Gold & Silver Trading Alert: Gold Stock Rise Back Up

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

On Friday, gold, silver and – especially – mining stocks declined substantially, but action seen yesterday was even more interesting. Gold and silver continued to move lower, but mining stocks rallied. Was the bottom just formed?

In short, that’s not likely as similar rallies were seen in mining stocks after particularly volatile declines. Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).

GDX - Market Vectors Gold Miners - Gold mining stocks

In mid-May, we also saw a big daily decline in mining stocks that was followed by a sizable daily rebound. The volume was smaller than during the decline, just like it was the case yesterday. What happened shortly thereafter in May? Miners moved only a bit higher on the next day, and then they continued to move lower. Back then, miners didn’t drop far, but this analogy doesn’t have to apply in this case – these daily analogies have strongest implications for the very short term (for the following day or two). We would need to have a much bigger pattern to discuss more long-term implications (like the one from 1983, which continues to have bearish implications up to this day).

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

As far as gold and silver are concerned, there’s little new to comment on. The sell signal from the Stochastic indicator remains in place, and both metals declined in a regular fashion. The volume in silver was big, but this doesn’t have any implications at this time, as we saw this kind of price-volume action before declines, rallies and sideways trading.

Gold and silver declined despite a move lower in the USD Index, which is a bearish development for metals.

On a side note, since many new subscribers joined us recently and we received quite a few questions about gold’s relationship between various news releases, we encourage you to read the August 8 Gold & Silver Trading Alert if you haven’t read it already, as it (especially its initial paragraphs) includes our take on that matter.

Summing up, it seems that what appeared most important yesterday – the miners’ daily rally - was nothing to call home about, and at the same time we saw another bearish confirmation in the form of gold and silver’s underperformance relative to the USD Index. Consequently, it seems that speculative short positions are justified from the risk to reward point of view.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (100% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,393, initial target price for the DGLD ETN: $74.37; stop-loss for the DGLD ETN $36.89
Silver: initial target price: $13.12; stop-loss: $21.63, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $14.34
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $33.17, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $18.80

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: $54.29
JDST ETF: initial target price: $245; stop-loss: $15.80

Long-term capital (core part of the portfolio; our opinion): No positions

Insurance capital (core part of the portfolio; 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 signs 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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