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

What a classic day Friday was! Gold moved a bit lower, miners moved significantly lower, and silver rallied. Truly classic and outstanding performance if one enjoys seeing topping patterns that are playing out according to their usual and likely characteristics. And Monday's early session seems to be an encore. Let's start today's analysis with examination of the Friday's "play".

Friday's Gold Action in Perspective

Gold once again managed to close the day above the declining resistance line that's based on daily closing prices. This seems very bullish until one examines the volume at which the breakout and it's supposed verification took place. It was very low. This is exactly the opposite of what one wants to see as a breakout's confirmation. So why did gold rally?

Well, one reason could be a delayed reaction to U.S. President's impeachment news, but if so, then what caused the delay? That's where the technicals come in and there is one specific thing that causes this price action to make sense.

In Friday's analysis, we showed you that one of the nearby triangle-vertex-based reversals might have been the technical factor that was at least partially responsible for the recent upswing. There is, however, another analogical reversal that is due today, which means that the implications of what we wrote on Friday remain up-to-date even though gold moved a few dollars higher.

If gold didn't rally before the reversal, it would have bullish implications. And the situation being what it is, we actually have bearish implications of what happened.

The existence of the reversal point, along with very weak volume on which gold moved higher recently, make it very likely that the move higher will be invalidated and followed by lower gold prices, not higher ones.

At the moment of writing these words, today's pre-market high in gold was $1,488.95. That's below the December 4^th high ($1,489.85) and the December 12^th high ($1,491.25). This means that all our comments on the shape of gold's recent price movement with regard to this month's seasonality, remain up-to-date:

Gold tends to move higher in the final quarter of the year, and if we consider the fact that gold closed September at $1,472.90, we see that it's been true at least so far. Based on the seasonal tendencies, the yellow metal was supposed to decline in November, and that's exactly what happened. Gold was supposed to then move higher and it did. It didn't move above the November high, though. That doesn't mean that the seasonality is useless - it simply means that since gold is now in a medium-term downtrend (considering highs, lows, and for instance the declining 50-day moving average), the implications might have a bit shifted, but they aren't necessarily totally absent.

The above chart suggests three tops in the head-and-shoulders form and that is indeed what gold formed.

What we just saw could have been the final of the three tops that is then likely (based on seasonality alone) to be followed by the biggest decline of the quarter.

Now, taking seasonality at its face value, this is the time of the year when gold should be bottoming and preparing for its year-end rally. However, it seems that the patterns were delayed and since we have indications of upcoming reversals at the end of the year, it seems that we are still likely to see quite a volatile move lower before the next short-term corrective rally starts.

There's one more thing about the first gold chart that we would like to comment on. We mean the two areas that we marked with red rectangles. The above chart features in greater detail what happened recently, and the one below features the past - late-2018 price performance.

Lessons From Gold a Year Ago

Both patterns started with a sizable daily rally in gold that took place on big volume (October 2018 and early December 2019). Then gold entered consolidation with a small breakout that was then invalidated. Gold recovered and went on to make the third attempt to break higher, but failed. What's notable about these final attempts is that we saw a day with very low volume (early November 2018, and the last few days). Back in 2018, this pattern was followed by several days of visibly lower prices before gold rallied.

Something similar could - and is likely to - take place also this time. The end of the year is likely to mark a reversal, which means that gold could bottom at that time and start a corrective upswing. The difference this time is that the follow-up rally that would take place in January is not likely to be as sustainable as the one that started in mid-November 2018.

Having said that, let's take a look at the silver market.

Turning to Silver

The white metal has indeed shown strength by rallying back to the rising resistance line and the 50-day moving average. It almost moved above the early-December high on Friday. It finally managed to break above it in Monday's pre-market trading.

Silver has shown exceptional strength and soared to new monthly highs. This means that it also broke above its 50-day moving average and the rising resistance line. This would have been a very important and bullish development if...

If it wasn't silver. The white metal can be counted on to provide fake signals over and over again, and one of the ways to tell if silver is likely lying is to look at what the rest of the precious metals market is doing. If gold is not breaking higher and if miners are underperforming, it's very likely a fake move on silver's part. The above is one of the most important trading tips for the gold market. There are many techniques that are universal, but this one is specific - and highly useful - in case of the PMs.

We already know what happened in gold - it didn't break above the previous highs, at least at the moment of writing these words. And what about the gold miners?

The Miners' Turn

On Friday, miners confirmed their breakdown below the rising support line. It's hard to imagine a clearer sign that silver's breakout should not be trusted.

Remember the two, three tops in gold? In miners we can only see two of them, right? You know why? Because miners are already in the decline mode.

Just as it's usually the case, miners were the first to rally and silver was catching up. Again, that's a classic topping performance in the precious metals market.

Before summarizing, let's take a look at what the USD Index is doing right now.

The Greenback's Short-Term

Shortly after the USD Index broke above the highest of the declining resistance lines, it was rallying quite visibly without pausing. Well, it's finally pausing. It's taking a natural breather before likely rallying some more. The downside is relatively limited. Even though the USDX could slide back to the previously broken declining line, it has further support higher - at the rising support line that's currently at about 97.10. The downside seems limited.

This means that the upside is also likely to be limited in case of the precious metals sector. It could be the case that the pre-market high that we've been discussing today, is actually the final short-term high and that lower prices will follow.

Finally, there's one more non-chart issue that we would like to raise. And no, it's not about our new products (Market News Report, and Stock Pick Updates, where the longs are up by 1.11% so far, while the S&P is up by only 0.81%) - it's about the time of the year and how it could translate into price swings.

It's right before the Holiday Week and many traders are going to be away from their computers, spending times with their families. On one hand, this is a perfect opportunity to relax and focus on what's most important in life, but on the other hand, it's also a great time for anyone (on any entity) wishing to trigger volatile moves, to do so, while many people are unable to react. The writing is already on the wall in the form of silver outperforming gold on a very short-term basis, which is something that we often see right before big price drops. As always, we'll keep you - our subscribers - informed.

Naturally, the numerous other factors that we discussed previously continue to support lower precious metals prices in the following months. If you haven't read these analyses - especially the ones from the "critical" section, we strongly encourage you to do so. These are not quick reads, but they are really well worth the time spent reading them.

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 stocks appear to be repeating their performance from 20 years ago, which means that a bottom in the entire precious metals sector is quite likely to form at much lower prices, in about a year

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.

Summary

Summing up, the short-term outlook for the precious metals sector is bearish for the next 1-1.5 weeks. It's quite likely (no promises, though, as it depends on what the market does) that we're going to take (partial or complete) profits from the current short position this month. We might also reverse the position and go long, but - as above - it's too early to say with certainty at this time. For now, it seems that the USDX is about to rally and the PMs are about to slide.

On an administrative note, due to this being the Holiday week, there will be no regular Alerts (including Gold & Silver Trading Alerts) between December 24^th and December 26^th. The next regular Gold & Silver Trading Alert will be posted on Friday, December 27^th. However, as we have explained earlier today, this week might be hot in the precious metals market, so we are not going to let our guard down. We will be monitoring the market and we will notify you via quick intraday Alerts should anything change with regard to outlook.

We would like to wish you Merry Christmas and Happy Holidays – may you spend this festive period in peace and harmony with the closest ones. Let the upcoming days be filled with joy and happiness all around.

In the meantime, we’ll be watching the markets for you. 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 binding exit profit-take price levels:

• Gold futures: profit-take exit price: $1,391; stop-loss: $1,573; initial target price for the DGLD ETN: $36.37; stop-loss for the DGLD ETN: $25.44
• Silver futures: profit-take exit price: $15.11; stop-loss: $19.06; initial target price for the DSLV ETN: $24.88; stop-loss for the DSLV ETN: $14.07
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $23.21; stop-loss: $30.11; initial target price for the DUST ETF: $14.69; stop-loss for the DUST ETF $6.08

In case one wants to bet on junior mining stocks' prices, here are the stop-loss details and target prices:

• GDXJ ETF: profit-take exit price: $30.32; stop-loss: $44.22
• JDST ETF: profit-take exit price: $35.88 stop-loss: $11.68

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.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager