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.

We started yesterday's analysis with the discussion of support levels in the USD Index and we stated that USD's breakdown below the rising support line and the neck level of the head-and-shoulders pattern is both: likely to happen, and likely to cause gold to slide. That's exactly what happened. The breakdowns were invalidated, and gold responded with a sizable intraday decline. But what happened in the following hours was even more important.

The Immediate USDX-Gold Developments

The above chart shows what happened in GLD and UUP ETFs in the last couple of days. Each candlestick represents one hour of trading. GLD is a proxy for gold, and the UUP is a proxy for the USD Index. We used these proxies, as the chart provider doesn't have the intraday charts for the USDX or gold futures, and the ETFs clearly show what we want to tell you.

The important thing is what happened, when, and what didn't happen at all. We already wrote what happened - gold erased the early gains (and then declined some more) as the USD Index invalidated its breakdown. USD Index's intraday high was 97.52 - well above what we described as the critical level (97.25).

But then...

Then the USD Index declined profoundly, breaking below all the above-mentioned support levels and even the October lows. One would expect gold to soar in such a case, right?

Gold practically ignored the USDX slide. If there ever was a perfect example of what gold's underperformance looks like - that's it.

Gold did follow the USD Index from the immediate-term point of view, but USD's slide (bullish factor for gold) was mostly ignored, while USD's comeback (bearish factor for gold) was mostly magnified.

The overall effect of seeing the above over and over again is that the USD Index is significantly lower than at the beginning of the month (almost 2 index points), but gold is barely up. Actually, just a few hours before writing these words, gold was below the November closing price.

This underperformance is even clearer on the chart below.

The USDX-Gold Dynamics

We have the same kind of non-reaction in silver. The white metal is below the November closing price. And that's very bearish for the following weeks.

Given this kind of weakness, gold and silver are poised to decline strongly indeed once the USD Index truly bottoms and then starts soaring back. And once the USD Index moves to its previous highs - and then above them - gold will be trading tens - or more likely - hundreds of dollars lower.

In the next few days, gold's and USD's performance might be a bit chaotic, though. The reason is the fact that likely triggered the moves - the outcome of the UK vote which made it likely that the Brexit would take place after all. This removed a lot of uncertainty from the market, which caused the British pound to soar and the USD Index to decline. This might be nothing more than an initial reaction to the drop in uncertainty, and a different course of action could follow. British pound could decline based on Brexit indeed happening, and the USD could gain as the safe-haven currency. We're not saying that it will happen, we're just saying that it might happen and it's difficult to say how the very near term will look like in case of the British Pound and the USD Index at least from my point of view. There are trading opportunities in other currency pairs, though.

It's not that important, though. What's really important is that gold and silver are not willing to react to USD's weakness in any kind of sustainable manner. This means that the precious metals sector is still likely to decline in the next 1-3 weeks, but we might have to wait for a day or a few more before the decline picks up.

The price action of yesterday and today's pre-market move didn't change gold's outlook and our yesterday's comments on gold chart remain up-to-date:

Yesterday's rally was beneficial in a way, because it helped to align several techniques for estimating gold's upcoming short-term bottom. Based on the price increase, we have moved the lines that are based on the previous declines by several days. They now point to a bottom close to December 23, which is in tune with silver's reversals and silver seasonality. It's also reasonably close to the end-of-the-year long-term turning point that we have in gold.

Also, please note that yesterday's rally - and reversal in case of gold futures - was in perfect tune with gold's cyclical turning point.

[Edit: yesterday's - Thursday's - reversal was even more profound and it was just one day after the turning point]

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, gold and silver weakness relative to USD Index decline is more important than the decline itself, and the outlook for the precious metals sector remains bearish. Our short positions remain profitable even despite yesterday's price action, and this week's price moves could be actually viewed as beneficial as they helped to clarify when the next local bottom is likely to be formed. The odds are that it will be formed in the final part of the month, close to December 23^rd or to the end of the month. 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, but - as above - it's too early to say with certainty at this time.

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