Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The precious metals market finally showed some strength in the final days of last week and mining stocks finally showed some strength. How significant it is and how much does it change in the current market environment? Let’s jump right into the charts (charts courtesy of http://stockcharts.com).
Gold’s Price Changes
Gold moved down and back up last week, finally ending well below its both moving averages: the 50-day one and the 300-day one. The latter is important for the big moves, while the former is quite often the place after reaching which gold reverses its short-term moves (the January 2017 bottom, November 2016 top and September 2016 tops serve as examples). There was no breakout above these moving averages, so not that much changed from the technical point of view. This is especially the case, since the volume was not significant.
The last week’s move higher in silver was also small – the white metal didn’t even manage to reach the previous retracement level.
It seems that last week’s comeback was simply a form of a verification of the breakdown below the rising red support line. The support/resistance line is above last week’s high (below $17, though), so even if silver moves temporarily higher this week, it shouldn’t change much.
Gold Stocks’ Strength
Gold stocks finally showed real strength last week, which could indicate higher prices on the horizon, but please note that the likely upside potential is small. The declining medium-term resistance line and the rising, short-term one are just below the 200 level and with the HUI’s close just below 195, the potential size of the rally is very limited. Moreover, even though the miners closed above the late-May lows, the breakout above them is not confirmed – it’s relatively small so far and there was only one daily close above them.
Interestingly, just like it is the case with gold, the HUI Index moved to its 50-day moving average – it could be the case that the MA has already stopped the rally, however, based on the miners’ weekly strength vs. gold, we would not be surprised to see a move to 200 before the decline returns.
The move higher in the precious metals was – as it is usually the case – reflected by a move lower in the USD Index. As the medium-term outlook for the latter didn’t change based on the Friday’s (and the earlier ones) decline, the very short-term trend is likely to reverse sooner rather than later and the lengthy consolidation (after all the USD Index has been moving back and forth for about a month now) will soon turn out to have been a sizable price bottom.
Summing up, the precious metals market moved higher last week and it could move a bit higher before the downtrend resumes, however, it doesn’t seem that the following rally would be significant. Day-traders may want to adjust their positions, but since the downside potential for the huge decline didn’t diminish based on the above, we don’t think that adjusting our position is really justified at this point. All in all, the short- and medium-term outlook remain bearish, even though we could see some strength in the next day or a few of them.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; stop-loss: $43.12
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
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 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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