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.
Several weeks ago, we discussed gold’s volatility and what we could infer from it. Long story short, the situation did develop as we had expected, but what we just saw in gold’s volatility index is even more profound than what we saw back in February – it broke to new lows. What are the implications?
Let’s start the analysis by quoting our analysis from February 21st, 2017:
(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.
The situation developed just as indicated above – gold indeed managed to move higher, but the move was limited. Since the previous signal proved to be correct, its general efficiency increased even further. Consequently, it is particularly important that we have just seen the most significant signal ever – the volatility dropped to levels that had not been seen since the index’s inception. Naturally, the implications are very bearish for the following weeks. Another small upswing is still not out of question, but – as it was the case previously – it doesn’t seem that it would be significant.
Whether we get a small upswing before the big slide or the big slide without an additional upswing beforehand could depend on how the markets interpret what they hear in today’s announcement from the Fed. Either way, it seems that keeping the short positions intact is currently justified from the risk to reward point of view.
As far as metals are concerned, we didn’t see significant changes yesterday – the decline was quite normal. The thing that is worth mentioning is the volume in mining stocks.
Namely, miners declined on significant volume, which serves as a bearish confirmation for the short term.
The USD Index declined as we had expected. In yesterday’s alert, we wrote the following:
Yesterday’s intra-day low was 100.86 – a mere 0.15 above one of the target levels – it could very well be the case that the short-term decline in the USD Index is already over. The outlook for the USD Index improved based on yesterday’s session, and the implications for the precious metals sector are more bearish than they were previously.
It appears that the bottom for the USD Index is indeed in, but we would still not be surprised if it declined one final time before turning up (reversing very close to its turning point). As discussed earlier – this could depend on the way the market reacts to the Fed’s comments, but the outlook for the USD Index remains bullish either way.
Summing up, it appears that the potential size of the decline in the USD Index and rally in metals are very limited and that the medium-term trends will resume shortly (if they haven’t already resumed, that is). The extremely low volatility reading in gold is a strong suggestion that a major slide in gold is just around the corner. It appears that speculative short positions in the precious metals sector remain justified from the risk to reward point of view.
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: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
- 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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