Yesterday’s flagship Gold Trading Alert was large and comprehensive, and since very little happened during yesterday’s session, today’s analysis is going to be rather brief.

In short, the markets moved a bit lower, thus increasing profits on our current short positions in junior miners.

After the initial decline, the markets paused, hesitating over what to do next.

In today’s pre-market trading, gold is up, and it even moved to this week’s high.

Does it change anything? Absolutely not.

As I emphasized several times in the previous days, the point of the recent long position was to catch the easy part of the corrective upswing regardless of whether it was something tiny or small (I don’t think it will be anything big, whatever happens). And that’s exactly what we did.

Even if gold, silver, and mining stocks move higher from here, it doesn’t mean that it’s worth keeping a long position open. In short, it’s all about the risk-to-reward ratio. The risk component is key here. We both spent a lot of time on the reasons why gold, silver, and – in particular – mining stocks (and especially junior mining stocks) are likely to move lower in the following months and weeks. I spent this time writing about myriad reasons, and you spent this time reading about it.

So, you are well aware of how likely the decline is and how profound it’s likely to be. If it’s not clear, please read yesterday’s Gold Trading Alert, and in particular the parts about the HUI Index and about world stocks – along with the comparison of the $MSWORLD index and the XAU Index (proxies for gold and silver stocks). The situation is extremely bearish for the medium term.

Consequently, it’s imperative – in my view – not to miss the opportunity that this provides us with. In light of the strong downtrend, a long position was a risky bet, and we managed to pull it off anyway. This might have seemed easy, but trading against a strong trend is anything but easy, and in most cases, it’s not even a good idea to engage in such trades at all.

That’s the perspective on the recent upswing and the current short position. In my view, aiming to stretch the profits from the long positions here would really be “pushing it.” It might work or it might not work. However, I’d view this more as a gamble than a justified trade, and I don’t want to gamble with money – neither my own, nor anyone else’s.

So, that’s why I’m back in the short position at this time – the risk-to-reward ratio no longer favors a long position in my view; it favors a short position.

The medium-term downside target of about $26 remains intact. This is not the final target for this decline. After this target is reached, I will probably (!) limit / exit / switch the short position in order to re-enter it at higher prices (just like what we did this week). However, it’s too early to say right now.

All in all, the medium-term outlook remains extremely bearish, and the profit potential for the current short position is still enormous.

And as soon as the situation changes, I’ll keep my subscribers informed.

There are a few other things that I would like to tell you today:

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First, it is giving you a little heads up that I stumbled upon what might be an extraordinary opportunity (even compared to the above), and I will consider taking advantage of it using options. Of course, it will not be for everyone, but since I’m considering participating myself, I will also let you know, and some of you might also want to participate in it as well. I want to think about it some more before I provide you with details. You can expect a follow-up from me (probably early) next week.

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Second, I want to emphasize what I can do and what I can’t do (and what doesn’t make sense) through the newsletter format with regard to sharing my opinions on specific positions.

The key thing to keep in mind is that there are many people reading this, and each person is different.

There are people with a long-term approach who don’t care at all about even the medium-term trend and are here just to get insights regarding the ultimate buying opportunity in the precious metals sector.

There are people here that want to profit from the medium-term decline by shorting it, and they don’t care about the short-term rebounds.

There are also other people here that want to trade the short-term rebounds but don’t care about intraday moves. Some of those people prefer to trade with stop-loss levels, and some don’t.

There are those that engage in many trades in many markets and take a look at my analyses to get to know targets and see how they align with their own targets.

There are those who might follow what I’m writing to the letter.

And, of course, each category can be mixed with another to some extent. On top of that, some investors can’t invest in junior miners and have to use (or simply prefer) gold or silver instruments. Or they trade commodities. Or currencies/stocks.

The reason why I’m mentioning this is to emphasize that I can’t reply to the question “what you should do with your trade.” It depends on your preferences / strategy / availability of options / risk tolerance / and many more characteristics that are unique to you. I can tell you what I think the market is going to do and what my preferred way of approaching what’s likely is. But it is up to you to decide how you’re going to use that information. Please start with yourself and then apply my insights, not the other way around.

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Third, the position that is justified from the risk-to-reward point of view depends on both the above-mentioned factors: you (and your approach, etc.) and the outlook.

What it does not depend on is the status of your trade. Is it profitable? Is it not profitable? Was it entered in January? Or October? Or May?

There might be exceptions in cases of tax consequences, in cases of very large traders that can’t simply enter/exit the market as they please as they would move the market, and in case of some rare and unique circumstances. Most likely, in 95%+ of cases, it’s not relevant.

Whatever the entry position was, the move in tune with your position or against your position will have exactly the same impact on your portfolio.

Simple simulation:

Bought at $10, and the current price is $13. The price is extremely likely to move to $15. Should I sell?

No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $13 = $2. The initial $10 is irrelevant.

Bought at $10, and the current price is $13. The price is extremely likely to move to $8. Should I sell?

Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $8 - $13 = -$5. The initial $10 is irrelevant.

Bought at $10, and the current price is $7. The price is extremely likely to move to $15. Should I sell?

No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $7 = $8. The initial $10 is irrelevant.

Bought at $10, and the current price is $7. The price is extremely likely to move to $4. Should I sell?

Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $7 - $4 = -$3. The initial $10 is irrelevant.

In no case does the initial value (purchase price) impact the decision.

People tend to overcomplicate things, which then makes it harder for them to stay objective and apply the above simple mechanism.

For example, they will add labels like “the trade is profitable” or “the trade is at a loss.” And then something like “loss aversion” will kick in. You see, emotionally, when one is at a loss, they don’t care that much if the loss gets bigger (they do, but it’s more important if they “frame” it as a loss or win). Try this: what makes a bigger difference – a move from a -10% loss to a 10% profit, or a move from a 20% profit to a 50% profit? Probably the former “feels” more important, right? Because the framing changes. However, from the portfolio point of view, the latter is much more important.

Let me paste the above example with extra info about the labels.

Bought at $10, and the current price is $13. The price is extremely likely to move to $15. Should I sell?

No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $13 = $2. The initial $10 is irrelevant, as is the fact that the position was profitable.

Bought at $10, and the current price is $13. The price is extremely likely to move to $8. Should I sell?

Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $8 - $13 = -$5. The initial $10 is irrelevant, as is the fact that the position was profitable.

Bought at $10, and the current price is $7. The price is extremely likely to move to $15. Should I sell?

No, because due to the likely move, the value of the portfolio is likely to increase thanks to keeping the position intact. What matters is $15 - $7 = $8. The initial $10 is irrelevant, as is the fact that the position was not profitable.

Bought at $10, and the current price is $7. The price is extremely likely to move to $4. Should I sell?

Yes, because due to the likely move, the value of the portfolio is likely to decrease due to keeping the position intact. What matters is $7 - $4 = -$3. The initial $10 is irrelevant, as is the fact that the position was not profitable.

So, again, please start with yourself and your approach, and then check the outlook (based on my analyses or also on those of others, if you so choose). Then enter/close/adjust your position accordingly so that it reflects the current situation. That – in my opinion – is the right approach to trading in general.

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