Briefly: In our opinion, speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward point of view.
Silver rallied sharply yesterday but before the day was over, it erased almost all the gains and the same was the case with gold. It was not really the case with mining stocks, but likely only because miners were not trading before the session started in the U.S. What’s next? Let’s jump right into the charts (charts courtesy of http://stockcharts.com).
Once again nothing changed on the long-term gold chart (we’ll cover it on Monday anyway), so let’s move right to the short-term one.
In yesterday’s alert, we wrote the following:
From the short-term point of view, not much changed either. Gold moved to the 61.8% Fibonacci retracement level and declined after reaching it. There was no meaningful breakout.
Despite yesterday’s pre-market rally, the above remains up-to-date as gold closed below the 61.8% Fibonacci retracement once again yesterday. Without a breakout, the decline remains in place.
Moreover, the size of the reversal and the size of the volume that accompanied it is a very clear bearish sign for the following days.
As far as silver is concerned, we saw a similar reversal yesterday. The important thing is that we saw it once silver touched its May 2015 high. This makes the reversal very believable and it is very likely that silver will slide in the coming days. Still, we can’t rule out another move to the mentioned resistance – the May 2015 high ($17.77)
Mining stocks moved a bit higher, but the move was not spectacular and the size of the volume was not greater than what we had seen on the previous day. Consequently, we don’t think miners truly outperformed. The important thing is that gold stocks (the HUI Index) didn’t move (let alone break) above the 2015 high. All in all, it seems that the miners rally is well overdone and that a decline is likely to be seen.
Meanwhile, our analysis of the USD Index remains up-to-date:
What was the likely reason behind the PM’s rally? The decline in the USD Index. The important thing is that despite this decline, the USD didn’t invalidate the previous breakout and that it didn’t move below the previous low. The outlook is still more bullish than it was about a week ago and the implications for the precious metals market continue to be bearish.
The USD moved higher yesterday despite an intra-day decline, so the outlook remains bullish.
Summing up, even though a lot happened in pre-market trading yesterday, once the session was over, we saw that not much changed in the case of gold and mining stocks (as the short-term outlook for them was already bearish) and that the outlook became more bearish for silver due to the big turnaround after reaching an important resistance level. Consequently, we think that a short position (full) in gold, silver and mining stocks is justified from the risk to reward point of view. It’s rather unclear, but it seems that the decline should start within the next several days and the decline could remain in place for a few months (no market moves in a straight line and there will be corrections, though).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:
- Gold: initial target price: $973; stop-loss: $1,304, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $47.15
- Silver: initial target price: $12.13; stop-loss: $18.05, initial target price for the DSLV ETN: $61.16; stop-loss for DSLV ETN $26.80
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $24.07, initial target price for the DUST ETF: $5.72; stop-loss for the DUST ETF $1.74
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 ETF: initial target price: $14.13; stop-loss: $36.37
- JDST ETF: initial target price: $8.86; stop-loss: $2.27
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.
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, Gold & Silver Fund Manager
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