Briefly: In our opinion speculative long positions (half of the regular size) in gold, silver and mining stocks are justified from the risk/reward perspective.

Last week was rich in various events that are important for both: precious metals investors and traders, but ultimately gold ended the week on a positive note, rallying $3.10. However, the most important developments were seen not in gold, but in silver and the USD Index. What are the implications and what’s next? Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

In Friday’s alert, we wrote the following about the USD Index:

The resistance level that was just reached is very significant and that’s the most important thing that the above chart tells us.

The resistance line was insignificantly broken on Friday. The move is not confirmed, and we doubt that it will be confirmed given the strength of the resistance that was encountered.

Overall, the USD Index moved higher by 0.89 last week. What did gold do?

It managed NOT to decline despite the above. It even closed the week $3.10 higher. We saw most of this exceptional strength in the final part of the week – on Thursday and Friday. This is a serious bullish sign for the short term.

Moreover, please note that the RSI indicator is at the level that accompanied local bottoms several times in the past. In a way, gold is just as oversold as it was during the 2008 bottom.

What’s likely to happen to gold next? There are no certainties as far as market predictions are concerned, but it seems likely to us that gold will now correct its most recent decline, moving to the previously-broken rising long-term support line, which is now a resistance. The next step would be to decline once again – to the previous lows, which we marked on the above chart with the dashed red line. At that time we could see another corrective upswing (not too significant, though) and shortly thereafter we would expect gold to finally plunge into our target area in the $1,100 - $1,000 range.

Of course the above is what we view as most likely at this time – we will continue to monitor the situation and report to you as the situation evolves.

Now, on a short-term basis we see that even if we don’t consider the USD-gold link, the picture is still bullish for the short term. Thursday’s move higher (reversal) took place on huge volume and Friday’s small downswing took place on relatively low volume. Moreover, gold closed the week visibly above the declining red resistance line.

The situation in the silver market confirms the above. The white metal moved almost 1% higher on Friday, which is another sign of strength given the dollar’s rally.

The non-USD silver chart continues to support higher prices and our previous comments remain up-to-date:

The medium-term support line was reached and the RSI Indicator shows that the situation is extremely oversold on a short-term basis. Consequently, we have another reason to believe that higher prices will be seen at least temporarily (silver confirmed the breakdown below the previous lows in terms of the USD Index, so its likely to decline even more in the coming weeks, but not likely right away).

Let’s check the situation in gold and silver mining stocks.

Miners moved a bit lower on Friday, but they did so on relatively low volume and their move below the previous lows was very small. Consequently, we don’t think this is the true direction in which the market is heading.

Summing up, it seems that the corrective upswing in the precious metals sector is underway or is about to start in the next few days. In our opinion, it’s not the beginning of another big rally in the precious metals just yet, but a counter-trend move, which will be followed by further declines. At this time it seems likely that we are just ahead (in terms of weeks) of a big slide in the prices of metals and the final bottom for this prolonged decline. We’ll keep you updated.

To summarize:

Trading capital (our opinion):

It seems that having small (half of the regular position) long positions in gold, silver and mining stocks is a good idea:

• Gold: stop-loss: $1,187, initial target price: $1,249
• Silver: stop-loss: $16.89, initial target price: $18.07
• Mining stocks (price levels for the GDX ETF): stop-loss: $21.59, initial target price: $23.37

In case one wants to bet on higher junior mining stock ETFs, here are the stop-loss details and initial target prices:

• GDXJ stop-loss: $33.80, initial target price: $37.14
• JNUG stop-loss: $12.37, initial target price: $16.34

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

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.

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 always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.

The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the automated tools (SP Indicators and the upcoming self-similarity-based tool).

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
Founder, Editor-in-chief

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