Very Informative Follow-up to a Boring Session

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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.

We don’t have much to say regarding yesterday’s performance in the precious metals market or in the related markets as nothing really changed. Gold moved $3 higher and changes in silver and mining stocks were similarly small. But, quite a lot is happening in today’s pre-market trading and we can already infer something from the details of the price moves.

Before moving to the latter, let’s check what happened yesterday (charts courtesy of http://stockcharts.com).

Gold - Continuous Contract

The rally that we see in mining stocks is still very small compared to the size of the previous decline and at the same time it’s small compared to the size of the corrective upswing in gold and silver. No matter how one looks at it, mining stocks are underperforming, which is a very important sign confirming that what we saw was indeed just a counter-trend corrective upswing and not a beginning of a new medium-term rally.

Moreover, nothing changed yesterday in the case of the USD Index.

US Dollar Index - Cash Settle

Yesterday’s pre-market rally was invalidated and the USDX closed the session more or less where it had closed it on Tuesday. To be precise, it closed 0.10 lower, but there was no breakdown below the neck level of the medium-term reverse head-and-shoulders formation based on the daily closing prices and the close was above 95. Consequently, practically everything that we wrote about the outlook for the U.S. currency in yesterday’s Alert, remains up-to-date:

The key pattern for the U.S. currency is not the rising wedge. It’s the huge multi-month reverse head-and-shoulders pattern with the upside target of about 102.5 – 103.

The question is if this major pattern was invalidated or not. In our view, it wasn’t. The upper, dashed line (the neck level of the pattern based on the intraday highs) was broken in a rather insignificant way and the USDX is almost back above it (trading at 95.32 at the moment of writing these words). The more significant thing is that the neck level was not broken in terms of the daily closing prices.

The thick dashed line represents the neck level in these terms and as you can see, it was only touched on an intraday basis – the USDX didn’t close below it.

Moreover, since these lines are very close to the 95 level, traders might have simply viewed this round number as critical. And what did the USDX do yesterday? It moved to 94.96 on an intraday basis and then moved back up, closing at 95.15.

Consequently, since the breakout above the neck level of the reverse head-and-shoulders was clear and followed by several daily closes above it, it seems that we shouldn’t view yesterday’s brief move to this line as anything close to being a game-changer.

Besides, it’s important to note what was the likely reason for the USD’s decline.

Quoting a finance.yahoo.com article:

“The dollar fell under pressure after Trump’s interview with Reuters, where he reiterated that he is “not thrilled” by the actions of the Fed and prefers a policy of low-interest rates. The dollar index lost 0.7% over the past 24 hours. EURUSD up to 1.1530, the maximum in the last 2 weeks.

Previously Trump used similar verbal interventions in an attempt to stop the U.S. Dollar rally. Such comments were made on July 19, which restrained the dollar from growth for several weeks. Investors were waiting for Powell’s reaction to the president’s dissatisfaction. However, the Fed has not changed the rhetoric, hinting at the willingness to raise rates as soon as September. In addition to raising the rate of the Fed, the dollar is also supported by Trump’s policy.”

To be clear, the daily decline that followed the July 19 comments was practically the end of the declines. The time after the daily decline was a perfect moment for one to position themselves for profiting from higher USD values and lower precious metals values.

Back then, investors were waiting for Powell’s reaction and they now know that Trump’s comments didn’t change anything regarding the interest rate decision.

Consequently, it’s highly likely that yesterday’s decline in the USDX was emotional and temporary and the overall trend didn’t change – and the trend for the U.S. currency is up.

Pre-market Changes

At the moment of writing these words, the USD Index is at 95.37 after reaching 95.48 earlier today. Gold is down by almost $10, while silver is down by 21 cents, trading at about $14.50. Based on yesterday’s closing prices, gold was up by $19 this week, so today’s pre-market move means that about half of the entire weekly rally is already gone. Silver was up by $0.12, which means that at this time, this is already a down week for the white metal. Mining stocks have not yet started to trade today, but GDX was up by $0.34 and its down by $0.25 in the pre-market trading. The pre-market values are not very reliable, so the GDX could decline by more than $0.34 in the first hour after the markets open.

At the same time, the USD Index was down by 0.93 (again, taking into account yesterday’s closing price) and it’s up by 0.19 today. This means that USDX erasing only ¼ of the weekly decline was enough for silver and mining stocks to approximately cancel their entire weekly upswing. Gold erased half of the move up, so it’s magnifying the USD’s moves when it comes to declining, and at the same time the bearish forces are even stronger for mining stocks and for silver.

That’s a very bearish combination of factors. The USDX seems to have bottomed and we have fresh signals suggesting that when the USDX rallies, metals and miners will provide a very strong response. The outlook remains to be extremely bearish for the following weeks and days.

Important Analyses

Before summarizing, we would like to emphasize that we have recently posted several analyses that are very important and that one should keep in mind, especially in the next several weeks. If you haven’t had the chance of reading them previously, we encourage you to do so today:

Dear Gold Investor - Letters from 2013 - Analogy to 2013, which should make it easier to trade the upcoming sizable upswing (if enough factors point to it, that is) and to enter the market close to the final bottom.
Gold to Soar Above $6,000 - discussion of gold’s long-term upside target of $6,000.
Preparing for THE Bottom in Gold: Part 6 – What to Buy - extremely important analysis of the portfolio structure for the next huge, multi-year rally in the precious metals.
Gold’s Downside Target, Upcoming Rebound, and Miners’ Buy Plan - details regarding the shape of the following price moves, a buying plan for mining stocks, and a brief discussion of the final price targets for the current decline.
Key Factors for Gold & Silver Investors - discussion of key, long-term factors that support the bearish outlook for PMs. We are often asked what makes us so bearish – this article is a reply to this question.

We will also be posting another issue of the “Preparing for THE Bottom” series shortly (likely next week). The title will be “Buy-and-hold on Steroids”. Stay tuned.

Summing up, the USD Index seems to have formed an important bottom yesterday, or it’s extremely close to it. The breakout above the rising wedge pattern was invalidated, but the much more important pattern – the reverse head-and-shoulders formation – remains in place. This means that the pause in the precious metals and mining stocks is over or very close to being over and that another big slide is likely just ahead. Based on what we can infer from the 2013 decline, it is the time that we should pay extra attention to the PMs as their decline is likely not close to being over since no meaningful support has been reached in the case of gold and mining stocks.

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: $1,221; initial target price for the DGLD ETN: $82.96; stop-loss for the DGLD ETN $54.27
Silver: profit-take exit price: $12.72; stop-loss: $15.56; initial target price for the DSLV ETN: $46.97; stop-loss for the DSLV ETN $28.87
Mining stocks (price levels for the GDX ETF): profit-take exit price: $13.12; stop-loss: $20.81; initial target price for the DUST ETF: $80.97; stop-loss for the DUST ETF $30.87

Note: the above is a specific preparation for a possible sudden price drop, it does not reflect the most likely outcome. You will find more detailed explanation in our August 1 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: $30.72
JDST ETF: initial target price: $154.97 stop-loss: $62.78

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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