Different Kinds of Rallies

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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.

Gold, silver and mining stocks moved higher in yesterday’s trading as the USD continued to decline. Still, mining stocks moved only barely higher and this makes the implications of yesterday’s session less clear than it seems at first sight. In which way are the precious metals likely to head next?

Let’s take a look at the charts, starting with the USD Index (chart courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

In yesterday’s alert, we wrote the following about the above chart:

In today’s pre-market trading, the USD Index moved to 94.609 (Bloomberg data), which is right at the 23.6% Fibonacci retracement. This support is something that could stop the decline. What’s more interesting, however, is gold’s and silver’s lack of reaction to the pre-market decline. A decline of about 0.4 is something significant, which should theoretically generate a visible ($10+) rally in gold. At the moment of writing these words, gold is barely $3 higher, which is next to nothing. The implications of this underperformance are bearish.

The USD Index closed the session (according to Bloomberg, not Stockcharts) at about 94.60 and at the moment of writing these words it’s trading at 94.74 (gold being $3 down today). In other words, even if we view yesterday’s session as a breakdown below the 23.6% Fibonacci retracement, today’s pre-market rally has already invalidated it. This, plus the proximity of the cyclical turning point continue to make the rebound in the USD likely.

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

Gold and silver moved higher and silver reached a combination of two resistance lines, so the situation in the latter didn’t change much. In the case of gold, we saw a breakout above the declining black resistance line and rising red, dashed resistance line. The breakout is not confirmed so far and the odds are – in light of today’s pre-market decline and the following chart – that it will not be confirmed.

HUI Index chart - Gold Bugs, Mining stocks

Gold reacted to the USD’s decline in an insignificant way and gold stocks reacted to the upswing in a very weak way – the HUI Index moved higher by only half of an index point (0.28%). This prominent underperformance suggests that the precious metals sector really wants to decline – the only reason it’s been trading sideways is the continued weakness in the USD Index. Since the latter is likely ending, the outlook for the precious metals market remains definitely bearish.

Summing up, yesterday’s session didn’t invalidate multiple bearish points that we had made in our previous alerts and there are even some bearish implications of yesterday’s upswing. Namely, the gold stocks’ significant underperformance makes the upswings in the metals doubtful to say the least. Overall, the outlook remains very bearish for the following weeks. As we had already written previously, we could see higher prices in the coming days, but much lower prices in the coming weeks and months. Any strength here is likely to be only temporary.

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: initial target price 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

Important Details for New Subscribers

Whether you already subscribed or not, we encourage you to find out how to make the most of our alerts and read our replies to the most common alert-and-gold-trading-related-questions.

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 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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