Briefly: In our opinion, short (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The debt agreement was not reached once again and this time it seems that the situation worsened significantly. Greece introduced capital controls and Greek banks didn’t open on Monday. Gold moved over $10 higher when the markets opened after the weekend and investors could react to the situation in Greece. Afterwards, gold corrected most of this rally, but since the end of the Greek crisis is nowhere in sight, gold could still soar based on the Greek turmoil…
Last week, however, gold declined over $26, silver declined $0.30 and the HUI declined more than 4 points. The entire sector moved lower, but miners are not underperforming gold as they used to in the previous weeks. Moreover, silver reversed in quite a meaningful way on Friday. Is the miners’ outperformance – on a weekly basis – a sign of strength, especially given that silver refused to slide much further?
In short, not likely. The support created by the 2008 low still seems to be keeping the decline in check, which is not surprising, nor particularly bullish – it’s simply natural for the market to be reluctant to decline below a major support without pausing. Even the weekly lack of outperformance is not meaningful given the mentioned major, long-term support.
Regarding the situation in Greece, please note that we wrote that gold “could” still soar. It could, but it’s not really likely to. Gold’s overall reaction to banks closed in Greece and the capital controls is extremely small. When a given market doesn’t react to factors that should make it move in a certain direction, it’s likely to move in the other direction shortly. In this case, when the Greek tensions subside (some form of agreement is reached), gold could (and is likely to) decline once again.
Before we move to charts, please note that we covered the situation in Greece in greater detail in today’s Gold News Monitor (it’s available for your account) and we encourage you to read it.
Let’s examine closely what happened last week, starting with gold (charts courtesy of http://stockcharts.com).
The decline continues – gold has been forming lower highs practically each time it moved higher. Plus, the sell signal from the Stochastic indicator remains in place, while the RSI indicator doesn’t indicate an oversold status. The implications are bearish for the medium term.
On a short-term basis, gold moved a bit higher on Friday, but this rally seems to have been just a pause within a downtrend – the volume was not significant, which tells us that the move higher is not something meaningful.
With the long-term picture being bearish and the same situation (less precise, though) on the short-term chart, the overall outlook for gold remains bearish.
Silver moved visibly lower last week, but the size of the decline is still tiny compared to how low it will have to go to reach even the first of our target areas (and it’s more likely that it will move below it).
On a short-term basis, we saw an intra-day reversal. These kinds of daily patterns are usually followed by rallies, but let’s keep in mind 2 things.
Firstly, technical signals from silver are quite often not meaningful if they are not confirmed by other markets (especially silver’s breakouts).
Secondly, there were quite a few cases in the recent past when we saw similar reversals within declines, not only at their ends.
Consequently, we don’t find silver’s reversal as really bullish. The short-term trend remains down, just as the medium-term one.
Gold stocks held up relatively well last week by not moving below their 2008 low, but, as we wrote earlier today, that’s something natural given the significance of the support. Even if one looked at the above chart for just a second, the odds are that one would remember the big spike and price bottom in the middle thereof. The 2008 bottom was a major development and so is the support created by it.
Once this support is broken, the following decline could be sharp, so it seems justified to have at least a small speculative short position in this market at this time.
Plus, let’s not forget about the important gold-stock-related ratios.
Gold stocks relative to gold show a continuation of the weakness. The medium-term trend remains down and the ratio managed to close the week below the 2000 low. That’s right, gold stocks are cheaper relative to gold than they were at the beginning of the bull market. This breakdown, however, suggests that they can get even much more oversold before the decline is over.
If we compare gold stocks to other stocks, we see that the former are showing weakness as well. The medium-term trend remains down also in this case and it seems that we will see another slide shortly. The next support is at the late-2001 low and the next – very strong – one is at the 2000 low. If the ratio moves as low, we don’t think that the ratio would manage to break below the 2000 extreme.
Finally, let’s take a look at the USD Index.
The breakout above the declining short-term resistance line was confirmed, so we are likely to see higher USD values and lower precious metals’ values.
Summing up, Summing up, the situation in the precious metals market remains bearish. The strength that we saw in miners is natural – not bullish. Silver’s intra-day reversal is not meaningful. Gold should have rallied based on the situation in Greece and it didn’t, which is yet another bearish sign. Multiple other bearish factors remain in place as well. Even if we don’t see a decline immediately, it’s quite likely that we will see one in the following weeks or (more likely) days. We will likely double the size of our short position once we see an additional bearish confirmation or a number of them.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (half) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $17.33, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $41.17
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
In case one wants to bet on lower junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in case of short-term trades – we if one wants to do it anyway, we provide the details), here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Please note that a full position doesn’t mean using all of the capital for a given trade. You will find details on our thoughts on gold portfolio structuring in the Key Insights section on our website.
As a reminder – “initial target price” means exactly that – an “initial” one, it’s not a price level at which we suggest closing positions. If this becomes the case (like it did in the previous trade) we will refer to these levels as levels of exit orders (exactly as we’ve done previously). Stop-loss levels, however, are naturally not “initial”, but something that, in our opinion, might be entered as an order.
Since it is impossible to synchronize target prices and stop-loss levels for all the ETFs and ETNs with the main markets that we provide these levels for (gold, silver and mining stocks – the GDX ETF), the stop-loss levels and target prices for other ETNs and ETF (among other: UGLD, DGLD, USLV, DSLV, NUGT, DUST, JNUG, JDST) are provided as supplementary, and not as “final”. This means that if a stop-loss or a target level is reached for any of the “additional instruments” (DGLD for instance), but not for the “main instrument” (gold in this case), we will view positions in both gold and DGLD as still open and the stop-loss for DGLD would have to be moved lower. On the other hand, if gold moves to a stop-loss level but DGLD doesn’t, then we will view both positions (in gold and DGLD) as closed. In other words, since it’s not possible to be 100% certain that each related instrument moves to a given level when the underlying instrument does, we can’t provide levels that would be binding. The levels that we do provide are our best estimate of the levels that will correspond to the levels in the underlying assets, but it will be the underlying assets that one will need to focus on regarding the sings pointing to closing a given position or keeping it open. We might adjust the levels in the “additional instruments” without adjusting the levels in the “main instruments”, which will simply mean that we have improved our estimation of these levels, not that we changed our outlook on the markets. We are already working on a tool that would update these levels on a daily basis for the most popular ETFs, ETNs and individual mining stocks.
Our preferred ways to invest in and to trade gold along with the reasoning can be found in the how to buy gold section. Additionally, our preferred ETFs and ETNs can be found in our Gold & Silver ETF Ranking.
As always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
As a reminder, Gold & Silver Trading Alerts are posted before or on each trading day (we usually post them before the opening bell, but we don't promise doing that each day). If there's anything urgent, we will send you an additional small alert before posting the main one.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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