Gold & Silver Trading Alert: Gold Dives Before the US Presidential Elections

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

Gold declined significantly yesterday, the USD Index rallied, and mining stocks declined even more than gold did – it seems that the short-term downswing started without waiting for the result of the U.S. elections. What’s next?

In short, a continuation of the decline seems to be in the cards, based on the signals discussed yesterday and last week and also based on yesterday’s underperformance of mining stocks.

Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold failed to hold the move back above the resistance levels (50-day moving average, declining resistance line, 38.2% Fibonacci retracement level) and declined quite visibly yesterday. Additionally, it seems that the RSI indicator topped right after moving a bit above the upper border of our target level and the Stochastic indicator just flashed a sell signal. These are all bearish signs pointing to lower gold prices in the coming days and weeks.

Short-term Silver price chart - Silver spot price

Silver moved lower, but erased some of the declines before the session was over. Still, that not bullish, as silver used to decline in this way (with intra-day corrections) previously and it didn’t invalidate the bearish outlook. Please note that the Stochastic indicator flashed a sell signal for silver as well.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks declined on relatively big volume and they underperformed gold once again, which is a bearish sign. This is even more profound if one factors in the fact that the general stock market soared yesterday (on a side note, we took profits off the table and exited our short positions in the general stock market on Friday – practically right at the bottom). Miners declining about 4% despite a 2%+ rally in the S&P 500 is profound and bearish for the precious metals sector.

Summing up, based on yesterday’s session and the bearish signs that we had seen previously, it seems that a decline in the precious metals market is starting and the risk to reward ratio continues to favor speculative short positions in gold, silver and mining stocks.

As we are right before the U.S. elections, we need to note that we could see increased volatility in the market but… This doesn’t have to be the case. The polls are still close to a tie and they are publicly known, thus there will likely be little surprise just before the election. In the case of the Brexit vote, there was a huge surprise, as Bremain was the very likely outcome and the markets were surprised, to say the least. In this case, the market is not likely to be surprised as it has to take into account that both Trump and Clinton could really become the next U.S. President.

What will definitely happen after the elections? The uncertainty regarding the choice will be gone and this is much more certain than Trump’s victory which could (doesn’t have to) contribute to gold’s temporary (!) upswing. Consequently, even if Trump wins, the effect of lower uncertainty could outweigh the effect of bigger uncertainty related to him being the anti-establishment candidate. Therefore, we think that the best approach is to look at what the charts are saying and position oneself accordingly, while keeping the size of the position reasonable. If one is particularly risk averse, they might consider limiting the size of the position or even closing the position entirely temporarily (the positions are profitable, especially in mining stocks).

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (100% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: initial target price: $1,006; stop-loss: $1,331, initial target price for the DGLD ETN: $73.19; stop-loss for the DGLD ETN $41.89
Silver: initial target price: $13.12; stop-loss: $19.23, initial target price for the DSLV ETN: $39.78; stop-loss for the DSLV ETN $18.74
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $27.32, initial target price for the DUST ETF: $297; stop-loss for the DUST ETF $27.87

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: $14.13; stop-loss: $47.41
JDST ETF: initial target price: $245; stop-loss: $18.59

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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