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.
We now know the name of the Fed’s next chair and we know the latest employment numbers. We are also after the first interest rate hike by the Bank of England in a very long time and… Nothing happened. Why didn’t gold react? Why isn’t it moving in any direction?
To be honest, there is no 100% certain explanation except for the one that neither buyers nor the sellers are willing to take huge bets yet and overwhelm the others. The long-term technical factors remain in place and the last 2 days were characterized by early rallies and follow-up declines in mining stocks, which created bearish reversals. Silver’s outperformance was and still is a bearish factor and the same goes for gold’s invalidation of the small breakout above the declining resistance line. Let’s take a look at the charts for details (chart courtesy of http://stockcharts.com).
In addition to what we already wrote earlier, the above chart also shows that yesterday’s reversal took place on relatively big volume which strengthens its bearish implications.
We also see that the cyclical turning point in gold is just around the corner, so we could see a sharp move (most likely to the downside) any minute now. However, let’s keep in mind that the above is not certain and the turning point could market a local top instead of a major bottom.
If we see another upswing today (even if it is just a few-dollar one), then latest very short-term move will be to the upside and the turning point will have bearish implications. What would it change for us? It would simply mean that the $1,200 - $1,220 target area would not be reached within a few days, but within 1-3 weeks. In other words, all of the long-term signals would still be very likely to come into play, but they would do so with a 1-3-week delay. In this case, we could see a repeat of last year’s November and gold’s pause around $1,200 could be very brief.
Still, based on the recent performance in silver, gold’s invalidation and verification of a breakout and a breakdown in USD and gold stocks, respectively, it seems that the decline is likely to start shortly.
Quoting our yesterday’s comments:
The HUI Index confirmed the breakdown below the rising medium-term support/resistance lines and the GDX ETF confirmed the breakdown below the early October low.
Moreover, GDX was flat yesterday and gold stocks were up only very insignificantly. That’s not a confirmation of silver’s supposedly bullish rally – that’s a clear sign that silver’s rally was fake. The implications are very bearish.
We saw analogous action yesterday and with breakdowns being even more confirmed, the implications are clearly bearish.
Speaking of mining stocks, we haven’t discussed their performance relative to the general stock market for some time and since there is not much else that we can report on today, it seems like a good opportunity to catch up with that topic.
Comparing the values of HUI Index to the performance of the S&P 500 Index, we see that their ratio is after a breakdown below the line based on the late 2016 and 2017 lows – exactly like the HUI Index itself.
In case of the ratio between the HUI Index to the Dow Jones Industrial Average we see something even more profound – a confirmed (!) breakdown below the late 2016 low.
Since these ratios move in tune with the miners and the rest of the precious metals market, the above-mentioned breakdowns have bearish implications for the following months (not necessarily days, as the breakdowns are below levels that are important from the medium- and long-term point of view). Consequently, we have yet another factor that is bearish for the medium term.
Summing up, while we haven’t seen much action yesterday, it doesn’t mean that the signals that we saw previously are any less important. The outlook remains bearish, especially that the analogy to the 2012-2013 decline remains in place and the previously discussed long-term signals remain in place: gold’s huge monthly volume, the analogy in the HUI Index, the analogy between the two most recent series of interest rate hikes, and the RSI signal from gold priced in the Japanese yen.
As far as the following weeks are concerned, it seems that we could see another rebound during the decline, but not likely until gold moves to the $1,200 - $1,220 range, which is likely to take place in the first half of November. We could see the slide shortly or – if not – then a local top either today or on Monday and then a decline to the above-mentioned target area.
We understand that it may not seem believable that gold could decline in the near future or that the decline is going to be really huge, but please keep in mind that this is the generally the case with big moves (and the same was the case with the 2013 slide) – they don’t appear believable until they are over and it’s too late to take action at that time. We will continue to monitor the market and strive to keep you informed and prepared for what’s coming.
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 exit price levels / profit-take orders:
- Gold: exit price: $1,218; stop-loss: $1,366; exit price for the DGLD ETN: $51.98; stop-loss for the DGLD ETN $38.74
- Silver: exit price: $15.82; stop-loss: $19.22; exit price for the DSLV ETN: $28.88; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): exit price: $21.23; stop-loss: $26.34; exit price for the DUST ETF: $29.97; 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 exit prices:
- GDXJ ETF: exit price: $30.28; stop-loss: $45.31
- JDST ETF: exit price: $66.27; 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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Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
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