Gold & Silver Trading Alert: PMs Erase Earlier Gains

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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 sector moved in a very specific way last week. Gold showed strength by closing the week above the mid-2015 low, silver moved back and forth, but finally ended the week below $14 and mining stocks declined and more than erased their previous 2016 gains. Moreover, silver stocks broke well below their previous lows. What’s likely to happen next?

Let’s jump right into the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved higher on Friday, but that didn’t change much regarding the short-term trend. The pace of the decline is currently in tune with what we’ve seen previously and just because gold doesn’t move lower each day is not a bullish sign on its own.

Gold closed the week slightly above the mid-2015 low, but it had stayed below this low for many sessions and we don’t think this low is very important at this time.

Gold from the non-USD perspective - GOLD:UDN

From the non-USD perspective, gold moved back below the rising support / resistance line and thus the above picture deteriorated a bit.

Short-term Silver price chart - Silver spot price

During Friday’s session was saw a repeat of what we had seen previously – a sharp move higher (to the 50-day moving average) that was immediately canceled. We’ve previously written the following about the mentioned phenomenon (and it remains up-to-date also today):

(…) that was something we had seen quite often right before big declines, for instance in late October 2015 or mid-August 2015. Silver is known (at least by those who have been following it for a longer time) for its fake moves, so it’s important to consider confirmations and other signals before making an investment or trading decision based on what happens in silver.

We summarized that silver’s recent performance may have seemed positive, but based on the way similar situations had developed previously, we actually viewed the white metal’s unconfirmed rally as something bearish – especially given the very weak performance of mining stocks.

We didn’t have to wait long for a confirmation of the above – silver canceled the previous day’s upswing and the rest of the precious metals sector followed on the very next day. The trend remains down.

HUI Index chart - Gold Bugs, Mining stocks

From the long-term point of view, we clearly see that the consolidation continues and gold stocks are quite close to breaking below the previous lows. The situation in the Stochastic indicator continues to favor lower prices as well.

HUI Index chart - Gold Bugs, Mining stocks

From the short-term point of view, we saw breakdowns below the previous 2016 low and the rising support line. The implications of these breakdowns are bearish.

HUI:SPX - Gold stocks to the general stock market ratio

We can say the same about the situation (and its implications) in the gold stocks to other stocks ratio. It had moved to the declining resistance line, but once again reversed and the decline seems to be ready to continue.

SIL - Long-term Global X Silver Miners

Silver stocks have already broken below their previous lows and the implications are very bearish. A breakdown in silver stocks is a good sign that both silver and other mining stocks are likely to move much lower relatively soon.

On the above chart, you can see the previous similar breakdowns – the last 2 of them (not including the current one) were quickly followed by big declines, so it’s quite likely that we will see similar performance relatively soon.

Finally, we would like to briefly discuss the situation in the USD Index.

Short-term US Dollar price chart - USD

Friday’s action is somewhat similar to what we saw in silver – only in the opposite direction. This intra-day decline and the following reversal have bullish implications at this time. The reason is that USD was right at the cyclical turning point on Friday. If it weren’t for the quick turnaround, the USD would be likely to decline as its most recent move was to the upside. With a quick decline and a comeback already behind us, the rally can continue and the implications of such a rally are likely to be bearish for the precious metals sector.

Summing up, last week seems perplexing at the first sight, but analyzing many markets separately makes us think that the implications of last week’s price action are bearish for the precious metals sector. The outlook for the PM sector had been bearish anyway, so not that much changed in this regard. Anyway, the outlook remains bearish and full short positions appear to be justified from the risk / reward point of view, even though we could still see a few days of strength before the decline resumes. After the invalidation of silver’s rally and continued weakness in mining stocks, it might be the case that we will see a slide in prices without an additional corrective upswing. It seems likely that profits from this trade will at least match the current profits in oil and likely exceed the recent profits in stocks.

On a side note, we have just posted the Oil Trading Alerts’ performance and we invite you to review it (long story short, the oil trades resulted in gains of almost 90% in the past 12 months).

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

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels:

Gold: initial target price: $973; stop-loss: $1,143, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $74.28
Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61

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 ETF: initial target price: $15.23; stop-loss: $21.13
JDST ETF: initial target price: $52.99; stop-loss: $21.59

Long-term capital (our opinion): No positions

Insurance capital (our opinion): Full position

Plus, you might want to read why our stop-loss orders are usually relatively far from the current price.

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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