Gold & Silver Trading Alert originally sent to subscribers on June 9, 2015, 6:46 AM
Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
Silver caught the attention of many precious metals traders earlier this year when it outperformed gold in a quite sharp manner and broke above the declining long-term resistance line. Many investors and analysts were cheering and emphasizing the importance of silver’s breakout and silver’s leadership as something bullish for the precious metals market. We respectfully disagreed. It was the case years ago (!) that silver’s outperformance signaled higher prices for the entire precious metals sector, but it wasn’t the case in recent history – in fact, exactly the opposite was the case. Several weeks ago we featured the following silver to gold ratio chart (charts courtesy of http://stockcharts.com).
The reality is that silver’s short-term outperformance was actually a bearish sign and the RSI based on the silver to gold ratio moving above 70 is actually a sell signal, not a bullish sign. The history seems to have repeated itself once again.
What about the silver’s breakout above the major, declining resistance line (red dashed line on the below chart)?
It has already been invalidated, just like most breakouts in the case of the white metal in recent history. Silver’s breakouts are not reliable, especially if they are not confirmed by analogous action in gold and mining stocks. Consequently, we had been expecting to see this breakout’s invalidation, and that’s what we saw.
Silver didn’t manage to break above the 50-week average and the 2013 low, so in one way the trend remains down and in another way (taking the declining resistance line) we saw a sell signal because of the breakout’s invalidation. Either way, the outlook for silver in the short and medium term doesn’t look good.
On a short-term basis, silver showed us something as well.
Silver broke below the rising medium-term support line and the 61.8% Fibonacci retracement level and – based on yesterday’s closing price – confirmed these breakdowns.
Silver’s previous attempt to move below this line was invalidated and followed by a visible rally, however this time, we have a confirmation of a breakdown, which makes another decline very likely in the following weeks.
What about gold?
Gold confirmed its breakdowns last week, so the situation here is bearish and it will remain bearish even if we see some very short-term strength. Gold moved a bit higher yesterday, but the move was accompanied by relatively low volume, which suggests that it was just a counter-trend bounce – nothing more. The trend remains down.
As far as the situation in gold stocks is concerned, our yesterday’s comments remain up-to-date:
(…) gold stocks have broken below a certain support level. This level is created by the rising line based on the 2014 low and the March 2015 low. The breakdown is not confirmed, but a weekly close below the support is quite a bearish development on its own even if it doesn’t imply a confirmation of the breakdown.
With another daily close below it, we are closer to a confirmation of the breakdown (you will find more about waiting for confirmations in our list of gold trading tips) – the situation is now more bearish, but it will be much more bearish if the breakdown is indeed confirmed.
On a short-term basis we see that miners moved a bit higher and the move took place on relatively big volume. We could see some more short-term strength in the next few days, but we don’t expect to see anything significant. The declining red resistance line is relatively close and it seems that it would be able to stop the resulting rally, especially that miners have been underperforming gold for a few weeks now.
Speaking of relative performance, gold and miners moved a little higher yesterday while silver declined a little and it seems that overall the precious metals sector didn’t do much. That is only the case until one compares the above with the performance of the USD Index, which declined by more than 1%. Precious metals didn’t respond to the USD’s bullish signal, which is a bearish signal on its own. That’s the kind of performance that preceded many declines in the precious metals sector, and it seems that our profitable short positions (we had opened them when gold was about $40 higher and silver was about $1 higher) will become much more profitable in the following weeks.
Before summarizing, let’s take a look at the gold seasonal chart to see what’s likely in store for us in the short term.
In short, our yesterday’s comments remain up-to-date:
June tends to be a quite bearish month for gold and the rest of the precious metals sector, especially the part of the month that we are just about to enter. Gold has already been declining for days, but it seems that the declines are far from being over (even if we see a temporary bounce, it’s likely to be short-lived).
Summing up, the outlook for the precious metals market was bearish on Friday and yesterday and after yesterday’s session it became – once again - even more bearish. It seems that the final bottom is still ahead of us. The current short positions in the precious metals sector are already profitable but it seems that they will become much more profitable in the future, so we are keeping them intact.
On a side note, we would like to stress that despite our short- and medium-term outlook, we are actually very bullish on gold for the long term – we simply think that it will be best for our gold portfolio to wait for another big downswing (likely the final one) to re-enter this promising market with the long-term investment capital and we think that using speculative capital to profit from the likely decline is a good idea as well.
Please note that our thoughts on the precious metals market may change in the coming days. If you enjoy our analysis, we encourage you to join us on this profitable trade and subscribe to our Gold & Silver Trading Alerts today.
To summarize:
Trading capital (our opinion): Short (full position) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (!) target prices:
- Gold: initial target price: $1,115; stop-loss: $1,253, initial target price for the DGLD ETN: $87.00; stop loss for the DGLD ETN $63.78
- Silver: initial target price: $15.10; stop-loss: $18.13, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $38.44
- Mining stocks (price levels for the GDX ETN): initial target price: $16.63; stop-loss: $21.83, initial target price for the DUST ETN: $23.59; stop loss for the DUST ETN $10.37
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: initial target price: $21.17; stop-loss: $28.68
- JDST: initial target price: $14.35; stop-loss: $5.65
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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 sings 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.
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
