-term perspective. Gold doesn't appear to be starting a new bull market here, but rather to be an exception from the rule.
• Gold's True Seasonality around the US Labor Day points to a big decline shortly.

Very important, but not as critical factors:

• Long-term technical signs for silver, i.a. the analogy in terms of price to what we saw in 2008, shows that silver could slide even below $10.
• Silver's very long-term cycles point to a major reversal taking place right now and since the most recent move was up, the implications are bearish (this is also silver's technical sign, but it's so important that it deserves its own point)
• Long-term technical signs for gold stocks point to this not being a new gold bull market beginning. Among others, it's their long-term underperformance relative to gold that hint this is rather a corrective upswing within a bear market that is not over yet.
• Record-breaking weekly volume in gold is a strong sign pointing to lower gold prices

Important factors:

• Extreme volume reading in the SIL ETF (proxy for silver stocks) is an effective indication that lower values of silver miners are to be expected
• Silver's short-term outperformance of gold, and gold stocks' short-term underperformance of gold both confirm that the precious metals sector is topping here
• Gold topped almost right at its cyclical turning point, which makes the trend reversal more likely
• Copper broke below its head-and-shoulders pattern and confirmed the breakdown. The last time we saw something similar was in April 2013, when the entire precious metals sector was on the verge of plunging lower.

Moreover, please note that while there may be a recession threat, it doesn't mean that gold has to rally immediately. Both: recession and gold's multi-year rally could be many months away - comparing what happened to bond yields in the 90s confirms that.

Copper moved above the neck level of its head-and-shoulders pattern that's based on the intraday lows, but it didn't invalidate the analogous level based on the weekly closing prices, so we don't think it's justified to say that this bearish formation was invalidated at this time.

Summary

Summing up, the big decline in the precious metals sector appears to be finally underway. While there will be periodic corrections, it seems that we will see them only after gold, silver and mining stocks decline some more - possibly close to the middle of October. In today's analysis, we updated our short-term downside targets based on the latest information as the recent decline is not as sharp as the 2011 one, so the technique that predicted the 2011 correction might not apply here.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

• Gold: profit-take exit price: $1,391; stop-loss: $1,553; initial target price for the DGLD ETN: $36.37; stop-loss for the DGLD ETN: $26.74
• Silver: profit-take exit price: $16,41; stop-loss: $19,06; initial target price for the DSLV ETN: $20.96; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $24.62; stop-loss: $30.11; initial target price for the DUST ETF: $10.32; stop-loss for the DUST ETF $6.08

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: $33.82; stop-loss: $41.22
• JDST ETF: profit-take exit price: $21.58 stop-loss: $12.46

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

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