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Gold Retests the Late-2011 and 2012 Lows

August 8, 2019, 7:58 AM Przemysław Radomski , CFA

Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks are justified from the risk/reward point of view at the moment of publishing this Alert.

In yesterday's Alert we wrote that gold was making headlines and while headlines-based moves are short-lived, they can be emotional and volatile. This meant that the $1,500-breakout-based rally was likely to take gold to the late-2011 and 2012 lows and since this was likely to take silver and mining stocks higher, we suggested re-entering short positions only after gold moves to $1,519. In short, that's exactly what happened. Gold futures soared to $1,522.70 and they moved back lower in today's pre-market trading.

Key Resistance Reached

The previous lows were reached on big volume while the RSI was extremely overbought. The top in gold appears to be in. In a few months it will most likely be 100% obvious to everyone that all signs pointed to gold's inevitable decline, but at the same time very few people actually predicted it.

We described multiple medium-term signals in the previous Alerts and we emphasized that it was practically only the gold market that was showing substantial strength in the recent past. Neither mining stocks, nor silver confirmed it. Yes, both moved higher, but the size of the move was relatively insignificant from the very long-term point of view. None of them moved close to their 2016 high. Silver stocks didn't even manage to correct 25% of the 2016 - 2018 decline. Now, once gold finally reached its very long-term resistance, the rally appears to be over. The momentum, generated by the - likely temporary - trade-war tensions, was stopped and gold price can now return to its decline that started in 2011.

The huge volume that accompanied recent rally in gold is not a bullish sign. We marked the huge-volume rallies with vertical red lines and as you can see similar big-volume rallies were practically always followed by sizable declines.

As we already discussed the multiple long-term signals coming from other parts of the precious metals market, today we will focus on the short-term price changes.

Looking Under the Hood of Yesterday's Advance

The most important thing about yesterday's price changes is how different parts of the precious metals market behaved relative to each other. Gold rallied as it made headlines. Silver soared and it greatly - and clearly - outperformed gold on a short-term basis, which is a traditional sell signal for the entire precious metals sector, especially when it's accompanied by weak performance in the mining stocks. And how did the miners perform?

Gold stocks' performance was disappointing to say the least. They moved higher initially, but reversed shortly and instead of rallying, they formed a clear bearish shooting star reversal. The reversal is bearish on its own but taking it into account along with silver's outperformance makes it exceptionally bearish. It's difficult to imagine a more bearish combination of daily price moves in the precious metals sector.

Summary

Summing up, we wrote about opening the short positions in gold, silver, and mining stocks based on gold reaching $1,519 without any other conditions, but based on silver's and miners' movement, we see that this was most likely a good decision. From the long-term point of view, it appears that the recent move higher in gold was fake and that the next big move will be to the downside, just as other parts of the precious metals market suggest. The big picture of silver and mining stocks, key precious metals ratios that we covered earlier this week, and the USD Index all point to much lower precious metals prices in the following months. Based on how silver and mining stocks moved yesterday, we also have the very short-term confirmation of the bearish scenario.

As always, we'll keep you - our subscribers - informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full speculative short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:

  • Gold: profit-take exit price: $1,241; stop-loss: $1,552; initial target price for the DGLD ETN: $51.87; stop-loss for the DGLD ETN $25.37
  • Silver: profit-take exit price: $13.81; stop-loss: $17.53; initial target price for the DSLV ETN: $39.08; stop-loss for the DSLV ETN $20.67
  • Mining stocks (price levels for the GDX ETF): profit-take exit price: $17.61; stop-loss: $33.37; initial target price for the DUST ETF: $32.28; stop-loss for the DUST 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 target prices:

  • GDXJ ETF: profit-take exit price: $23.71; stop-loss: $48.42
  • JDST ETF: profit-take exit price: $73.32 stop-loss: $9.67

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

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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 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.

Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager

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