Briefly: in our opinion, small (50% of the regular size of the position) speculative long position in silver is justified from the risk/reward point of view at the moment of publishing this Alert. We are moving the profit-take level for silver very close to the current price, and we are almost opening new short positions in gold, silver, and mining stocks.

The top in the precious metals sector is in or at hand and the implications for both the precious metals investors and traders are critical. That's because at some point, traders need to take profits off the table and get ready for the next trade, and they are important for investors as we're quite likely close to or already beyond the point that we will refer to as the last chance to get out before the slide.

The Hint from the Miners

Let's start today's analysis with the look at the mining stocks and with a quote from November 26^th:

Some may say that the close in the GDX ETF below the previous November low is a major breakdown. It isn't. The move was not confirmed and GDX didn't break below the October low.

Interestingly, if the GDX rallies from here in a way that's very similar to how it rallied earlier in November, it will move exactly to our price target in early December - and that's to the letter what we've been writing about for days.

And what happened in the GDX in the following days?

It moved higher in a zig-zag manner, in exact tune with the line that we created, topping at $27.94, a bit above our profit-take level.

Our target of approximately (!) $28 was reached. Moreover, the ratio that made us view the proximity of $28 as the likely target also reached its own target.

On November 14^th, we commented on the GDX to GLD ratio in the following way:

Looking at the GDX to GLD ratio, we see that the ratio could move higher, to about 0.2. This is (approximately) the 50% Fibonacci retracement level that is strengthened by the upper border of the rising trend channel, and the early-October high.

In case of gold, our target ($1488.90) is based on the very recent high - on November 6th gold closed at $1,493 and the intraday high was $1495.90. We placed the profit-take level a bit below these levels in order to increase the odds of the waiting order being reached. This high corresponds to $140.45 and a bit below it would be $140.

Multiplying $140 by the 0.2 from the ratio provides us with $28 as the target for the GDX - and that's almost exactly the upper border of the trading channel - the resistance that we thought was going to be reached anyway. Both techniques point to the same level - they confirm each other.

Now, the question is why don't we think gold, silver, or miners move even higher. Actually, that might happen, especially if we see more weakness in the USD Index than we expect to see at this time. But the point is that our profit-take levels represent the easy part of the move. Our goal here is not to catch the exact top, but to make some quick profits and get back on the short side of the market, because that's where the biggest money is likely to be made in the following months. What we're doing right now is a trade against the bigger trend (down), which is quite risky - and that is also why our trading position is relatively small.

And what happened in the ratio since that time?

It moved higher and topped in the middle of our target area (value-wise) and practically right at the upper border of the rising trend channel.

Why are we mentioning both situations today? Because we want to emphasize that what bullish was supposed to happen, has likely already happened. The easy part of the rally is over. It could be the case that the rally is completely over and that the current trading is just a post-top pause.

The USD Index Shares Its Message

The USD Index is one of the things that is very useful in case of precious metals trading and it's particularly useful in two ways:

1. Directly - as the PMs tend to move in the opposite way
2. Through the analysis of gold's relative strength to what the USD Index is doing.

The USD Index declined significantly yesterday, but it came back up before the day was over. The decline continues today, which suggests that the USDX might move even lower before rallying back up.

Since the USDX broke below the support line created by the previous lows and highs (thick line) and it also broke below the 50% and 61.8% Fibonacci retracement levels, the next strong support is provided by the rising support line based on the October and November lows. The support is at about 97.2, so it's just 0.26 away (at the moment of writing these words).

So, the implications for the precious metals market are still bearish, but only for the very short term - perhaps for only the next several hours.

The relative strength of gold and silver to the USD Index already has bearish implications. Even though the USDX is very close to its recent lows, gold and silver are not approaching their recent highs. Gold is about $10 below its recent high, while silver is about $0.50 below the recent highs.

Both facts together suggest that precious metals might move higher from here, but not significantly so. We might not see new highs - neither in gold, nor in silver.

The Reversals At Hand

This scenario is confirmed by the double triangle-vertex-based reversal that we've been previously writing about.

The reversal was yesterday and while metals and miners could move a bit higher from here, the odds of them doing so decline with each passing day and hour.

Silver Seasonality Concurs

On average, silver tends to form a second top right after the first one, which is what we might see today or tomorrow, but the True Seasonal tendencies don't point to any substantial strength here. Conversely, taking into account what tends to happen at this time of the year, we should expect a sizable slide in the near future.

The volume that accompanied yesterday's reversal in silver wasn't huge, but it was still highest since early Novembe. While it's not crystal clear that the final top for this rally is already in, it's definitely the case that the easy part of this rally is over.

In our Tuesday's intraday Alert, we wrote that it would not be appropriate to leave the silver long position intact for most people and those, who closed it at that time (silver was trading at about $17.25), are likely quite happy that they did. Those, who didn't, are still likely to close the position profitably as we entered it very close to the November bottom.

Based on the likelihood that the USD Index is going to bottom shortly and that the short-term upside in gold and silver might be limited, we are moving our profit-take level closer to the current silver price.

Naturally, the key bearish factors for the medium term remain intact.

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 outlook for the precious metals sector remains very bearish for the following months (also because of the record volume and open interest in gold), and it seems that we have already seen the short-term top in the precious metals sector this week. Still, based on the USD Index weakness in the very near term, it seems that gold and silver will move a bit higher before turning south. Consequently, we are moving the profit-take level for the current position in silver much closer to the current price, and we expect it to be reached shortly (quite likely today). We plan to open a big short position shortly thereafter.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Small speculative long position (50% of the full position) in silver is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

• Silver futures: profit-take exit price: $17.04; stop-loss: $16.51; initial target price for the USLV ETN: $79.49; stop-loss for the USLV ETN: $74.68

Moreover, as soon as silver futures hit the above-mentioned profit-take level, we will (automatically) view the following short positions as justified from the risk/reward point of view:

Big speculative long position (250% of the full position) in gold, silver, and mining stocks will be justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:

• Gold: 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: 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.

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Thank you.

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