Gold & Silver Trading Alert: Rally? What Rally?

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

The recent move higher on the precious metals market took silver visibly higher, which got many investors excited. We were not among them, as we know that silver’s breakouts are quite often turning into fakeouts. This time was no different – silver declined once again and it took gold and mining stocks with it. In fact, miners declined below the previous lows and HUI closed below 140. Is the continuation of the decline imminent?

Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold continues to decline on increased volume and the corrections are taking place on lower volume. The implications are bearish, especially that we saw a breakdown below the previous July low and the rising dashed support line based on previous major medium-term bottoms.

Short-term Silver price chart - Silver spot price

Silver is not yet below the previously July lows, but the slide is definitely significant – silver is almost $1 below the recent local high. The situation didn’t deteriorate much, because it hadn’t improved based on the previous rally either – it simply remains bearish. The sell signal from the Stochastic indicator seems to confirm the above.

As far as mining stocks are concerned, the long- and short-term pictures remain bearish.

XAU - The Philadelphia Gold and Silver Index (XAU Index)

HUI Index chart - Gold Bugs, Mining stocks

Both key indices for the mining stocks sector (XAU and HUI) made fresh lows and that makes the recent breakdown below the 2008 low even more profound and even more bearish. The precious metals stocks and the rest of the PM sector seems to be on its way to much lower price levels.

GDX - Market Vectors Gold Miners - Gold mining stocks

The short-term GDX ETF chart provides another bearish confirmation – miners not only moved significantly lower, but they’ve done so on high volume, which makes it even more bearish.

Summing up, the situation in the precious metals market remains bearish and yesterday’s big decline on significant volume in mining stocks serves as another confirmation. The profits on our short position have increased once again, but it seems that closing them at this time would be premature – in our opinion the odds are that these profits will become much bigger before the move is completely over.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short position (full) 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: $1,062; stop-loss: $1,208, initial target price for the DGLD ETN: $95.88; stop loss for the DGLD ETN $66.49
Silver: initial target price: $12.72; stop-loss: $17.11, initial target price for the DSLV ETN: $102.21; stop loss for DSLV ETN $38.32
Mining stocks (price levels for the GDX ETN): initial target price: $14.12; stop-loss: $18.73, initial target price for the DUST ETN: $30.68; stop loss for the DUST ETN $14.08

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: $18.12; stop-loss: $25.78
JDST: initial target price: $16.26; stop-loss: $5.79

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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