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.

Yesterday’s session was relatively calm in the precious metals sector, but we can’t say the same thing about what happened in the USD Index. The latter rallied visibly, which is not surprising given its breakout above the declining short-term resistance line. Yet, gold didn’t react with a strong decline? Why? Could it be indicating strength?

It could, but it’s not likely. It could be a very temporary technical development, which is in tune with gold’s tendency to sometimes delay its reaction. Let’s start today’s quick (as very few things happened) analysis by checking the strength of gold’s reaction relative to the USD Index by looking at the changes in gold’s price in terms of the euro. After all, the euro is the biggest component of the USD Index, and thus, by dividing the USD-based gold price by the euro–USD exchange rate, we can see what would be taking place with gold if most of the USD’s movement was not happening at all.

Gold remains within a trading range and this means that nothing changed with regard to the outlook. Gold hasn’t started to respond to the USD’s bearish signals (its rallies), but – what’s the key detail here – gold is not showing any exceptional strength. Yesterday’s action was a small show of strength, but it was too small to change the overall gold-USD link and its implications.

Just as there was no breakout in the above chart, there was “no breakout in the USD-gold” link that could imply much higher gold prices. It doesn’t. The outlook for gold remains bearish.

This means that the USD Index is likely to trigger a sizable decline shortly. It’s still possible that the USD Index moves lower into early February and in this case, we could see a more visible move higher in gold, but based on yesterday’s strong rally in the USDX, it’s not a likely outcome. The USDX simply appears to be following the bullish path. Consequently, what we wrote yesterday is still mostly up-to-date:

The USD Index closed above the declining short-term resistance line for the second day in a row and the breakout is now almost confirmed. Unless the USDX closes below 95.50 today, the breakout will be fully confirmed, which is a likely outcome as the USD is 0.07 higher so far today (not much, but still).

The more bearish piece of news is that the USD Index could decline back to the previously broken line in a rather slow manner and in this way it could almost reach the previous 2019 lows within a week or two. Even if this happens, it would not invalidate any medium-term points about the USDX or the precious metal sector. It would likely correspond to a small (one that would not take gold and silver to new highs) corrective upswing in the PMs.

Overall, while the above chart makes a corrective upswing in the PMs possible, it doesn’t make them likely as confirmations of breakouts are bullish developments, not bearish ones. And it seems that we’re about to see one in the USDX, which is going to have bearish implications for gold, silver, and mining stocks.

Only “mostly”, because the odds for a continuation of the rally have just increased.

So, the USD Index is still likely to have a bearish impact on the precious metals market. Why is gold not declining yet?

Because of the vertex-based reversal of the recently broken triangle. Gold verified the breakdown below it by closing below the lower border for (actually more than) 3 consecutive trading days. This means that gold is likely to decline in a profound manner. However, it doesn’t exclude the possibility in which gold first verifies the breakout once again by temporarily moving back to the pattern. This would imply an approximately $10-$15 rally from the current price levels.

The perfect time to do so (based on technical tools), would be at the nearest reversal and the nearest reversal is today or on Monday. The chart is a bit unclear with regard to the specific date. Consequently, we might see a small move up before the slide takes place and gold’s reluctance to decline based on the USD’s yesterday’s upswing seems to be confirming this scenario.

Now, you may be wondering if this leaves enough room for a decline in the upcoming 1-2 weeks, because of the combination of 8 reversals at the end of January and in early February. It does. We marked two weekly declines with red and we copied them to the current situation (assuming that they would start from the vertex of the triangle).

One of the declines is based on how gold declined in June 2018, and the other is based on how it declined in August. The former is more like the current situation as the decline is starting, not ending. Still, both analogies suggest that gold could easily slide to the $1,230 - $1,245 range and reverse from there. Reaching the rising dashed support line at about $1,220 is therefore not out of the question either. Please keep in mind that we are discussing just how low gold could get within a week, not where this decline is going to end. It’s likely to end much lower.

Therefore, we could have both a quick rally today and / or on Monday and then a big decline until the end of the month and possibly in the first week of February. At this time this scenario seems likely, but we’ll keep you updated as we move forward, and we have more details to analyze.

Summary

Summing up, even if we see a corrective upswing from here, it’s not likely to be anything major – we don’t expect gold or silver to move back to their previous highs. In fact, a move to $1,290 or so in gold might even be viewed as something bearish if the yellow metal simply verifies the breakdown below the triangle pattern and then declines once again.

The key thing is that the bearish outlook for the following weeks has been confirmed by multiple factors, i.a. silver’s extreme outperformance and miners’ underperformance, gold’s performance link to the general stock market, gold getting Cramerized, and many more. Despite yesterday’s reversals in gold and silver, the above are also bearish factors for the  short term. The USD Index broke above the short-term support line, gold broke below the triangle pattern and both have almost confirmed these moves. This all tells us that more weakness in the PM market is just around the corner. The number of signals confirming the above and the profit potential of this situation are enormous, especially compared to the very limited upside for the possible corrective upswing. It’s not the best time to prepare as the best time was many months ago. But it’s the final time when you can do something about this huge opportunity without regretting it in several weeks, months, and – perhaps – years.

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: $1,313; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $44.97
• Silver: profit-take exit price: $12.32; stop-loss: $16.04; initial target price for the DSLV ETN: $47.67; stop-loss for the DSLV ETN $24.68
• Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $22.03; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $20.37

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: $32.03
• JDST ETF: initial target price: $154.97 stop-loss: $42.17

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