Gold: Pause or Reversal?

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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 precious metals market paused after a sharp post-Fed-hike reversal and price decline. Did the markets end their reaction to the Fed’s decision or is this just a technical pause, after which the decline will resume?

In short, the latter is much more probable. Let’s take a look at the charts for details (charts courtesy of http://stockcharts.com).

Long-Term Outlook

Long-term Gold price chart - Gold spot price

From the long-term point of view we see that gold remains below the declining long-term resistance line and last week it moved back below the 60-week moving average. The latter has been an important support and resistance throughout the entire 2000 – today bull market in the precious metals, which makes a move below it an important development. To be precise, this moving average worked on an approximate basis more than on an exact basis, but still, a move below it still serves as a bearish confirmation.

It still seems that much lower gold prices are to be expected this winter. The precious metals market shows seasonal strength in the final months of the year, but let’s keep in mind that seasonality is particularly important in light of the absence of other important factors and if the USD Index rallies to new highs the situation is going to be anything but the above.

True Seasonal charts feature gold seasonality, silver seasonality, U.S. Dollar and other seasonal trends and patterns

Besides, as you can see above, the uptrend has not been very strong in the past several years (in fact, we saw significant declines in the last two Novembers), so it doesn’t seem that it will be a major factor in determining the timing of the final bottom in gold.

HUI Index chart - Gold Bugs, Mining stocks

The long-term chart of the HUI Index continues to have bearish implications as well. After gold stocks broke below the rising support line based on the 2015 and 2016 lows there was only a move back to it – there was no confirmed breakout above it. Consequently, the breakdown is more than confirmed.

Short-term Outlook

Short-term Gold price chart - Gold spot price

Short-term Silver price chart - Silver spot price

GDX - Market Vectors Gold Miners - Gold mining stocks

In the days following the interest rate hike and the initial decline, gold, silver, and mining stocks paused a bit, but the significant decline in volume during this pause suggests that it’s just that – a pause. If the volume had been huge, it would have suggested that we were seeing a reversal – big volume would suggest that both sellers and buyers were fighting intensely. However, the volume was small, which means that traders and investors were simply taking some time off, waiting for the situation to clarify after the big post-rate-hike price action.

Short-term US Dollar price chart - USD

The USD Index declined a bit on Friday, but it didn’t cause precious metals to move higher, which suggests that the next move in the PM market is going to be down. If a given market (in this case precious metals) doesn’t react to what it should react to in a certain way (in this case, by rallying given the USD’s decline), then we have an indication that the market really wants to move in the opposite direction (in this case that would be the PMs wanting to move lower).

Summing up, the price action that we saw last week in the currency markets and in the precious metals market itself, suggests that lower prices of PMs are likely just around the corner.

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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