Gold & Silver Trading Alert: Silver’s Big Rally and Its Implications

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Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are currently justified from the risk to reward perspective.

Gold and mining stocks didn’t do much yesterday, but silver rallied almost $0.50. Silver’s outperformance is often a very meaningful indication pointing to a looming reversal. Was it the case also this time?

In short, it could have been and the outlook is no longer bullish based on the above, but let’s keep in mind that there is still a reason due to which precious metals sector could rally.

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

Short-term Gold price chart - Gold spot price

Gold is still very close to the 61.8% Fibonacci retracement, moving back and forth around it. There was no confirmed breakdown (thus the implications are bullish) and the invalidations were not followed by rallies – at least not yet.

The RSI indicator moved back above the 30 level, which suggests that a short-term rally may indeed be around the corner as this is what followed similar actions in the recent past in most cases. It’s far from being a strong buy signal, though.

Short-term Silver price chart - Silver spot price

Silver rallied and the Stochastic indicator based on it moved close to the 80 level, but not yet to/above it. The sell signals from the Stochastic indicator seen above 80 usually corresponded to local tops, so the current position of the indicator suggests that the top is close to being in, but not yet in.

Does the above imply that moving back to a long position is a good idea? No – after all, silver did outperform gold in a very profound way yesterday, which is a strong bearish confirmation.

Overall, the situation in silver doesn’t strongly imply an immediate move lower from here, but it does indicate that a decline will likely be seen relatively soon (within a week or 2).

Another “almost” sign comes from the silver to gold ratio.

SILVER:GOLD - Silver to Gold ratio chart

There is a very effective technique confirming the tops that you can see on the above chart. The technique is looking at RSI’s (based on the ratio) performance and viewing moves back below the 70 level as a strong sell signal. Naturally, for the RSI to move above 70, it first has to rally above it. The indicator moved to 68 based on yesterday’s closing prices. Again – “almost”.

GDX - Market Vectors Gold Miners - Gold mining stocks

The mining stocks didn’t do much yesterday – they moved higher only a little, but so did gold, silver we really can’t speak of miners’ underperformance.

Short-term US Dollar price chart - USD

Let’s keep in mind that the USD Index is still quite likely decline to about 99.5 level, which would be a bullish factor for gold. The same goes for the situation in the Japanese yen.

XJY - Japanese Yen

Just like gold, yen is sitting on its 61.8% Fibonacci retracement and is likely to rally based on that. Still, let’s keep in mind that there is a difference between likely and inevitable. In early 2013 (and we think the current decline in PMs is similar to the one from 2013) yen declined almost without any corrections, so something similar could be seen also this time. The 61.8% retracement continues to have bullish implications, but let’s keep in mind that don’t guarantee a move higher – just make it likely.

All in all, as far as the short-term implications of what we see on the charts are concerned, we have bullish situation in gold, bearish situation in silver, neutral situation in mining stocks, bullish implications of the situation on the currency market.

On top of the above we have a medium-term downtrend and a looming U.S. interest rate decision (we will discuss this issue in greater detail in tomorrow’s alert) that could trigger a big price swing.

What are the overall implications? The outlook for the short term is too unclear to justify opening any position at this time. This will most likely change relatively shortly as we get additional confirmations. It would be perfect to see additional bearish confirmations along with higher prices in the short run as this would make the following bet on lower prices less risky and more profitable (higher prices and the same target prices mean bigger move to profit on).

Catching the downswing (or upswing) is not the most important thing, though. The key thing is to be prepared for the final bottom in the precious metals market that is likely to be seen within the next few months. That’s so important, because the core part of the portfolio – the long-term investment capital – will most likely be affected. Still, until we get there, we’ll strive to profit thanks to the short-term price swings (just like profited on the last quick bet on higher precious metals prices).

Summing up, a short-term rally from here wouldn’t be surprising, but based on silver’s outperformance, the rally is no longer likely enough to keep betting on it. Consequently, it seems that taking profits off the table yesterday, was a good idea. The short-term outlook is unclear, but the medium-term remains bearish. Ideally, we would like to see bearish confirmations along with higher prices, but we might see other signals that could also result in another profitable trade.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions (in other words: cash and/or positions from our other alerts)

Long-term capital (core part of the portfolio; our opinion): No positions (in other words: cash)

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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