Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. This position was originally featured on Jan. 12, 2017 at 3:49PM.
In our previous alert, we discussed gold’s situation regarding the uncertainty that market participants face right now and we discussed the very important implications thereof. Today, in addition to discussing weekly price changes, we focus on the current volatility readings in gold – believe it or not, even though the day-to-day price changes don’t seem to imply it, the volatility in gold is currently extremely low. Can it tell us something about the precious metals sector?
It can and what it tells us is actually very important as the efficiency of the lack-of-volatility signal is very high. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).
In the past years, very low readings of the gold volatility index were usually followed by lower gold prices. The key thing is what we mean by “usually” here – gold moved lower in the weeks following extremely low volatility readings in 10 out of 11 cases and 9 cases thereof were followed by immediate declines. Naturally, the implications are bearish.
Naturally, one could say that gold declined on average during the past 5 years which makes it normal for gold to decline on average after any random signal, but still, the 9 out of 11 or 10 out of 11 (depending on how one treats the March 2013 spike) efficiency shows that it is unlikely that the signal was random. In other words, 6 or 7 out of 11 signals could have raised an eyebrow, but it would be nothing to call home about, but 9 or 10 out of 11 is too many to be explained by just randomness.
Let’s move back to the bearish implications – they are present, but it’s also true that the volatility index could move even lower and therefore the top might not be here , but is just around the corner. What’s special about it? That it’s not just a usual indicator, but volatility. If it continues to decline, it means that gold is likely to move even less significantly higher than it did recently. Consequently, delaying the slide – IF it is delayed at all - is likely to be accompanied by a small upswing – not a huge one.
Speaking of not very significant moves, let’s take a look at gold’s upswing that we saw last week.
Last week, gold’s price increased by an entire… $3.20. If the volatility were to decrease even further and gold moved higher by a mere $3, then we should not expect any significant price increases in near future.
Before moving further, please note that gold didn’t close the week above the 60-week moving average, even though it moved temporarily above it during the week. The implications are bearish as the small breakout was already invalidated (the weekly closing prices are more important than daily closing prices, which in turn are more important than the intra-day extremes).
While gold moved $3 higher, gold stocks didn’t manage to move higher at all, at least not in terms of weekly closing prices. The HUI Index declined 4 points (a little below 2%), which is not a lot, but in light of gold’s higher close, is something that points to lower precious metals’ and miners’ prices in the following weeks.
Moreover, due to this week’s decline, last week’s breakout above the 50-week moving average was invalidated. Since late 2011, whenever the HUI Index moved back below its 50-week moving average, big declines followed, so the implications here are bearish as well.
Summing up, while the daily price changes are not particularly meaningful, we get more and more signals that are very important (being highly effective in the past) from the medium-term point of view and they paint a very bearish picture for the precious metals sector for the upcoming weeks and months.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,263; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.47
- Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37
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: $45.31
- JDST ETF: initial target price: $104.26; stop-loss: $10.78
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
Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).
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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