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Time to Short Gold, Silver, and Mining Stocks?

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The outlook for precious metals is bearish, but not extremely so.

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In my firm's opinion, speculative short positions (half) are justified from the risk/reward perspective in gold, silver, and mining stocks.
 
The situation in the currency and precious metals markets developed to a large extent as we had outlined it yesterday. The USD Index paused, but gold, silver, and mining stocks caught up a bit in terms of the reaction to the previous dollar's moves. Let's take a closer look (charts courtesy of http://stockcharts.com).
 

 
Basically, everything that we wrote yesterday about the USD Index remains up to date:
 
The USD Index paused after moving very close to the declining short-term resistance line. That's not really surprising -- the previous move up had been quite sharp, so it's no wonder that we saw a breather. No market can move up or down without any corrections. However, the USD Index is after long- and medium-term breakouts, and thus the continuation of the rally is to be expected.
 
The short-term USD Index chart reveals that there is one additional resistance level that needs to be taken out before the USD can rally much higher -- the declining line based on the February and April highs. Once we have the USD Index above this line and the breakout is confirmed, traders should become convinced that the next move in the US dollar is up. That's when we might see metals and miners finally respond to the USD Index' strength (by declining).
 
Click to enlarge
 
Yesterday, we wrote that the Market Vectors Gold Miners ETF (NYSEARCA:GDX) had moved higher on tiny volume, which was a bearish sign. Another bearish sign (or more precisely: not a bullish one) was that we didn't have gold above the previous local high. Moreover, we emphasized that this week's small upswing hadn't made gold move above the 50-day moving average, and that the small move higher still seemed to be a countertrend move.
 
The above is up to date, and yesterday's session confirms it: GDX declined on volume that was significantly bigger than the volume accompanying the previous daily rallies.
 

 
The "lower highs" observation applied to the mining stocks sector and the bearish price-volume implications were seen here as well. Just as it is the case with the gold market, the situation remains bearish; yesterday's decline on relatively big volume confirms it.
 
The precious metals sector usually declines in the middle of May, so we have bearish implications also from this perspective.
 
Summing up, the outlook for gold, silver, and mining stocks remains bearish, but not extremely bearish, which means that we don't increase the size of the short position just yet. Precious metals aren't responding strongly (we have seen some reaction yesterday, though) 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). Plus, silver's strong performance and the lack thereof in the case of mining stocks, plus lower highs in gold and mining stocks, are a bearish combination.

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

Twitter: @SunshineProfits
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No positions in stocks mentioned.
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