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Outlook for Gold, Silver Remains Bearish, but for How Long?

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As charts show, the situation in the USD Index has changed more visibly than that of silver and mining stocks.

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In my firm's opinion, speculative short positions (half) in gold, silver, and mining stocks are justified from the risk/reward perspective.
 
History repeats itself once again -- gold recently attempted to move higher but failed to ignite anything more than a small daily rally. Let's see if there's anything that this can tell us (charts courtesy of StockCharts.com).
 

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There's one clue. It's not a very strong one, but at least we have something new to comment on. The last two sessions were very similar to what we had seen at the beginning of the month. Back then gold declined quite visibly, so perhaps the same reaction will be seen this time. In this case, such a decline would have more bearish consequences, as it would take gold below the previous lows and such a breakdown would likely lead to further declines.
 
Other than that, there's not much that we can say about the changes in the gold market itself. What we wrote about gold in our previous alert remains up to date:
 
We wrote that the strength that we could see here would likely be temporary. It turned out that the rally that this reversal generated was indeed very small and temporary. We saw another lower intra-day high in gold, and the move higher materialized on low volume. We're once again seeing this bearish combination. If the USD Index confirms its breakout, gold might finally break below the short-term support.
 
How far can it go initially? Our best guess at this particular moment (this might change as the situation develops) is the $1,200 level or close to it. One of the ways to estimate the size of a given move is to assume that the move following the consolidation (which we've been seeing since the beginning of April) will be similar to the one preceding it. In this case, the move following the breakdown could be similar to the March decline, and such a move would take gold close to the $1,200 level. This level is very close to the 2013 lows, so we expect gold to pause there (but not to end the decline).
 
There is not much to comment on in case of silver and mining stocks, but the situation in the USD Index has changed more visibly.
 

 
The US dollar moved higher once again and almost confirmed the breakout above the declining resistance line. Precious metals are not reacting yet. Unless metals start to react to the dollar's strength (by declining) we will view this as a sign of their strength. For now we still think that the reaction is delayed, not really absent.
 
One of the reasons for the lack of reaction could be the situation in the silver market.
 

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Silver is right at its support line. In addition to the 2013 lows this is the key support level that prevents silver from moving much lower -- to the $14-$16 target area. Once this level is broken, silver is likely to move sharply lower. Being this significant, it's no wonder that this support line is not easy to break. Since gold, silver, and mining stocks are highly correlated in the short term, it's also no wonder that silver's refusal to move lower already is accompanied by a similar refusal in the case of gold and mining stocks.
 
Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we are not increasing the size of the short position just yet. Precious metals are not responding strongly to the dollar's rallies so far, but it seems that investors and traders are simply waiting for a confirmation of the breakout in the USD Index (there have been cases when the metals' reaction was delayed in the past).
 
To summarize:
 
Trading capital (our opinion): Short positions (half) in: gold, silver, and mining stocks with the following stop-loss orders:
 
- Gold: $1,326
- Silver: $20.30
- GDX ETF: $25.20
 
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position

For the full version of this essay and more, visit Sunshine Profits' website.

Twitter: @SunshineProfits
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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