Briefly: In our opinion, long (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
The precious metals sector declined once again yesterday and the HUI Index moved to new lows. Is the rally (that wasn’t really seen in the case of mining stocks) already over? Are all the current gold bears right and will gold fall much more?
Despite yesterday’s decline, not much actually changed. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
From the long-term perspective, nothing changed because gold didn’t move below the 50% Fibonacci retracement based on the entire bull market.
There is a small (so far) bullish sign in the form of the buy signal from the Stochastic indicator. The indicator moved only a little above its signal line, so the signal is not crystal clear, but still, it’s there, so the situation improved for the short term.
It might seem surprising, but the short-term chart actually improved based on yesterday’s decline. The decline on its own didn’t change anything as gold didn’t move below the lowest of the 4 declining support lines, but the thing that made it rather bullish is the size of the accompanying volume, which was low (in both relative and absolute terms). The implications are bullish as it suggests that the decline is not the true direction in which the market is about to move.
Yesterday, we wrote that the above (silver’s move higher) actually had bearish implications based on Friday’s action (taking into account the action in silver and miners). Silver moved to its 20-day moving average, which marked local tops in the previous months and it’s been performing rather well compared to gold and mining stocks.
Silver declined, but it didn’t break below the previous lows, so technically what was likely to happen might have already happened and silver could be ready to rally. In other words, even though silver is lower than it was before yesterday’s session, the outlook didn’t change.
Miners have not shown strength in the past several days despite a major daily reversal in late July and yesterday’s session is yet another example thereof. However, please note that the GDX ETF didn’t move below its previous low, so the situation didn’t deteriorate from this perspective. The implications of the above chart were already bearish yesterday, and – just like in the case of silver – didn’t really change based on yesterday’s decline. In fact, one could say that the outlook improved as we previously had bearish implications stemming from a rally on low volume, and we don’t have a similar sign at this time.
The HUI Index chart is the only chart where the situation deteriorated based on yesterday’s decline. In the case of this proxy for mining stocks, we saw a breakdown below the recent lows and consequently a move to the next support level is now quite likely. The next support is relatively close – it’s at 102.99, so it would take less than a repeat of yesterday’s decline’s for this level to be reached.
If this level can be reached, why not short the market? Because the GDX ETF – a different proxy for the mining stocks has not broken lower, so it’s not very likely that the HUI is going to move lower. Plus, the situation in gold and silver doesn’t necessarily support lower prices in the short term. Most importantly, the bearishness levels in mass media are so high that it seems that long positions should be considered, not short ones (at least at this time; we expect to be back on the short side of the market within the next few weeks).
Summing up, from the medium-term perspective nothing changed in the precious metals market recently as the situation was and still is bearish, but – as we described yesterday - from the short-term perspective the situation is bullish but not extremely so (the situation in the HUI Index deteriorated, but it improved in the case of gold’s short-term chart, so overall not much changed based on yesterday’s price swings). The precious metals market is still oversold on a short-term basis and the situation still seems bullish for the short term (and we think that taking profits off the table and closing our previous short position when silver moved to $14.33 was a good idea), but it’s not as bullish as it was just a few days ago and not as bullish as it was when we decided to open the speculative long positions.
While – based on the bearishness in the mainstream media – it doesn’t seem that closing the speculative long positions entirely is a good idea, it does seem that only half of the regular size of the position is currently justified from the risk/reward point of view.
Since mining stocks moved already lower and they could (! – which doesn’t imply that it’s likely) move a bit lower before moving back up, we are lowering the stop-loss for the mining stocks (GDX) to $12.37.
We will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Long position (half) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:
- Gold: initial target price: $1,130; stop-loss: $1,063, initial target price for the UGLD ETN: $9.24; stop loss for the UGLD ETN $7.69
- Silver: initial target price: $15.20; stop-loss: $14.12, initial target price for the USLV ETN: $14.40; stop loss for USLV ETN $11.51
- Mining stocks (price levels for the GDX ETN): initial target price: $15.87; stop-loss: $12.37, initial target price for the NUGT ETN: $5.17; stop loss for the NUGT ETN $2.46
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: initial target price: $21.78; stop-loss: $17.67
- JNUG: initial target price: $12.01; stop-loss: $6.39
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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