Briefly: In our opinion, a speculative short position (full) in gold, silver and mining stocks is justified from the risk/reward point of view.
Gold, silver and mining stocks finally declined yesterday and the moves were not minor. However, did this really change much?
As much as we would like the decline to finally start (as we would like the final bottom to be reached sooner – which means that gold’s next major upswing would also start sooner), the decline that we saw yesterday is only somewhat suggesting that the corrective upswing is completely over. Let’s take a look why (charts courtesy of http://stockcharts.com).
Gold moved lower invalidating the intra-day breakout above the 50% Fibonacci retracement level, but it didn’t manage to move back below the 38.2% one, so the situation didn’t deteriorate very much. It is more bearish than it was, though, as the decline was accompanied by relatively high volume.
The above picture shows that we are very, very close to the point when the situation becomes much more bearish, but not at it just yet (it’s bearish, but not extremely bearish on a short-term basis). Silver is known (to those who have been following the silver market for more than some time) for invalidating breakouts and we think that this time will be no different and that silver will generate a major sell signal by invalidating the breakout above the medium-term resistance/support line.
Silver declined visibly yesterday, but didn’t close below the mentioned resistance/support. Consequently, we saw no invalidation of the breakout and thus the situation hasn’t deteriorated significantly just yet. We think that it will happen sooner rather than later, but it’s simply too early to open the champagne bottles because of that.
Gold stocks moved lower and the above picture is just as bearish as it was previously – there was no breakout above the declining resistance line, only a very temporary move to it. The trend simply remains down and the outlook remains bearish.
On a short-term basis, we saw a change as the GDX ETF moved below the rising support line and finally managed to close below this line. Moreover, it closed also below the Nov. 2014 high and the volume on which the decline took place was relatively high.
The breakdown is not confirmed just yet, but the situation has definitely deteriorated for the short term for miners and – consequently – for the rest of the precious metals sector.
Summing up, the situation in the precious metals market deteriorated yesterday, but not very significantly. We still have to see the invalidation of the silver’s breakout before we can say that the corrective upswing is (very likely) over. Silver moved right to the declining resistance/support line, so it seems that it will break below it any day now. The mining stocks have already broken below their rising support line, which does not bode well for the short term. The overall outlook for the precious metals sector remains bearish – it seems that the final bottom is still ahead of us.
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: $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.
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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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