Briefly: In our opinion, speculative short positions (full) in gold and silver are justified from the risk/reward point of view.
On Friday we saw a continuation of the moves that started earlier last week – the precious metals sector moved higher while the USD Index moved lower. What can we expect this week?
In order to reply to this question let’s take a look at the charts. We will once again start with the USD Index (charts courtesy of http://stockcharts.com).
On the short-term chart you can see a new daily low as well as support levels in the form of May 2015 and August 2015 lows. Both levels were insignificantly broken last week and the breakdowns are not confirmed. It’s still quite likely that USD will reverse based on these levels. If not, then the lowest of short-term support levels is at about 92.5 (relatively close to where USD is trading right now).
Keeping this in mind, let’s take a look at the long-term chart. The implications are much more important. Firstly (and less importantly), please note that the long-term support levels are more or less aligned with the short-term ones. The 38.2% Fibonacci retracement level is at about 92.5, which is another strong support. The level through which the USD Index broke (about 92) and that stopped previous declines and rallies (marked with red ellipses) is also relatively close.
The second thing is even more important for us, precious metals investors. Please note that this year’s move higher in gold (lower part of the chart) has been a reflection of the decline in the USD Index. It was not until the USD Index started to slide that gold started to rally. Gold is now a bit (from the long-term perspective) below the level it reached in early 2015 and USD is a bit above this level. More or less what’s been going on in gold within the past year or so can be explained by the moves in the USD Index. Why is this so important? Because the very limited potential for additional declines in the USD Index implies very limited (again, from the long-term perspective) potential for a move higher in gold.
In early 2015, USD broke through all these important resistances in a sharp, volatile fashion and the fact that it’s been consolidating for many months is not surprising – it’s quite natural. Was the breakout invalidated? No. Are the support levels close? Yes. This means that the USD Index is likely to rally – if not right away, then relatively soon. This means that gold is likely to decline – and decline significantly, just as the USD Index is likely to rally significantly. The moves that follow consolidations tend to be similar to the moves that preceded it and this provides with an upside target of 118 in the USD Index.
Is the bottom in the USD Index already in? Possibly, but the most important thing is that if it’s not, then it’s not likely far away. The opposite is the case with gold.
With the situation in the USD Index being as it is, being invested in the precious metals market appears very risky.
Moreover, please note that while USD is well below its early-March low, gold is only a little above its early-March high. Gold is not responding to USD’s decline strongly, which suggests that gold “wants” to decline, but declining USD is not “allowing” it to.
Gold is now a bit above the declining trend channel, but all previous similar attempts to break out were invalidated, so we don’t view this breakout as important – at least not yet. Moreover, gold didn’t move above the 38.2% Fibonacci retracement based on the entire bull market, so all in all not much changed.
Gold moved higher on Friday and closed a few dollars above the March high. This appears very bullish, but:
- The 2015 high is just a few dollars higher (at about $1,307), so if gold moves higher it’s not likely to move much higher
- As mentioned above, gold is not reacting strongly to what USD is doing and the potential size of the decline in the USD Index is very limited.
Besides, last year – in May – gold moved above the previous high just to start a $150 decline shortly thereafter. Consequently, Friday’s small breakout does not have meaningful bullish consequences.
From the non-USD perspective, nothing changed either. Gold didn’t move above its 2015 high or the previous 2016 high. The bearish implications of the invalidation of the previous breakout remain in place.
Gold priced in the Japanese yen provides us with similar implications. Gold recently moved back to the declining resistance line and declined after reaching it. The breakdowns below the declining and rising support lines seem to be confirmed and the implications are bearish.
Meanwhile, silver also moved a bit higher yesterday on Friday and it closed several cents above the May 2015 high, but it already moved back below this level (below $17.77) earlier today, so the breakout is definitely not confirmed. Our previous comments about the bearish implications of high volume in silver remain up-to-date.
There is also an additional bearish factor present in silver – the cyclical turning point (vertical lines on the above chart) is only a few days away and since it works on a near-to basis, the reversal could already be behind us.
Gold stocks moved well above their 2015 high, but given the extremely overbought reading in the RSI indicator it is doubtful that gold miners can really rally much higher (let’s keep in mind that the situation in the USD Index is likely to affect miners too). Each time except 1, when the RSI indicator was as overbought as it is right now, gold stocks declined. However, the most important factor that is likely to impact the prices of mining stocks is the USD Index.
Can miners move even higher before turning around? Yes, based on the breakout above the 2015 high, the HUI Index could rally another 10 – 25 index points as the next resistance lines are created by the 2014 highs. That’s why given the proximity of the resistance levels in gold, silver and mining stocks, we are only keeping an opened position in the metals, but not in the mining stocks.
Taking a look at the junior mining stocks, we see that a combination of 2 important resistance levels was reached – the declining resistance line and the 2008 low. This suggests that the days of the rally in the precious metals sector are numbered.
Summing up, the current situation in the USD Index suggests that a big move higher in it will be seen rather sooner than later and the implications for the precious metals market are profound and bearish. Since the major breakout in the USD Index was never invalidated (conversely, it was verified a few times already) and USD is very close to both: short- and long-term support levels, we can expect higher USD values in the coming weeks. This is likely to translate into much lower precious metals values – if not immediately, then still very likely relatively soon. The only part of the precious metals sector where anything changed are the mining stocks, which moved above their 2015 high. Still, miners are extremely overbought on a short- and medium-term basis and we expect to see another shorting opportunity to present itself relatively soon. We are also moving the stop-loss order for gold a bit higher due to the proximity to the 2015 high. If it get’s hit, we’ll likely re-enter the position at higher prices.
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: $1,317, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $46.25
- Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $61.16; stop-loss for DSLV ETN $26.34
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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