Briefly: In our opinion (half) speculative short positions in gold, silver and mining stocks are now justified from the risk/reward perspective.

Gold and the rest of the precious metals market moved higher on Friday and the volume was not low. It was lower (for the GLD ETF) than what we had seen during Thursday’s decline, so there are some bearish implications. But are they really that important? Let’s take a closer look (charts courtesy of http://stockcharts.com.)

Click here for reference chart.

The very short-term trend remains down (based on July highs), so we can’t say that a lot changed. The analysis of price and volume provides us with bearish implications even though the last move was down. The GLD ETF closed slightly below the 300-day moving average (spot gold closed above it). Gold is declining also today – clearly the short-term trend remains down.

From the long-term perspective – and comparing gold’s performance to that of the bond market – the situation remains bearish.

Gold is already very close to its previous lows. It would now take only a little more weakness for gold to break below them, which would likely start a sizable downswing.

In the case of mining stocks, the short-term trend is more horizontal, but it’s still pointing downward. The volume here was a bit higher on Friday than during the previous daily decline, and it’s a bullish sign. If miners continue to show strength, it might suggest that we will see another rally before a bigger decline.

The situation on the USD Index chart is bullish, but we see some caution signs as well. The RSI indicator is above the 70 level, which has previously meant that a local top would be seen shortly. In fact, it was the proximity of this level that was followed by declines, and at this time the U.S. currency is even more overbought – it’s more overbought than it’s been in a year. What we wrote previously about the possible implications remains up-to-date:

We could see a pause here, but we could also see another visible move higher followed by a correction close to the cyclical turning point (meaning in a week or so).

In other words, we are gold fans, but not fanatics. We don’t act in the best interest of gold or silver producing companies. We act in your best interest. We are neither permabulls nor permabears. We don’t believe blindly in gold or any other asset class. We are not against any particular asset class either. We strive to look at the world in the most unbiased way possible (please note that we don’t accept any advertising on our website in order to prevent any conflict of interest), then combine it with our experience in the precious metals market, trading in general and all other linked areas, and provide the outcome of our analysis to you – our subscribers and readers – in order to make your investments and trades more profitable and to help you grow money over time.

At this time, based on the analysis of various fundamental factors including the low interest rates and Quantitative Easing programs, we think that gold and silver are poised to move higher in the coming years. However, markets are only logical and do what they are “supposed to do” in the long run (counting in years, not months or days). We also realize that markets don’t move in one way only – at times even the markets with the most favorable outlook have to correct or decline. In the medium term and especially in the short and very short term, markets are not logical, but emotional. They are also vulnerable to big entities moving the market with sudden sales of assets. Did the fundamental situation change for gold in 2008? No, but it declined very significantly nonetheless. It moved back up and rallied much above the previous high, but not before declining sharply and significantly.

At this time, even though we like gold and silver as very long-term investments, we don’t think that the medium-term decline is already over. We like gold, but based on the information that we have available today, it seems likely to us that it will need to move even lower before it starts its next big upswing.

Summing up, it seems to us that the situation in the precious metals market remains bearish, but it improved a bit based on Friday’s session. While the USD Index is visibly above the June high, gold is not below its June low. This strength could be meaningful, or it could be the case that the metals’ reaction is just delayed. Please note that the major breakdown in the Euro Index has just materialized and it’s quite likely to impact the precious metals market negatively in the coming weeks and months. The short-term outlook for the USD Index is rather mixed. The medium-term trend is down, but the currency is strongly overbought in the short term and the turning point is just around the corner.

While we continue to think that the medium-term trend remains down for gold, silver and mining stocks, the odds for a move higher in the coming days somewhat increased based on the sector’s strength on Friday and the overbought situation in the USD Index. It seems to us that decreasing the size of the short position (at this time the silver market provided the biggest gains) in the sector is now justified from the risk/reward perspective.

To summarize:

Trading capital (our opinion): Short (half) position in gold, silver and mining stocks with the following stop-loss levels:

Gold: $1,353

Silver: $21.73

GDX ETF: $28.30

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position