Gold Pauses, Miners Decline Anyway

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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 and silver didn’t decline or rally yesterday, but mining stocks not only moved lower, but actually closed below the previous October and November lows. What are the implications?

Let’s dive right into the charts (chart courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Long-term Gold price chart - Gold spot price

GOLD:XEU - gold price in euro

In terms of the USD, gold didn’t do anything, which means that the previous bearish indications remain up-to-date. In yesterday’s alert, we wrote the following:

Gold moved sharply back and forth as both positive and negative data was released and ultimately it ended the session a few dollars higher (based on kitco’s prices, the closing price was $1,279.60). Why was the reaction so significant? The reason could be technical – the apex of the triangle was likely to be accompanied by a turnaround and since we just saw a more visible top a couple of days ago and apparently gold doesn’t want to form a bottom here, then the only remaining outcome is a local daily top that doesn’t change much – which is what we saw.

Why do we think that gold doesn’t want to bottom here? Because if it did, it would have ended Friday’s session much higher.

The additional bearish factor comes from the inability of gold in terms of the euro to move back above the lower border of the triangle patterns. Yesterday’s close below the triangle was the third consecutive one, which means that breakdown below it was confirmed.

The thing that we would also like to emphasize using the long-term gold chart is the lack of volatility in gold. In terms of the closing prices, the past two months were practically flat despite the high volume. This is discouraging from the trader’s point of view, but the silver lining is that periods of very low volatility tend to be followed by huge moves. In other words, being lulled by the lack of action and giving up on the previous metals market as something boring would be a mistake at this time.

The Bollinger Band width that you can see in the upper part of gold’s long-term chart is extremely low and that’s what preceded major moves in the past – we marked analogous situations with vertical, dashed lines. Multiple signs point to lower gold prices in the medium term, so the volatile move is likely to be a sharp decline.

Short-term Silver price chart - Silver spot price

Just like gold, silver didn’t do much yesterday, which means that it closed below the rising support / resistance line for the third consecutive trading day and that the breakdown is confirmed. The short-term outlook became even more bearish.

HUI Index chart - Gold Bugs, Mining stocks

GDX - Market Vectors Gold Miners - Gold mining stocks

Gold and silver’s pause was enough for mining stocks to decline and break below the previous lows, which is yet another bearish sign from this part of the precious metals sector. The miners’ underperformance relative to gold is a bearish sign and we continue to see it on a daily basis.

We adjusted the target area on the HUI Index chart by moving it lower. If gold and silver are to decline sizably shortly, then – especially in light of the mining stocks’ underperformance – it’s unlikely that the decline in mining stocks would stop or pause after a move to just 179 or so.

Summing up, there are multiple bearish signals in the gold market and what we saw yesterday further confirms this outlook. The mining stocks’ underperformance as well as silver’s confirmed breakdown point to lower precious metals prices in the near future. The big decline in PMs appears to be underway as 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 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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