Gold & Silver Trading Alert: USD’s Confirmed Breakout

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Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward perspective.

The precious metals sector moved back up yesterday as the USD Index ended the session lower. Is the top in the metals really in (based on silver’s outperformance and miners’ underperformance) or will they continue to rally based on the strong performance relative to the USD Index?

We don’t like to report this (much prefer to report a profitable trading opportunity), but the situation is still unclear. Let’s see why (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

In yesterday’s alert, we wrote the following:

As you can see on the above chart, the USD Index not only broke above the March highs – it also closed above it for the second day. Some traders already view the breakout as confirmed and once we get the third closing without an invalidation today, the breakout will be fully confirmed. The implications would be bullish as the next strong resistance will be very close to the 100 level. The implications for the precious metals market would be bearish.

We have indeed seen the confirmation of the breakout – the USD closed above the March highs for the third consecutive day and the implications are bullish for the USD and bearish for precious metals. However, the USD also reversed on an intra-day basis, indicating a good possibility for seeing lower prices later this week. Based on the confirmation of the breakout, the move lower is not likely to be significant though. It will be interesting to see how metals and miners perform in light of a move lower in the USD. So far the USD Index declined a bit (to 98.5) and gold didn’t rally – in fact, it moved about $2 lower.

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

Gold and silver moved higher yesterday and they both ended the session above the previous short-term highs in terms of closing prices.

Miners didn’t.

GDX - Market Vectors Gold Miners - Gold mining stocks

Even though mining stocks moved higher as well, miners closed the session visibly below the previous high. Mining stocks seem to be underperforming gold, which is a bearish sign.

The volume that accompanied yesterday’s move higher was similar to the one that we saw on Monday, when miners declined and it doesn’t have much implications, apart from the fact that it makes the current situation similar to the previous tops in miners when they moved sideways for days (mid-June, early July, mid-August) before moving lower. It seems that it was a good idea to take profits and close the long position earlier this week.

Summing up, the short-term outlook for the precious metals sector is unclear, while the medium-term outlook is bearish. Once we get additional bearish confirmations and / or the current bullish ones disappear (metals are still holding up very well given the action in the USD Index), we will most likely open short positions, but it’s too early to do so now (the risk associated with any position seems to high at this time). Naturally, if we get more bullish indications, we’ll consider going long precious metals. Either way, it seems that another profitable trading opportunity is just around the corner.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions

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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