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 back and forth movement continued yesterday in the case of metals and the USD Index (while miners showed strength by not declining along with gold). It seems that the markets are taking a breather before another volatile move. What kind of move will it be?
Most likely a final part of a short-term rally in the case of the USD Index and another wave lower in the case of the precious metals market. Mining stocks indeed showed strength yesterday, but this strength was not enough to take miners back above the resistance lines. Please take a look at the details below (chart courtesy of http://stockcharts.com).
In yesterday’s alert, we wrote the following:
Gold stocks rallied, just as gold did, but they didn’t close the session back above the rising resistance lines based on the 2016 and 2017 lows and consequently nothing changed from the technical perspective. Lower prices are still likely to be seen in the following days based on the above chart.
Gold miners declined only a bit, but this means that they are still below the mentioned resistance lines. No breakout translates into no changes in the outlook, which remains bearish.
The comment on the above USD Index chart will once again be rather short as once again nothing changed. Consequently, what we wrote previously remains up-to-date:
The breakout above the neck level of the reverse head and shoulders pattern is more than confirmed, so another rally appears very likely to be seen this week. The target at about 96 level (precisely 95.89) is supported by the declining red resistance line and the 38.2% Fibonacci resistance level. Both are based on a clearly visible, medium-term move, so they are important.
In yesterday’s alert, we commented on the above gold chart in the following way:
Gold moved above the declining resistance line and even managed to close above it. However, since that was just one closing price above it, we don’t view this breakout as confirmed, especially that at the moment of writing these words, gold is trading at about $1,275, so it could easily invalidate yesterday’s breakdown in just a minute or a few of them.
Gold closed only a little above the declining resistance line, so the breakout is not yet confirmed. At the moment of writing these words, gold remains below $1,280, so the chances of a quick invalidation of the short-term breakout are big, especially given the situation in the USD Index.
As far as silver is concerned, we wrote the following yesterday:
Silver soared once again and once again we are seeing a decline that follows an upswing – silver is already 18 cents lower today, being at about $17 at the moment of writing these words. Overall the white metal has been moving back and forth in the last few days and it doesn’t seem that the implications are particularly bullish.
At the moment of writing these words, silver is at about $17 as well, so the above remains up-to-date.
Before summarizing, we would like to briefly discuss two long-term charts that show that it’s quite possible that precious metals and mining stocks will decline sharply even if the USD rallies only to 96 or so.
The gold to S&P 500 ratio is after a small breakdown below the level that kept the declines in check for more than a year. Will the breakdown finally result in lower prices or will it be invalidated, just like it was the case earlier this year? We will know shortly, but the important detail here is that if we see a continuation of the decline, then it will likely be both: sharp and big. The reason is that a year is more than enough for a ratio to consolidate and the follow-up action is likely to be significant – the longer the base, the bigger the move. Moreover, we saw an analogous breakdown in late 2012 (which is yet another factor pointing to similarity between that time and now) and a huge decline followed, so the implications are bearish this time as well.
Another important breakdown that was not invalidated is the one in the gold stocks to S&P 500 ratio. It’s clearly visible from the long-term perspective, so it’s implications are also quite clear. Naturally, they are bearish. Please note that if the ratio continues to move lower and we see a sizable decline in the main stock indices (which is not that unlikely given how extremely overbought they are from the medium- and long-term point of view), then gold stocks would likely decline very sharply and junior mining stocks would likely be affected to an even greater extent (being a bit more volatile).
Summing up, much less changed based on this week’s rally than may appear at first sight. Gold’s breakout is not yet confirmed and – likely – about to be invalidated in light of the bullish short-term outlook for the USD Index and since mining stocks remain below the medium-term resistance lines, the short-term outlook for their prices remains bearish. Still, since precious metals and mining stocks moved higher while the USD didn’t decline much, the price targets in metals that will correspond to USD’s 96 level (95.89 to be precise) could be higher than we initially assumed. In Monday’s alert we discussed the possibility of gold bottoming temporarily (!) at about $1,250 and based on what happened on Monday and yesterday, this scenario became more probable (not certain enough to move the exit level to it just yet). It’s too early to determine the analogous price levels for silver and mining stocks (at least reliable ones), but keeping the 95.89 level for the USD Index in mind should prove most useful. Once the USD moves above 95.7 we will know what’s the closest important support in the case of metals and miners and we will most likely move our exit prices to these levels.
However, while this week’s performance might have changed the very short-term targets, it didn’t change the medium-term outlook and thus what we recently wrote regarding that matter remains up-to-date. Namely, it seems likely that after an additional decline the precious metals sector would be likely to correct before continuing the decline. This action would not be a bullish development from the medium-term point of view as it would be something natural at this stage of the decline and the opposite can be said about the upcoming pullback in the value of the USD Index. To be clear, the medium-term 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. However, it seems to be a good idea to take advantage of the upcoming short-term correction, should we get bullish confirmations from metals or miners.
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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