Briefly: In our opinion, a speculative short position (half) in gold, silver and mining stocks is justified from the risk/reward point of view.

Mining stocks were acting very strong this week even before yesterday’s session, but during it they showed even greater strength – they managed to rally well above the medium-term declining resistance line. What does this breakout mean for you and your portfolio?

At this time, in our opinion, it means much less than it might seem at the first sight. Plus, the miners’ move higher was not the only interesting development that happened yesterday – something else seems to be even more important. Before we move to the latter, let’s take a look at gold (charts courtesy of http://stockcharts.com).

Here’s what we wrote about gold yesterday:

The situation in the gold market deteriorated further as gold declined on significant volume. The breakdown below the lower of the rising support lines is now almost confirmed (only one additional daily close is required).

We just saw another daily close below the rising support lines, so the breakdown is now confirmed. Consequently, even though gold moved higher, the overall implications of the above chart became more bearish.

Additionally, the size of the volume on which gold moved higher was lower than what we’d seen during Tuesday’s downswing, so the implications are – once again – bearish.

Here’s what we previously wrote about silver:

In the case of silver, we saw a breakdown below the intra-day-based support line, but the move is not confirmed. In the case of silver, 2 additional closes below this level are required to confirm the breakdown. The situation deteriorated here but not significantly.

Silver tried to invalidate the breakdown below the red dashed line but it finally closed right at it, so it doesn’t seem that we can view yesterday’s price action as an invalidation. The outlook for the white metal remains bearish.

Please note that the price-volume implications are bearish here as well – silver moved higher on volume that was lower than what we had seen during Tuesday’s decline.

While the situation in the 2 previous charts deteriorated, it improved in the case of mining stocks. We saw a breakout. Since the breakout is not confirmed yet (2 more closes above the declining resistance line are required), the implications are only somewhat bullish, especially that miners didn’t break out on strong volume.

The red resistance lines that you can see on the chart are based on the possible head-and-shoulders pattern. If we see a move to the Nov. high or even to the $21 level but without a visible breakout above them and then see a decline, the implications will be very bearish. If we don’t see such upswings and miners decline before these levels are reached (which seems likely), then the implications will be very bearish anyway, because the head-and-shoulders pattern will continue to be formed. If it is completed, the decline following the breakdown below $17 could take the GDX ETF below $13.

Let’s keep in mind that miners have been particularly influenced by the USD’s movement and the USD declined yesterday. Consequently, miners had a good reason to move higher.

The key thing is that the decline might have just ended or is quite likely close to its end. The reason is that the USD Index moved to its rising support line without breaking below it. From this point a move higher is likely, since the trend remains up. Consequently, the miners’ move higher seems to have been a temporary development as well.

The most important development that we saw yesterday, however, was not the short-term price swings that we described above – it was the major breakdown that we saw in the gold to oil ratio.

We think that there’s nobody in the precious metals market that needs to be convinced that the 2011 top was a major event. However, it was not only major in gold itself, but also in the case of its ratios, including the gold to oil ratio.

This ratio peaked in 2011 as well and it was not until this year that it was broken. The initial move lower in the ratio earlier this year and a rebound from the 2011 high proved that this is indeed a major support/resistance level. This important level was just broken yesterday in a very profound way.

The gold to oil ratio moves in tune with gold, so such a major breakdown in this ratio has bearish implications for gold as well.

Summing up, it seems that while quite a lot happened yesterday, not much changed as far as the outlook is concerned, which we view as bearish but not extremely bearish. The situation in gold and silver deteriorated and we can definitely say the same about the gold to oil ratio, but it improved in the case of mining stocks (not dramatically, though). We think that overall it’s still justified to keep a small (and only a small one until we see more bearish confirmations) short position intact.

We will keep you – our subscribers – updated.

On a side note, I’m (PR) currently talking to 1-3 subscribers per day and I learned that these conversations are not only informative for you, but they are also very informative for me – i.a. regarding your expectations. I will cover the questions that were asked often (in writing) after we’ve received replies from all of you (on whether you choose consultation with me or a free month to one of the services that are currently not active on your account) and after I’ve had the chance to talk to those of you who choose to do so (and are able to do so, as this choice is available only to accredited investors due to legal regulations), so that I know that I can cover all the questions that have been asked quite frequently. If you haven’t made your choice regarding the 6th-anniversary gift, please contact us.

To summarize:

Trading capital (our opinion): Short (half 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: $17.63, initial target price for the DSLV ETN: $67.81; stop loss for DSLV ETN $44.97
• 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 $12.23

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: $27.31
• JDST: initial target price: $14.35; stop-loss: $6.18

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.

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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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