Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold declined once again yesterday, but the size of the move was not significant. Silver and miners didn’t do much, so the question is if the decline is really underway, or is this week’s performance just a pause within a rally.
Our opinion on the above matter remains generally unchanged, although the short-term outlook deteriorated a bit based on what we saw yesterday. Let’s see why (charts courtesy of http://stockcharts.com).
From the long-term perspective once again nothing changed, but today we are featuring this chart to emphasize that the first medium-term target area for gold is in the $1,000 - $1,050 range. With this in mind, let’s discuss the short-term picture.
The first and less important reason for which the situation in the precious metals sector deteriorated is that gold declined and closed once again below the 2014 low. The breakdown below this level is significant.
It could be the case that the local top is already behind us and that the decline will now continue (and that it’s in fact already underway). If that is indeed the case, then this tells us something about the possible size of the next short-term downswing.
The green lines on the above chart mark the situations in which the next decline is similar to the previous one. There are 2 lines as it’s unclear which previous top is analogous to the current one. The targets based on this analogy (and this kind of analogy has been working very well in the gold market) are $1,025 and $1,000. However, if we take into account the 2014 low and the previous 2015 low and create a support line based on them, we’ll get $1,050 as a good target.
Which of these levels will mark a local bottom? At this time it’s rather unclear, although it seems that $1,000 is the best candidate. The important thing will be to look at other markets ratios etc. – in other words, to look for confirmations that the bottom is in or about to be in. We’ll keep you informed.
Meanwhile, since nothing changed in the silver market, let’s take a look at the performance of mining stocks.
Our previous comments on the above chart remain up-to-date:
Miners moved significantly (almost 5%) lower, practically erasing the previous daily gains. The decline took place on relatively high volume, which serves as a bearish confirmation. We can say the same about the miners’ performance relative to gold – miners are weak once again and this does not bode well for the entire precious metals sector in the coming days and weeks.
In addition to the above, we can say that yesterday’s small move higher was accompanied by low volume, which is a bearish sign. Moreover, miners moved to the previously broken very short-term rising support line without invalidating the breakdown. Consequently, the short-term outlook deteriorated and it will deteriorate even more once we see a third consecutive close below the mentioned support line. Should that happen, the breakdown would be confirmed and the implications would be clearly bearish for the following days.
Other than the above, there’s little that new that we can comment on today.
Summing up, the situation in gold and mining stocks deteriorated a bit and it could be the case that the next decline in the precious metals sector is already underway. However, if we were to see additional short-term strength in the following days, it would not shock us (and it would likely not make us change our outlook on the precious metals sector). It seems that the profits from our short position will increase significantly in the coming weeks, but not necessarily days (it seems likely, though).
As always, 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 (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
- Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
- Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54
In case one wants to bet on junior mining stocks' prices (we do not suggest doing so – we think senior mining stocks are more predictable in the case of short-term trades – 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: $16.27; stop-loss: $24.33
- JDST: initial target price: $16.98; stop-loss: $3.42
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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