Briefly: In our opinion no speculative positions in gold, silver and mining stocks are now justified from the risk/reward perspective.

When one looks at gold and silver prices and their moves yesterday, it might seem that nothing happened in the precious metals market. That’s far from the truth because the real action took place in mining stocks. Several weeks ago, it was miners’ strength that heralded the rally in the whole sector. Will we see one also this time? Let’s start with mining stocks (charts courtesy of http://stockcharts.com.)

Click here for reference chart.

Miners moved higher and the volume that accompanied this move was rather average. It was not high enough to confirm the direction of the move by itself, but it was not low enough for us to say that the move was fake.

The fact that miners rallied without a rally in gold or a decline of the dollar is bullish for the short term. Consequently, we plotted an additional resistance line on the chart, in case GDX moves above its July high. The next resistance is close to the $28.50 level, at the September 2013 high.

There is little to comment on for gold as far as closing prices are concerned – there was a tiny – 0.08% – move higher, practically nonexistent. The interesting phenomenon was the intra-day decline right before the markets closed in the U.S. It caused the entire day to become a daily reversal – similar to the one that we saw on Friday. These reversals are bearish signs for the short term that contradict the bullish signal from mining stocks.

Consequently, even though the situation for mining stocks improved, it overall remains unclear and, in our opinion, it is still too risky to open a speculative position here. We realize that markets and our take on this situation might seem boring, but ultimately we are not investors and traders for the excitement, but for the growth of our portfolios, and it seems to us that at this time the risk that we would expose ourselves to by opening a position outweighs the potential profits that we could make.

As far as the USD Index is concerned, we can comment on it exactly in the same way as we did yesterday.

The difference is that we are one additional day after the cyclical turning point in the USD Index and, at the same time, the index is one additional day within the horizontal consolidation pattern.

Consequently, what we wrote yesterday is not only up-to-date, but actually, the implications are a bit stronger:

The situation in the USD Index is still a bullish factor for the precious metals sector. The U.S. dollar is after a sizable rally and right after the turning point, which is likely to cause at least a small decline.

If the USD Index doesn’t decline in the next several days, it will prove the dollar’s strength. We saw a sizable rally in July and if the US dollar is able to hold these gains and only correct in a mild, horizontal way, then we will likely see another big upswing shortly. For now, the index is still close to the cyclical turning point, and thus prone to a corrective downswing.

Please note that with each passing day, the USD Index is getting further from the turning point, and the odds for a decline diminish. Another reason is that we are already seeing a consolidation pattern in the index – we are no longer “extremely likely” to see at least a pause, as we are already seeing it. The RSI indicator is once again below the 70 level, so the situation is no longer overbought on a short-term basis.

Taking all the above into account, we can summarize the current outlook in the same way as we did yesterday.

Summing up, it seems that even though the next big move in the precious metals sector is still likely to be to the downside (we have not yet seen actions that are usually seen at important bottoms, like huge underperformance of silver [what we saw this week was not huge enough], and gold is not actively hated in the mass media), the odds for a corrective rally are relatively high.

The USD Index is [still, but less with each passing day] likely to decline at least a little, which is likely to cause a rally in the precious metals sector. However, let’s not forget that the USD Index is after long-, medium-, and short-term breakouts, so this corrective downswing could be small and temporary – the next big move is likely to be to the upside. The opposite seems likely for the precious metals sector.

We plan to re-enter short positions when we see either a small rally an some kind of confirmation that the next local top is in. At this time, we prefer to say out of the market. The situation simply seems too unclear and risky to open a speculative position.

To summarize:

Trading capital (our opinion): No positions

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position