Gold & Silver Trading Alert: Silver and Miners Slide as Expected

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Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.

The precious metals market declined yesterday, but the size of the move was particularly significant in the case of silver and mining stocks. Gold is still not close to its recent lows and there was no breakdown below the previous lows in mining stocks either – is this decline likely a temporary event?

No. In our opinion, it’s likely the beginning of another huge decline. Silver outperformed to a considerable extent recently (which is a quite clear bearish sign) and miners corrected for the second time after moving to the previous 2015 low. There was enough time to consolidate before the breakdown, which make one a quite probable scenario for the coming days.

Let’s move to charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold declined yesterday and the move took place on volume that was bigger then what we had seen on Monday, which means that the situation on the above chart deteriorated a bit. Only a bit, because the volume is still not as high as it was when gold rallied just a few days ago. Other than that, there’s still little new to say about the above chart, so in general, our yesterday’s comments remain up-to-date:

Gold moved above its 50-day moving average, but this is much less bullish than it may seem. In fact, it’s not bullish at all. The reason is we saw such action several times earlier this year and it was still followed by more declines. Is this time different? Not likely – why would it be?

Gold corrected more than 50% of the Aug. – Sep. decline – it rallied to the 61.8% retracement and it could reverse shortly. However, if it doesn’t and we see a rally to $1,150 - $1,155 or so, then this would still not change the medium-term trend. Gold would still remain below the declining medium-term resistance line. Will gold move as high before reversing? That’s rather unclear but the decline is more likely than not and it doesn’t seem that exiting the short positions in light of the above possibility is really justified.

Long-term Gold price chart - Gold spot price

From the long-term perspective, the medium-term trend remains down – nothing changed regarding that matter.

Before moving further, we would like to point out that the target areas that we marked on the above chart are not only our best estimates of future price levels, but also of the time frame in which these price levels are likely to be reached. We are quite often asked when we expect the bottoms in gold to form and the most up-to-date answer is always marked on the long-term charts, like the one above.

The most likely scenario is the one in which gold forms an interim bottom later this year at about $1,000 - $1,050, corrects and then plunges to the final low below $900. The size of the ellipse marking the latter target is big, as it is not clear when it’s most likely to happen – it could be reached in a month or two, but it could take several months as well. We’ll be monitoring the markets for confirmations that the bottom is at hand and we’ll report to you accordingly.

Gold from the non-USD perspective - GOLD:UDN

From the non-USD perspective, the situation remains unchanged:

Gold seen from the non-USD perspective moved to the declining resistance line and then reversed. The local top seems to be in or just around the corner. This implies not only that gold’s strength relative to the USD Index is nothing extraordinary, but also that it’s likely to be over relatively soon (if it’s not over already at this point).

Long-term Silver price chart - Silver spot price

Our opinion on the long-term silver chart has not changed either:

The long-term silver chart continues to have bearish implications as silver moved to the long-term declining resistance line and reversed. It seems that silver is ready to decline once again. Silver’s temporary outperformance of gold doesn’t change the above – conversely, it served as a bearish confirmation many times in the past.

Short-term Silver price chart - Silver spot price

From the short-term perspective, silver clearly invalidated the breakout above the declining resistance line and moved lower on relatively high volume. The temporary-strength-in-silver-followed-by-disappointment pattern seems to have worked once again – as we expected it to.

What about mining stocks?

GDX - Market Vectors Gold Miners - Gold mining stocks

Miners continue to decline on rising volume, which serves as a bearish confirmation. In yesterday’s alert we emphasized that the invalidation of the previous breakout above the 50-day moving average was an important signal and it has indeed resulted in much lower prices (the GDX declined more than 4.5% yesterday).

Short-term US Dollar price chart - USD

Our yesterday’s comments on the USD Index remain up-to-date:

The USD Index chart continues to have bullish implications as far as the index itself is concerned, and bearish ones as far as precious metals are concerned. The reason is that it seems that the USD Index is done declining (after reaching our target area) and ready to move highs. Just because metals and miners are not responding to the rally in the USD is not concerning, because this temporary lack of reaction is within the historical norm and the medium-term trend which we described earlier today (the gold to UDN ratio).

All in all, we can summarize today’s alert just as we summarized yesterday’s issue:

Summing up, it seems quite likely that the corrective upswing in the precious metals is over and that we will see lower prices shortly. It seems that the profits from our short position will increase significantly in the coming weeks.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short position (full) 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: $1,050; stop-loss: $1,213, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $65.60
Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
Mining stocks (price levels for the GDX ETN): initial target price: $11.57; stop-loss: $17.33, initial target price for the DUST ETN: $41.10; stop loss for the DUST ETN $8.54

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: $16.27; stop-loss: $24.33
JDST: initial target price: $16.98; stop-loss: $3.42

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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