Briefly: In our opinion, regular (100% of the full position) speculative long positions in gold, silver and mining stocks are justified from the risk/reward perspective.
In yesterday’s trading, we saw a big daily rally in the USD Index and a big daily downswing in gold. It appears bearish at the first sight (for the PM market), but it’s not the case once one factors in the relatively strong performance of mining stocks. Considering all of the above, what is likely to be seen next for metals and miners?
Let’s take a look at the charts to find out, starting with the USD Index (charts courtesy of http://stockcharts.com).
The USD Index moved higher, but the daily rally didn’t change anything. The correction that we’ve seen recently is still quite small and it doesn’t appear to be enough to cool down the traders’ emotions. Please note that the rally that we saw in October was smaller than the November one and it was followed by a much more significant corrective downswing than what we’ve seen so far. Consequently, it would be natural to expect the corrective downswing to be equal or bigger than what we saw in late October and early November.
Moreover, the last several trading days formed a bearish head-and-shoulders pattern in the USD Index. The implications are bearish and the target – based on the size of the head – is at about 99.50. Still the other support levels suggest that the bottom will be formed higher, so we are not viewing 99.50 as our official prediction, even though it also could stop the decline once it is seen.
With the bearish outlook remaining in place, the question is if anything changed on the metals’ or miners’ charts.
Gold moved once again to the 61.8% Fibonacci retracement level, but didn’t break it, let alone confirm the breakdown. Without a confirmed breakdown, there are actually no bearish implications to discuss.
The RSI and Stochastic indicator continue to suggest higher prices in the following days.
Silver and mining stocks moved only a little lower, suggesting that the decline in gold was rather accidental and not the true direction of the precious metals market. The decline in mining stocks is particularly significant as the strong performance of the latter is a bullish sign that often precedes rallies.
Summing up, even though the medium-term trend in the precious metals market remains down (as multiple bearish indications for the medium term remain in place), it appears that a combination of bullish factors (support levels were reached in gold once again, silver and mining stocks showed strength; a resistance level was almost reached in the USD and the weekly Stochastic indicator suggests a temporary upswing) makes a speculative long position justified at this time. It appears that we will see an upswing in the precious metals sector within a week or so.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Long positions (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: $1,237; stop-loss: $1,157, initial target price for the UGLD ETN: $10.48; stop-loss for the UGLD ETN $8.62
- Silver: initial target price: $17.27; stop-loss: $15.67, initial target price for the USLV ETN: $15.04; stop-loss for the USLV ETN $11.22
- Mining stocks (price levels for the GDX ETF): initial target price: $23.27; stop-loss: $18.87, initial target price for the NUGT ETF: $10.74; stop-loss for the NUGT ETF $5.78
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: $38.17; stop-loss: $30.94
- JNUG ETF: initial target price: $8.88; stop-loss: $4.78
Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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