Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold, silver and mining stocks moved sharply higher yesterday even though USD Index didn’t slide much. Is this the final sign of strength that indicates that the worst is over and that higher prices will be seen?
In our opinion that is unlikely. Please recall that when we had doubled the size of the current short position (on Aug 25, while we had opened it on Aug 24), we wrote the following:
As we promised yesterday, we are providing targets and stop-loss details. Both are relatively far from the current price levels and the reason for this is that gold and the rest of the precious metals sector could still move higher temporarily (which is unlikely, though) and this move – perhaps to $1,200 or so – would not invalidate the bearish outlook. We are not focusing on day-trading here (even though we already have profits on this trade thanks to the last 2 hours of yesterday’s session and today’s pre-market decline in gold) – we are focusing on the next big downswing, which has a much better risk/reward ratio than betting on a short-term decline. Consequently, even if metals and miners move higher (again, which is unlikely) we are willing to accept the temporary move higher as it is very unlikely that it would result in a major rally. On the other hand, if the decline doesn’t start right away, it could start after a $1 “rally”, after a $2 “rally” or a $10 rally in gold or something along those lines – it seems much better to stay short even if that happens as the following action is likely to be well worth it and the risk of missing it would be too high.
As you can see what happened yesterday not only didn’t invalidate our initial views on the market, but it was also in tune with what we viewed as possible and for which we had prepared for (plan was to wait out the temporary strength while focusing on the medium-term move).
Again, what happened yesterday does not invalidate our outlook, but if falls within the initial assumption how things could unfold. The outlook remains unchanged and it is bearish.
Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
Gold moved higher and it broke above the declining medium-term resistance line. This might seem to be a bullish development, but it was already invalidated. At the moment of writing these words gold is after a $11 decline to $1,143, so it’s visibly back below the declining resistance line.
Invalidations of breakouts tend to be even more important than breakouts themselves, so at this time the implications of yesterday’s session and what we’re seeing today is not bullish, but insignificantly bearish. It will be significantly bearish if gold closes the day (and the week) below the declining resistance line.
As mentioned higher, gold could (which is not likely, but it’s possible) move higher and still (!) remain in a medium-term downtrend. Consequently, if we see a confirmed breakout above the declining resistance line seen on the first chart of today’s alert it will likely not mean the end of the medium-term decline, but rather a good possibility of rally to the declining medium-term resistance line and the 60-week moving average, which are at about $1,185 - $1,195. The odds are when the breakout was confirmed, gold would already be at about $1,175-$1,180 or so. If gold was at that price, in light of a likely major top just $10-$15 higher, exiting short positions would not really be justified from the risk/reward perspective – entering them would be (if one didn’t have one that is).
At the same time gold could reverse and spike lower any day – perhaps today or on Monday, without a move to the above-mentioned resistance levels.
That’s why we believed that focusing on the medium-term move and not on the short-term price swings is justified. This was the case when we had opened the current short position and it remains to be the case right now. Consequently, we don’t think that the above chart has bullish implications – we have already seen a temporary move above the declining resistance line just a few weeks ago and it was followed by invalidation and another decline. It seems to be a likely scenario also for the following days.
The gold to UDN ratio moved higher yesterday, but given today’s pre-market decline in gold, it seems quite likely that it will decline as well.
Silver moved higher, but the way it’s been performing recently is to a great extent a repeat of the topping patterns that we saw in March / April and in August. Consequently, we don’t view silver’s yesterday’s rally as something bullish.
What about gold stocks?
The above long-term chart shows that they are declining in tune with the previous decline – yesterday’s rally changed nothing. The outlook remains bearish.
From the short-term perspective we see that miners moved higher – they moved back to the lower part of our target area. They didn’t move to the declining resistance line, so the trend clearly remains down.
Summing up, while yesterday’s session might appear to be a game changer, we don’t think that it is. In fact, when opening the current short position, we had described a move to even higher levels as possible and as one that would not invalidate the bearish outlook. The situation on the silver and mining stock charts didn’t change yesterday. The only change was seen in gold (small breakout), but this breakout was already invalidated in today’s pre-market trading. It seems that the profits from our short position will increase significantly in the coming weeks, but not necessarily days. Moreover, in our opinion, it continues to be justified from the risk/reward point of view to keep the current short position intact.
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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief
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