Briefly: in our opinion, full (250% of the regular size of the position) speculative short position in gold, silver, and mining stocks is justified from the risk/reward perspective at the moment of publishing this Alert.
Gold's decline continues and yesterday's tight session hasn't changed that. Is this a moment of hesitation before another decisive move, or is a reprieve at hand? In the search for the right answer, we better look at the whole sector. Today, we're bringing you the hints that silver and gold miners have in store for us all. Just like that we can keep our trading plan at its best every day. Talking of which...
Gold's decline simply continues and what we wrote previously remains up-to-date. In particular, the analogies and long-term factors that we described in the recent weeks remain intact. Consequently, our today's Alert will focus on the few things that changed (in silver and miners) and on what may change (gold).
Checking on Gold
Yesterday was the second day below the neck level of the head-and-shoulders top formation. Many investors view this as a confirmation that the top is in, but we have the experience that in the precious metals sector, it's best to wait for three subsequent closes before stating the above. The breakdown is more valid than it was yesterday, and the outlook deteriorated, but it will become fully valid after today's close. It assumes that gold doesn't rally strongly today, but this doesn't appear to be happening - at the moment of writing these words, gold is down a few dollars in the overnight trading.
The thing that we would like to mention is the upcoming cyclical turning point for gold. It might trigger a turnaround just like it did in February, but it doesn't have to (like in December 2018). This technique is more of a gentle indication than a sure-bet trigger. Consequently, we will use it as something that can support other techniques and not the decisive one.
In particular, if gold continues to decline at a slow or moderate pace, we will likely not adjust the trading position based on the turning point alone. However, if gold declines on significant volume in a volatile manner and reaches the support line, we will close the position. In fact, the profit-take exit order is already in place, so we have already taken this situation into account. What might change here is that if gold declines slowly and it moves beyond the turning point, we might move the profit-take level lower - to $1,240 or so. For now, the profit-take order just above the rising support line seems to be justified from the risk to reward point of view.
Checking on the Change in Silver
The thing that changed about silver is yesterday's intraday rally. We previously wrote that even if we saw a move higher from here, it would be very limited. And that was exactly the case. The white metal moved a bit higher in an attempt to break back above the $15 level and it failed. In yesterday's Alert, we wrote that silver's recent resilience might be a form of very short-term outperformance of gold and yesterday's intraday action confirms this.
Silver's back and forth trading here is not uncommon - we saw something similar in early mid-2018. After topping in late July, silver declined, and it corrected to the upside in a back-and-forth manner. It took several days for the correction to complete, and when it was over, silver truly plunged. The similar decline this time would imply silver below $14 shortly.
It's Miners Turn Now
While silver showed temporary strength relative to gold, miners showed weakness. They broke to new April lows and there was just one session in February and March when they closed even lower. The previous lows provide support and so does the 38.2% Fibonacci retracement level. Even though the combination of support levels may appear strong, it's unlikely to hold. Why? Because if gold slides, gold miners are definitely likely to slide alongside. And gold is likely to slide as it just broke below its head-and-shoulders pattern and the USD Index is bottoming (or it has already bottomed).
Miners' underperformance by itself is also a way of the market telling us that it wants to move lower. To be clear, it's a weak repeat of what happened a few weeks ago, when the precious metals sector practically refused to rally despite Fed's dovish change. The PMs should have rallied profoundly and all we saw was a small move that was quickly invalidated.
Summary
Summing up, the breakdown in gold is getting confirmed, miners underperform, while silver just outperformed on a very short-term basis and it's a very bearish combination for the short term. Adding the bottoming process in the USD Index to the above mix, creates an excellent shorting opportunity in the precious metals sector. There will likely come a time later this year when we will get in the back-up-the-truck territory with regard to precious metals, but we are not even close to these discounted price levels. However, it looks like the final slide towards them has already started. Based on the likelihood of seeing a temporary turnaround in the next 1-3 weeks, we might have a good chance of exiting the current short position or even switching to a long one at that time.
On an administrative note, due to the Easter holidays and the travel schedule involved, we will not provide regular Alerts tomorrow (Friday; the US markets are closed anyway, so the trading is likely to be limited) and on Monday. The Alerts will be published normally, starting on Tuesday, April 23rd. Naturally, if anything urgent happens, we will keep you updated through quick intraday Alerts.
As always, we'll keep you - our subscribers - informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full short position (250% of the full position) in gold, silver, and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit profit-take price levels:
- Gold: profit-take exit price: $1,252; stop-loss: $1,357; initial target price for the DGLD ETN: $50.97; stop-loss for the DGLD ETN $39.87
- Silver: profit-take exit price: $14.11; stop-loss: $15.72; initial target price for the DSLV ETN: $36.97; stop-loss for the DSLV ETN $26.97
- Mining stocks (price levels for the GDX ETF): profit-take exit price: $20.41; stop-loss: $24.17; initial target price for the DUST ETF: $24.28; stop-loss for the DUST ETF $15.47
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 target prices:
- GDXJ ETF: profit-take exit price: $29.62; stop-loss: $35.67
- JDST ETF: profit-take exit price: $52.32 stop-loss: $30.97
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
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
Editor-in-chief, Gold & Silver Fund Manager
