Correction or End of Decline

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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.

Unlike what we saw two days ago, yesterday’s strength in mining stocks was not accompanied by (and thus cannot be attributed to) a rally in the general stock market. Can we therefore assume that the decline has ended?

In short, that’s not likely. Miners did outperform the general stock market, but this time, the reaction was not particularly strong when compared with what happened in gold. So, it was not really a sign of strength in mining stocks relative to the precious metals market – it was a small counter-trend move in both: gold and mining stocks. Since no market can move up or down in a straight line, the above is not that surprising. Let’s take a closer look (charts courtesy of http://stockcharts.com).

Gold’s Small Upswing

Short-term Gold price chart - GLD ETF - SPDR Gold Shares

Gold (GLD) moved a bit higher yesterday and please note that the analogy to the November 2016 decline is still intact. The initial slide was not as big this time, as it was in 2016, but we have indeed seen a few days of declines. Back in 2016, the few days of insignificantly higher prices followed and this could very well be the case this time. This pause didn’t change anything regarding the trend back then and it’s not likely to do so this time.

Additionally, the volume that accompanied yesterday’s small move higher was relatively low, which confirms the above scenario.

GDX - Market Vectors Gold Miners - Gold mining stocks

We see more of the same on the above mining stocks chart – the volume was a bit higher than what we saw on Tuesday, but it was still relatively low. Consequently, yesterday’s upswing doesn’t seem to be anything more than a pause within a decline.

Moreover, please keep in mind that miners recently broke below their late-May lows and they might simply be verifying this breakdown by temporarily moving back to these levels.

USD Action

Short-term US Dollar price chart - USD

It’s not visible on the above chart, but the USD Index moved to the declining resistance line in today’s pre-market trading and then declined once again. Such reversal might have contributed to today’s pre-market small move higher in gold. Still, once the declining resistance line is broken, the opposite could be the case – gold could accelerate to the downside as everyone that bought gold based on today’s reversal will then exit their positions as the implications of the reversal vanish.

Long-term US Dollar price chart - USD

From the long-term point of view, the USD Index simply corrected to the 61.8% Fibonacci retracement level and the levels reached by the RSI indicator correspond to other major bottoms - technically, the trend remains up.

Also, please note that when comparing the USD Index’s performance with gold, we see that while the USD is more or less at the same level as it was about a year ago, gold is over $100 lower. The medium-term implications are bearish.

Summing up, the outlook for the precious metals market remains bearish and it seems that we are seeing a pause in the decline, not a beginning of a new significant rally.

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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