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

Gold soared after the Fed chief said that the U.S. interest rates could likely stay close to zero until 2022 amid the coronavirus pandemic. But was this reaction really justified?

Theoretically, low interest rates increase the odds of seeing negative real interest rates, which is fundamentally positive for gold. In practice, however, the interest rates have quite often simply followed gold. As far as short-term implications are concerned, we think that the most important interpretation is the emotional one.

If we don't take negative interest rate policy into account, then the market just got the signals that are practically as bullish as they can be. Extended period of ultra-low interest rates is bullish for gold at face value, and thus gold rallied.

It moved to the declining resistance line based on the last two local highs, it broke slightly above it and then it declined, invalidating the tiny breakout. Gold is declining so far today. Perhaps the market has already realized that nothing really happened yesterday... After all, the Fed's forward guidance is quite often misleading - remember how the Fed claimed to be keeping the rates high, only to be bullied by Trump into lowering them, even before the pandemic?

Just how realistic is it to think that no significant news will pop up between now and the end of the next year? Not at all. Any such news could make Fed change their mind. Or the monetary authorities (not only the Fed) could be pressured into making a given interest rate decision for political reasons. Consequently, what we heard is really of little value, as Fed will have to react to whatever comes its way.

This means that yesterday's rally might have been a temporary overreaction. The fact that the tiny breakout was already invalidated from the technical point of view, seems to confirm the above.

Yesterday's overreaction might have brought about the final bottom in the USD Index to form as well. At the moment of writing these words, the USDX has almost erased its yesterday's decline, but it's too early to say if the move is indeed sustainable. Once it becomes obvious that the bottom is in, other markets are likely to react.

The rally in the miners seem decisive, but please note that it was based almost entirely on the reaction to Fed's remarks. Before that, miners have practically ignored gold's intraday upswing, in tune with its recent performance. So, it wasn't really an entire day of strength as the above chart might suggest, but rather a few hours thereof. Besides, the late-May correction has also ended in the same way. There was a daily rally after two days of tiny upswings that followed a reversal. Then within two trading days, miners moved to new lows. Given what's happening in gold so far today (invalidation and an overnight move lower), it seems quite likely.

This time, the move lower that follows could be more significant, though. Why? Because the media is catching up with what's going on in the case of the pandemic, and this means that the general public will also catch up to it.

The above is a screenshot from Bloomberg.com The second wave of Covid-19 is starting to become "a thing" in the media. We wrote about it on numerous occasions and we wrote specifically that the markets are not reacting to it because their focus is somewhere else. We wrote that eventually, something will happen that will make the media (and thus the investment public) focus on pandemic's exacerbation / prolongation. The 2 million US cases might have been the tipping point.

In March, the fear of the virus escalated quickly, and the prices moved quickly as well, as a direct consequence. These were the times when the USD Index bottomed and soared, and these were the times when the stock market declined along with the precious metals and mining stocks.

The second wave of the virus is likely upon us, and the second wave of the price moves that we saw in March, is likely just around the corner as well. So far today, the USD Index is up while the S&P 500 futures are down.

Summary

Summing up, the tops in gold, silver, and mining stocks appear to be already in, and the decline is likely to accelerate shortly, as the fears over the second Covid-19 wave increase. The outlook for the precious metals market is bearish for the next few weeks, and it's very bullish for the following months. Even if gold, silver, and mining stocks are not going to move to new 2020 lows, they are still likely to decline visibly when the USD Index soars.

After the sell-off (that takes gold below $1,400), we expect the precious metals to rally significantly. The final decline might take as little as 1-3 weeks, so it's important to stay alert to any changes.

Most importantly - stay healthy and safe. We made a lot of money on the March decline and the subsequent rebound (its initial part) price moves (and we'll likely make much more in the following weeks and months), but you have to be healthy to really enjoy the results.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short positions (250% of the full position) in mining stocks is justified from the risk to reward point of view with the following binding exit profit-take price levels:

Senior mining stocks (price levels for the GDX ETF): binding profit-take exit price: $10.32; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the DUST ETF: $231.75; stop-loss for the DUST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

Junior mining stocks (price levels for the GDXJ ETF): binding profit-take exit price: $9.57; stop-loss: none (the volatility is too big to justify a SL order in case of this particular trade); binding profit-take level for the JDST ETF: $284.25; stop-loss for the JDST ETF: none (the volatility is too big to justify a SL order in case of this particular trade)

For-your-information targets (our opinion; we continue to think that mining stocks are the preferred way of taking advantage of the upcoming price move, but if for whatever reason one wants / has to use silver or gold for this trade, we are providing the details anyway. In our view, silver has greater potential than gold does):

Silver futures downside profit-take exit price: $8.58 (the downside potential for silver is significant, but likely not as big as the one in the mining stocks)

Gold futures downside profit-take exit price: $1,382 (the target for gold is least clear; it might drop to even $1,170 or so; the downside potential for gold is significant, but likely not as big as the one in the mining stocks or silver)

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