The Tricky Short-Term Gold Outlook

Yes, we are (most likely temporarily) closing the speculative short position in the precious metals market. Before you ask, it doesn't mean that the medium-term outlook changed, or that the points made in Monday's extensive Alert were invalidated. The reason is that based on yesterday's strength in the miners, the shape of gold's session (bullish reversal), and - most importantly - the very short-term outlook for the USD Index, it seems that a corrective upswing is quite likely.

While it's not likely enough to materialize - and if it does, then it's not likely to remain in place for long enough for us to enter a long position here, it's still something that makes us want to limit our exposure.

Yesterday in the PMs

The Tricky Short-Term Gold Outlook - Image 1

Gold reversed, while gold stocks showed some strength for the first time in days. It could have been just a one-day event, but the combination with gold's reversal makes us think that a corrective upswing might really be in the cards.

The above is was not the only reason that we decided to temporarily close our short position. The background information was the key detail.

While the USD Index Stalls...

The Tricky Short-Term Gold Outlook - Image 2

The USD Index just formed a bearish daily reversal for three trading days in a row. It looks like it doesn't want to rally without pulling back a bit first. And that's perfectly normal at this point of the greenback's rally.

We drew a line that connects the recent bottom with yesterday's high, and then we copied this line attaching it to the previous important short-term bottoms. The sizes of initial rallies differ, but they all share the same similarity. Namely, the initial correction started more or less at the same time.

What's even more important is what happened in the precious metals market at each of the interim tops that could be similar to yesterday's intraday high. We marked these cases with red vertical lines on the chart below.

...Gold Does This

The Tricky Short-Term Gold Outlook - Image 3

In all 5 previous cases, gold, silver, and gold miners moved higher, at least initially. They moved to new highs in most cases shortly thereafter (except for April 2019), but this doesn't imply that we will see a major rally right now.

Why? Because the medium-term trend was up in the analyzed period, and - based on the clear reversal in gold that was confirmed by the record-breaking weekly volume - it seems that we are now in a medium-term downtrend. This means that what is the more likely outcome, is probably more similar to what we saw in April 2019 than to the other cases.

We definitely don't expect gold, silver, or miners to move to new 2020 highs based on this corrective upswing, but they could erase 38.2% - 61.8% of the January decline before their move lower resumes. In case of gold miners, we could simply see a comeback to the previously broken rising red support line and a local top at or very close to it.

We wrote these words on January 7th: "in our view, if there ever was an excellent time to enter or add to one's short positions in precious metals sector - this was it". That was the day when gold topped in terms of the daily closing prices, and the gold miners were still very close to their tops. Now - in our opinion - is a great time to exit these new positions and any other positions that one might have in the precious metals market. We will have a great opportunity to get back into the market once the short-term situation clarifies and we will keep you - our subscribers - informed.


Summing up, even though the medium-term outlook remains extremely bearish, the odds are that we will see a quick corrective upswing based on miners' daily strength, reversal in gold, and the likelihood of seeing a pullback in the USD Index. We plan to wait out the correction on the sidelines and get back into the market at a more favorable risk to reward point.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions

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.

Przemyslaw K. Radomski, CFA
Founder, Editor-in-chief