Gold Rallies Despite Bearish Signals

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Briefly: In our opinion, full (150% of the regular size of the position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.

In yesterday’s extensive alert, we discussed multiple factors for gold, silver, miners and the related markets. Based on yesterday’s session’s shape, we can discuss whether any of the points raised were confirmed. Gold didn’t decline yesterday, but does it really matter?

No, it doesn’t. The reason is that it is the end of the year when gold is most likely to reverse its course. The final session of the year is today so if gold reverses either today or during the first session of 2018, it will be in perfect tune with our expectations.

Then why did you already open the short positions? Wouldn’t it be better to open the positions at the top instead of opening it before it?

Yes, it would be better to open the positions right at the top. However, nobody knows for certain if the top is in at any given moment. You can know for sure only sometime after the top is formed that it was indeed the top. At that time, most of the trading opportunity might already be gone. That’s one thing. The other thing is that in light of the analogy to 2013 and the possibility that the first part of the upcoming decline is very sharp, it’s better to be a day or a few too early than to be even a few hours too late (hours meant many tens of dollars in April 2013). Finally, please note that the turning points tend to work on a near-to basis, meaning that the top could have been seen before the end of the year. Especially that this was the case at the end of 2016 – gold bottomed before the turning point and the end of the year.

Summing up, entering positions gradually when we see more and more confirmations of the upcoming reversal is a way of maximizing the odds of making money on the upcoming move. By waiting too long we would be risking missing a large part of the move.

Having said that, let’s take a look at the charts (chart courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved a bit higher yesterday and everything that we wrote yesterday, remains up-to-date:

Gold moved above the combination of resistance levels, but it doesn’t seem to be a big deal. The reasons are the proximity of another combination of resistance levels just several dollars higher and the fact that we have multiple other bearish indications in place.

As far as the combination of resistance levels is concerned, we have the 50% Fibonacci retracement, the November and (approximately) October highs and the psychologically important $1,300 level.

In terms of time, we have the apex of the triangle based on the intraday extremes (declining black dashed line and the lower of the rising red lines) pointing to a turning point at the end of the year. We also have gold’s turning point around January 8th. Given silver’s outperformance and miners’ small decline that we saw yesterday, it seems that the former time target is more likely to mark the final top for this corrective upswing. This is particularly the case since we saw a turning point in the first days of 2017 but the bottom actually formed in December.

So, it seems that the end of the year might also mark the end of gold’s rally.

Short-term Silver price chart - Silver spot price

Silver moved even higher yesterday, once again outperforming gold and – most importantly – mining stocks. The white metal moved to its 50% Fibonacci retracement level and the top might be in. Silver might move higher today as well, but that’s not really important if it is about to slide in a profound way within the next several sessions.

Again, silver’s outperformance is a major bearish sign for the short term.

Gold, Silver, HUI

In the last two days, silver’s outperformance, especially relative to mining stocks was extraordinary.

HUI Index chart - Gold Bugs, Mining stocks

Speaking of mining stocks, they remain below their rising resistance lines and the 200-day moving average. The 194 level was almost reached yesterday, but it was definitely not broken. It still seems that the rally is ending and we are about to see a start of a decline.

The only meaningful changes that we saw yesterday were in the currency market.

UUP PowerShares DB US Dollar Bullish ETF

The UUP ETF chart doesn’t show any changes as the support levels remain intact, but the USD Index and the Euro Index do.

XEU - Euro

Short-term US Dollar price chart - USD

The euro broke above the triangle while the USD moved below the neck of the head-and-shoulders pattern. Still, we don’t trust these moves and we trust even less in their ability to trigger a sizable rally in the precious metals market. Here’s why:

The breakdown in the USD Index is not confirmed – it was only one daily close, while we would prefer to see 3 consecutive closes to say that the move is confirmed.
The Euro Index moved to its previous high, which could also stop the rally.
Most importantly – the USD Index has declined by another 0.3 so far today and gold and silver have barely moved.

If metals are not willing to react to the currency market’s moves by moving higher, then we – precious metals investors – don’t need to be very concerned about them for a while. Still, it seems likely that the metals will get negative impact from the currency market as we continue to think that the next big move in the USD is up (even if we see an unlikely event of a retest of the 2017 lows).

Summing up, the medium-term outlook for the precious metals market remains bearish as confirmed by multiple factors, and based on the most recent short-term factors, it seems that the corrective upswing in gold, silver and mining stocks is either over or close to being over. Moreover, based on yesterday’s intraday action, yesterday’s closing prices, and based on how gold, silver and the USD Index are performing so far today, it seems that the situation is now extremely bearish with the possibility of seeing a big, volatile downswing shortly.

On an administrative note, due to your Editor’s Holiday- and year-end travel plans there will be no regular Gold & Silver Trading Alert on January 2nd. In other words, the next Alert will be posted on Wednesday, January 3rd.

However, since the situation in the precious metals is tense, we will be monitoring the market and if anything urgent happens, we’ll send you a quick message with our comments.

As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Full 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:

Gold: initial target price: $1,218; stop-loss: $1,322; initial target price for the DGLD ETN: $53.98; stop-loss for the DGLD ETN $40.98
Silver: initial target price: $14.63; stop-loss: $17.62; initial target price for the DSLV ETN: $33.88; stop-loss for the DSLV ETN $21.78
Mining stocks (price levels for the GDX ETF): initial target price: $19.22; stop-loss: $26.14; initial target price for the DUST ETF: $39.88; stop-loss for the DUST ETF $19.78

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: $27.82; stop-loss: $38.22
JDST ETF: initial target price: $94.88 stop-loss: $37.78

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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