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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 at the moment of publishing this alert.

The USD Index declined on Friday (and moved to new lows) while gold and silver did the opposite. Is the current trend sustainable and will these moves continue much longer?

The Big Picture

In all likelihood, this is not the case. Gold’s long-term chart (in addition to other factors) shows why (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

The major, long-term, declining resistance line is less than $10 above the Friday’s gold closing price and it’s highly unlikely that we would see a confirmed breakout above it anytime soon. This line stopped the rally previously, many times in the second half of 2016, so it’s already a proven resistance. Did gold shows exceptional strength moving closer to it last week? No, the volume that accompanied gold’s $12 upswing was relatively low and accompanied by more than a 1.5% weekly decline in the HUI Index – that’s the opposite of strength.

Short-term Gold price chart - Gold spot price

In the previous alerts we wrote that gold’s technical outlook would not change unless it confirmed the breakout above the rising red resistance line. When we first mentioned it, the line was at about $1,275, but since it is a rising line, it increased over time and it was at about $1,280 on Friday. That’s where gold closed on Friday, so there was no breakout, let alone a confirmed one. Consequently, still nothing changed.

Now, the thing is that even if we see a move above $1,280, there is a very strong long-term resistance line just about $10 higher, which would likely keep the rally in check and trigger a reversal followed by an invalidation of the breakout above $1,280 – that’s how the top could be formed. What would confirm this?

USD Index and Its Implications

Short-term US Dollar price chart - USD

The USD Index moved lower, but not to the target 61.8% Fibonacci retracement level at about 96.40. Therefore, it could move a little lower this week only to come back up with a vengeance. Any additional decline here would likely result in a move lower in the RSI indicator – possibly below 30 – and another buy signal from the latter. In other words, it looks like the bottom is in or – more likely – just around the corner.

HUI Index chart - Gold Bugs, Mining stocks

Practically all of the recent alerts mentioned the mining stocks’ extreme underperformance and today’s alert will not be any different. Even though it appears to be the case, it’s not that we are repeating the same thing over and over again. Indeed, the underperformance remains in place, however, its extent grows with each subsequent session. Consequently, in each alert the thing that was reported was more significant and more bearish than in the previous alerts. The same is the case today – even though we are repeating that the miners’ underperformance continues, the strength of this signal and its implications are even more important than previously.

Summing up, the medium-term outlook for the USD Index remains bullish and the outlook for the precious metals sector remains bearish. The USD Index could still decline before turning up again, but it’s likely that the decline would not be significant. The price of gold is close to a very important, long-term resistance line, which makes the rally’s visible continuation doubtful. In fact, especially in light of the mining stocks’ underperformance, it seems that the local top in the precious metals market is just around the corner (or already in). The precious metals market remains to be in the pennies to the upside and dollars to the upside territory (literally in the case of silver and the GDX) and thus the overall outlook remains bearish.

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: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
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: $417.04; stop-loss: $43.12

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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