Gold & Silver Trading Alert: Silver’s Rally and Its Implications

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Briefly: In our opinion, short (full) speculative positions in gold, and silver are justified from the risk/reward point of view. We think that no speculative positions are currently justified from the risk/reward perspective in the mining stocks.

Gold and mining stocks didn’t do much yesterday, but silver continued to move higher. Did this outperformance generate the important signal that we covered yesterday?

Not yet, but it’s close to doing so. The signal that we mean is the sell signal from the RSI indicator that’s based on the silver to gold ratio. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Let’s start with the long-term charts.

SILVER:GOLD - Silver to Gold ratio chart

In yesterday’s alert we commented on the mentioned ratio in the following way:

The silver to gold ratio doesn’t indicate a change in the medium-term trend. It moved to its declining resistance line and the last time it moved to it, a local top was in.

Moreover, if the silver to gold ratio moves a bit higher, it will also push the RSI based on the ratio higher. At this time the RSI is at 65 and practically each time the RSI moved above 70 and reversed an important local top was in. Consequently, the medium-term trend remains down and the prices could slide right away or after some additional short-term strength.

The ratio indeed moved a bit higher – to 66.37, however, if we look at the intra-day high of silver, it was even higher. Is the local top in? It could be, but we could still see some temporary strength before the next major slide.

Due to silver’s outperformance yesterday we now have the RSI at 69 – extremely close to the sell area. This tells us that silver’s outperformance is or is about to be excessive enough to be viewed as a medium-term sell signal on its own – and a quite effective one (as you can see on the above chart).

Long-term Silver price chart - Silver spot price

Silver itself indeed moved higher, but it closed just 4 cents above the 50-week moving average. This move higher is still well in tune with what we saw earlier this year and what preceded a massive decline. Moreover, silver plunged in today's overnight trading and the small breakout was already invalidated in a major way.

All in all, there was nothing bullish in silver’s yesterday’s move higher and in fact, if we see just a little more strength in silver, the implications will be bearish due to the current situation on the silver to gold ratio chart.

Other than the above, there’s little more new that we can say today as the situation in gold, mining stocks, general stock market and USD Index didn’t change much (the biggest change was seen in the dollar as the USD moved to a short-term support line, which is a negative factor for precious metals prices).

Consequently, our yesterday’s alert remains up-to-date and if you haven’t had the chance to read it previously, we encourage you to do so today.

Summing up, while it continues to seem justified from the risk/reward perspective to wait out any temporary strength in gold and silver, it seems no positions are justified in the case of the mining stocks due to the bullish outlook for the general stock market. Perhaps we have just seen the local top (based on silver's reversal), but we haven't seen enough sell signals to justify moving back on the short side of the market in case of the mining stocks. We might be very close to this moment, though.

Consequently, while we are not going long, we do think that staying on the sidelines in the case of the trading capital dedicated to the mining stocks, while keeping the existing short positions in gold and silver, is currently justified from the long-term perspective. Despite this rather long consolidation, it seems that the next big move will be to the downside and that significant profits will be made thanks to this move – likely higher than the ones from the previous trade and perhaps just as big (or higher) than from the previous short trade.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short position (full) position in gold and silver (but not one in the 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

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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