Briefly: in our opinion, full speculative long positions (150% of the regular position size) in silver is justified from the risk/reward point of view at the moment of publishing this Alert.
Although it's decline was not yet significant, the USD Index finally declined yesterday. Given the recent breakout above the November 2019 highs, this move lower might leave one with mixed feelings.
The USDX in the Short Run
On one hand, the USD Index just closed above the November high for the third consecutive trading day, which confirms the breakout, and is a bullish factor.
On the other hand, the USD Index reversed right at its triangle-vertex-based reversal as we had indicated yesterday. Plus, it did so after a big short-term rally and while being very overbought from the short-term point of view, as confirmed by the RSI indicator. The latter moved above 70, and in the past 1.5 years, this meant a local top in each case.
There are more bearish factors for the short term than the bullish ones, and RSI's ability to detect short-term tops is uncanny. Consequently, in our view, USD's outlook for the next several days is bearish.
The USD Index is likely to drop to approximately 98 or even lower, to the rising red support line, and the precious metals market is likely to react by rallying. Since the decline in the USDX is not likely to be very big, this move is not likely to take a lot of time. This means that PMs are likely to rally from here, but not for long.
PMs in the Meantime
Yesterday, PMs didn't react to USD's decline, but it doesn't seem meaningful as it was just one day and USD's decline was relatively small. Miners have barely moved even though gold moved lower, which might be viewed as a bullish sign, but... again - it was just one day of strength and it was not a screaming sign of strength anyway.
Overall, the situation and outlook for the precious metals market seems to be just as it's been previously. PMs and miners are likely to move higher in the very short term, as the USD Index is likely to decline for the next several days or so. As that's likely the final part of the rally, silver is likely to outperform, even though it's not doing so right now.
Summing up, it seems that the precious metals market is about to form the final medium-term top, and start another major move lower. Based on the likelihood of seeing a short-term decline in the USD Index, we might see the final very short-term upswing in PMs and miners first, but it's not likely to take more than a few days. In fact, the rally and top might even form as early as today.
In our opinion, once silver hits $17.89, your profits from the long position should be automatically taken off the table. We will let you know manually once we want to open short positions in gold, silver, or mining stocks.
As always, we'll keep you - our subscribers - informed.
Trading capital (supplementary part of the portfolio; our opinion): Full speculative long position (150% of the full position) in silver is justified from the risk/reward perspective with the following stop-loss orders and binding exit profit-take price levels:
- Silver futures: profit-take exit price: $17.89; stop-loss: $17.24; initial target price for the USLV ETN: $90.47; stop-loss for the USLV ETN: $82.95
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
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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.
Przemyslaw Radomski, CFA
Editor-in-chief, Gold & Silver Fund Manager