Briefly: In our opinion no speculative positions in gold, silver and mining stocks are currently justified from the risk/reward point of view.
Yesterday’s and today’s session (so far) are quite significant as a few important sectors invalidated their previous moves. How much changed?
Let’s start by saying that yesterday’s decision from the Fed was not surprising – there was no hike and no lowering of interest rates. The statement from the Fed was rather hawkish, but the market didn’t view it as such – the perceived probability of a hike in September decreased slightly, which is probably the trigger behind yesterday’s rally. Still, how far PMs and miners moved higher was determined also by the traders’ and investors’ emotionality – the fact that miners invalidated their previous breakdown can have entirely different implications than we would have if miners had rallied, but ultimately closed at or below the support line.
Let’s take a closer look at the charts, starting with the HUI Index(charts courtesy of http://stockcharts.com).
In yesterday’s alert we commented on the previous daily upswing that hadn’t taken the HUI Index back above the rising support / resistance line – since the breakdown had not been invalidated, the implications remained bearish. This changed based on yesterday’s upswing and yesterday’s prices – gold stocks not only rallied back above the mentioned line, but also managed to close visibly above it. In case of the GDX ETF, we saw sizable volume, so the move is confirmed.
Are the implications very bullish? No, but they do make the short-term picture much less bearish, making the short-term outlook rather unclear.
What’s bullish? The breakdown’s invalidation itself, a buy signal in the daily Stochastic indicator, and a rally on strong volume.
What’s bearish? A move close to the 2016 highs without breaking out and the analogy to the previous situation – back in May, the move close to the previous high and the preceding invalidation of the breakdown above the dashed line, were followed by declines, not rallies.
All in all, the short-term outlook is unclear, but the outlook for the following weeks remains bearish.
Silver is at about $20.40 at the moment of writing these words (it seems the data provider didn’t update the charts with the closing prices) and it doesn’t necessarily have bullish implications. Back in May, there were cases when silver moved up after reaching the 20-day moving average (just like it was the case recently) and bigger declines still followed. This time, however, the volume is significant (the data may not be correct, but the SLV ETF shows high volume as well, we think it’s safe to assume that the volume was high), while it was low during the May upswings. This makes the outlook more bullish today than it was yesterday, moving from bearish to the “unclear” range.
At the moment of writing these words, gold is trading at about $1,340, so it moved visibly higher, but there was no breakout. In fact, it appears that gold bounced after moving to the rising support line without breaking below it. After the miners’ breakdown, a breakdown in gold was likely, but based on what happened yesterday, it is no longer the case, especially that the True Seasonal patterns suggest a move higher in gold in August.
Finally, today, we saw an important invalidation in the USD Index. At the moment of writing these words, the USD Index is trading at about 96.40, which is visibly below the upper border of the triangle and even a bit below the lower border. With the breakout above the triangle being invalidated, we can no longer describe the short-term outlook for the USD Index as bullish (the medium-term outlook remains clearly bullish, though). The implication is that we could see an upswing in the precious metals market in the short term, but that the medium-term is likely to remain to the downside.
Summing up, based on yesterday’s (mining stocks) and today’s (USD Index) invalidations, the short-term outlook for the precious metals market changed from bearish to neutral / mixed. Consequently, we no longer think that any speculative positions in the precious metals sector are justified from the risk to reward perspective. We will enter positions (probably short ones, but we can’t tell for certain at this time) once the situation clarifies. The medium-term outlook for the precious metals market remains bearish due to reasons discussed in Monday’s alert.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): No positions
Long-term capital (core part of the portfolio; our opinion): No positions
Insurance capital (core part of the portfolio; 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 signs 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, Gold & Silver Fund Manager
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