Briefly: No speculative positions in gold, silver and mining stocks are justified from the risk/reward perspective. In other words, we think that closing the existing short positions and taking profits off the table is a good idea right now.
The precious metals have been slowly declining in the past few days in a rather steady manner (except for silver, which didn’t move almost at all), but it seems that the end of the week can be a lot more volatile. Why? The employment statistics will be released on Friday and there were many cases, when their release triggered huge moves in gold (at times gold plunged and at times it soared). What can one expect and how can one prepare for this volatility?
It seems that simply staying on the sidelines will be the most rational approach at this time. Did gold’s decline end or is about to end? That’s unlikely, but it’s quite likely that we’ll see a corrective upswing within the downtrend. To be precise – it’s too possible for us to keep viewing an extra-big speculative short position to be justified.
Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
In yesterday’s alert, we wrote the following:
The mining stocks declined after a breather, which makes the move much more sustainable then it would be if the price would just continue to slide without pausing. The increased volume confirms that the small consolidation is likely over and the decline has already resumed.
The bearish implications remain in place, however, let’s keep in mind that the first classic Fibonacci retracement (38.2%) is very close and the odds are that it will be reached today or tomorrow. This could generate an upswing, especially that the RSI indicator is below 30, which suggests that miners are oversold on a short-term basis.
The above factors do not change the main trend, which remains down, but they do suggest a short-term move up is quite possible. Moreover, the previously broken red support / resistance line was not verified as resistance so far, so we could see a move back to it, before the decline resumes (and accelerates). This would give us the $28 level as the upside target for this move, but we don’t think that it’s worth trading it – trading against the bigger trend is too risky and the potential size of the move seems to be too small to justify this risk.
There is nothing new to report in case of silver, so let’s take a look at gold.
In yesterday’s alert, we wrote the following:
While mining stocks paused after moving below their July low and they now continue their slide below it, gold only reached its July low. In other words, mining stocks are underperforming gold and are leading it lower – the exact opposite to what’s been the case earlier this year. This technical development alone is a strong suggestion that the main downtrend is back.
The downtrend still appears to be back, but let’s not forget that no market can move in a straight line. Gold has been moving lower for almost the entire month (with almost only intra-day upswings), so a breather would not be anything unusual or particularly bullish.
Yesterday, gold broke below the rising medium-term support line based on the daily closing prices, which is generally a bearish sign, but the move below the line was rather small and the analogous line based on intra-day lows was not broken so far. Consequently, the situation deteriorated only slightly and at the same time, the risk of a corrective upswing is still present.
The employment statistics will be released tomorrow, so we could see some fireworks in the gold market and in light of the support levels that are very close, a bigger (but not huge) rally could follow. It doesn’t seem likely that gold would move above $1,350 based on the above, but a move to $1,330 - $1,340 could be seen and it would not change the bearish trend.
What about the breakdown in terms of the daily closing prices that we have just seen? It was unconfirmed, so even a small rally could invalidate it, which would be another bullish sign triggering further gains. Consequently, caution is advised and a speculative short position doesn’t seem to be justified at this time.
What about the USD Index? Its after a sharp rally and daily reversal, which suggests that a pause here is quite likely.
Moreover, it could be the case that the old turning point scheme is back – those, who have been following our analysis for years, know that there was a time when the USD Index’ turning points were not in the middle of the month, but at the beginning of each month. This changed some time ago, and the above chart reflects the new turning points, but based on how the USD performed in the past several months, it could be the case that the previous way of reversing direction is back.
Beginning of January marked a local top. Beginning of February marked a local top. The same with the beginning of March. We didn’t see the same effect in April, but at the beginning of May, we saw a major bottom. Beginning of June marked a local top, beginning of July marked a (small, but still) local bottom. Beginning of August marked a local bottom. In most cases, the first days of the month were accompanied by important turnarounds.
The USD Index is now after a rather sharp rally, it reversed yesterday on an intra-day basis and the major news announcement is just around the corner. Will we see a turnaround and a temporary decline (the main uptrend is likely to be upheld)? As always, there are no certainties in any market, but that does seem rather likely. More importantly, it is too likely and the USD Index is too important for metals and mining stocks to keep the speculative short positions in the precious metals sector intact.
Summing up, another big decline in the precious metals sector is underway (which has been likely for weeks based i.a. on the 1983 analogy), but it does seem quite likely that a corrective upswing will be seen in the coming days.
We previously wrote that based on the sharpness of the recent daily rally in the USD Index, we wouldn’t be surprised to see a small corrective downswing in it, which could translate into a few additional days of consolidation in case of the precious metals sector (it doesn’t seem that it will be anything radical, though). Based on analogous signals from the precious metals sector, it seems that taking profits off the table and (most likely temporarily) closing the speculative short positions is justified from the risk to reward point of view at this time. We had opened these positions on August 8 with gold at $1,341, silver at $19.80 and GDX at $30.50 (closing prices) and we increased them to the extra-large size (150% of the regular size of the position) on August 19 with gold at $1,346, silver at $19.32 and GDX at $29.96 (closing prices). It seems that another trading opportunity is just around the corner and - 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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