Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
Yesterday’s session was quite interesting as we saw a decline in gold and a small move higher in mining stocks despite their decline in the first hours of the session. Some might say that this is another sign of strength of the precious metals sector. Is this really the case? In addition to covering the short-term picture, today’s alert will feature our best estimation of what’s likely to happen with the gold price once the final bottom is already in.
As far as the short-term is concerned - we don’t think that miners’ action is really bullish. Mining stocks were at the rising support line so the fact that they held up well yesterday is not necessarily a sign of anything else, including the inherent strength of the PM sector.
In short, yesterday’s session didn’t change anything on the long-term charts so today we will focus on the short-term ones only. If you haven’t read yesterday’s alert, we suggest that you do so today – the points made in it remain up-to-date. Let’s start today’s analysis with gold (charts courtesy of http://stockcharts.com).
In yesterday’s alert we commented on the above chart in the following way:
On a short-term basis, we see that gold declined, but is more or less where it was yesterday. Consequently, the situation is not really bearish, because the move above the declining resistance line is very small and the “breakout” was not accompanied by significant volume. The head-and-shoulders formation is still being formed and its implications will be very bearish (once it’s completed).
The breakout was already invalidated and the (already bearish) outlook deteriorated further. The volume that accompanied yesterday’s decline was relatively high, which is also bearish.
Silver moved lower on relatively high volume as well. The white metal seems to have corrected 61.8% of the previous decline and is now ready to move lower. Silver tends to be either “too calm” or “too volatile”, so the fact that it hasn’t plunged yet, is not concerning – its decline is likely to accelerate sooner rather than later.
The price / volume action in mining stocks is rather unclear. On one hand, we saw miners move below the rising support line and then back to it (so it seems that the breakdown already took place and we’re now seeing its verification), but on the other hand, miners closed at the support line, so, in a way, there was no breakdown at all. Overall, we view the breakdown as unconfirmed and without important implications at this time. If miners close the week below the rising support line, then the implications will be strongly bearish, but that’s not the case just yet.
Please keep in mind that based on the long-term picture that we described yesterday, even if miners move higher from here, their rally is likely to be very limited and would soon be followed by a much bigger decline.
Before summarizing, we would like to reply to one of the questions that we have been asked quite often recently: “In what way is gold likely to rally after the final bottom, how high can it go and how long will it likely take gold to move back to its 2011 high?”
As always, we’ll be completely honest with you – it’s not possible to predict all possibilities and the more distant a given projection is, the less likely it is to be correct regarding the details, because the amount of things that can change the outlook increases over time. However, we were asked to provide our best estimations and we deliver.
Based on our experience and shape of the previous post-bottom rallies in the precious metals sector, it seems that we will not see gold, silver and mining stocks at very low price levels for long. We expect the decline leading to the final bottom to be sharp and the first part of the rally to be very sharp as well. At some point – perhaps close to where gold is currently trading or close to $1,300 – the pace of growth will decline and we will see some kind of consolidation (for a few weeks). After that stage we expect gold to continue the rally and reach its 2011 high more or less 1.5 – 2 years after the final bottom (of course, there will be meaningful corrections along the way). We expect gold to consolidate either right below the 2011 top and then break above it or to consolidate after the breakout. Either way, we think that gold will then continue to rally (again, there will be small and big corrective declines along the way, but not as prolonged as the current one) and eventually move to or above the $5,000 level (in today’s dollars).
Why $5,000? That’s a just a milestone and in fact, we think that gold can move even higher – according to shadowstats.com inflation data, we would have to see gold at much higher levels than $5,000 even just to match the inflation-adjusted high of 1980.
Overall, since the situation didn’t really change yesterday, we can summarize today’s alert in a similar way to what we wrote previously:
Summing up, the medium-term decline is not threatened by last week’s or Monday’s temporary upswing – it seems it was simply delayed (and it seems that we may not need to wait for much longer). The outlook hasn’t changed, so the odds are that the profits that we have on the short position in the precious metals sector will become even bigger in the following weeks.
We will keep you – our subscribers – updated.
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: $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 $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: $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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