Briefly: In our opinion, full (150% of the regular size of the position) speculative long positions in gold, silver and mining stocks are justified from the risk/reward perspective at the moment of publishing this alert.
The first few days of this week were very boring for the precious metals investors. There were some additional signals as we saw how the PM sector reacted to the USD’s strength, but there were no changes in terms of the daily closing prices. It changed yesterday. Are PMs starting to really rally, or is this simply the final pop up before the short-term trend reverses?
As you have read in the previous alerts and as you know based on the apex turning points and True Seasonal patterns, the latter is much more likely. Yet, based on how PMs rallied yesterday and what happened in the USD Index, it became more likely that the rally doesn’t end today, but rather in the first days of the following week. Let’s take a look at the details (chart courtesy of http://stockcharts.com).
Gold’s Upside Target
Gold rallied, but it did so rather insignificantly. Our initial target for the rally was between $1,345 - $1,353. However, if the rally is about to end in a few days (even today), the above target may be too high. Consequently, we lowered the lower border thereof – to the 50-day moving average. It’s a rather weak resistance level, but if the other parts of the precious metals market reach their strong resistance levels and gold is only at its MA, it would be likely to form a top there anyway. The reason is that the entire PM sector usually forms tops and bottoms at the same time, at least the very short-term ones.
The up-to-date target area is between $1,330 and $1,353. It’s not precise, so we’ll need to look at other markets for confirmations.
Silver’s Strength
Silver’s original upside target remains up-to-date. In other words, silver’s upswing to $16.90 - $17, still seems to be the most likely scenario for the next few trading days.
Yet, if gold rallies significantly higher, silver would likely rally as well and since the tops are usually accompanied by silver’s outperformance, it’s unlikely that silver will lag in the next few days.
Consequently, silver could rally even up to $17.30 or so.
On the other hand, silver’s yesterday’s outperformance of gold suggests that we may already be seeing the short-term top and expecting another sizable upswing might be too much.
Mining Stocks’ Target
The clarity regarding the upside targets is biggest in the case of the mining stocks and there are two reasons for it.
The first reason is that the original target at $23.30 - $23.90 is neither very far, nor very close and thus it fits both scenarios that we outlined above – a bigger few-day-long rally and a quick daily upswing.
The second reason is that mining stocks tend to underperform the prices of precious metals close to tops. There are exceptions to this rule, but it happens often enough that we should expect it. Therefore, even if gold and silver rally much higher, mining stocks might end the rally much sooner.
Consequently, the lower part of the mentioned target is more likely to stop the rally than the upper part. In other words, the most likely target area at this time is about $23.30 - $23.50.
USD Index Pullback
The biggest problem that decreases the clarity at the moment is the situation in the USD Index.
On one hand the U.S. currency is likely to end its decline shortly.
The 38.2% Fibonacci retracement level (about 91.6 based on Stockcharts’ data) based on the most recent rally is within reach of a sizable, but one-day decline.
This level is a likely target also because of the analogy to the 2014 rally.
The above chart shows that the USD is currently very close to the rising dashed green line and when that was the case in 2014, we saw the first pullback within the rally.
In 2014, the USD corrected to almost the 38.2% Fibonacci retracement, but only in terms of the intraday low. Therefore, if the history is to repeat itself, the USD might move close to 91.6 in a sharp manner and then move back up. This would likely result in a sharp rally higher in PMs (especially in silver) and then a move back down before the end of the session.
On the other hand, please note that the October 2014 correction took more than a week to be completed and we saw the (likely) final short-term top in the USD only two days ago. This means that we could expect more weakness lasting longer than just a one-day downswing.
If the USD index ends the week at the current levels or lower, then we’ll have a major reversal candlestick in terms of the weekly prices. This would be a powerful bearish sign for the following week – not just for one day.
Therefore, it might be the case that the USD keeps declining for more than a few days, which would likely support higher PMs.
The bottom line is that the situation in the USD Index appeared quite clear just a few days ago, but it is no longer so as the USD moved even higher on a short-term basis and the pullback may just be starting – not ending.
This is likely to result in higher precious metals prices, at least initially.
It’s not clear how long it will take for the USD Index to complete its correction. Based on the above charts it could take between 1 day and even two weeks.
Turning Problems into Assets
While it seems to be a big obstacle in predicting precious metals prices, it might actually be a hidden blessing. If the USD moves lower in a rather controlled manner, then we should be able to see how the metals and miners react to it and a change in the reaction (unwillingness to continue to move higher despite a move lower in the USD) would serve as a perfect signal to cash in the profits, reverse the speculative long positions and turn them into short ones.
If the USD Index declines in a sharp manner, it should still provide us with valuable information. If silver soars, gold moves up a bit, and miners underperform, we’ll know that it’s almost certainly a top in PMs.
Summary
Summing up, based on the apex-based reversals and True Seasonal patterns for gold, silver and mining stocks, we are likely to see a local top either today or on Monday, but based on the way metals and miners rallied and – especially – the situation in the USD Index, it seems that the top could be seen a few days later. Both mentioned techniques: reversals and True Seasonals work on an approximate basis, so a few days of delay would not invalidate them.
Due to the lack of clarity regarding the forex market in general, it seems that the best approach is to remain alert and monitor how PMs react to the moves in the USDX. This strength of reaction will be more important than the values of the USD Index.
The profits on the current long position are getting bigger (over $0.60 on silver in just about 2 weeks), but it seems that closing them now will be premature as the outlook still remains bullish – at least for today.
As always, we will keep you – our subscribers – informed.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Full long 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: $1,338; stop-loss: $1,294; initial target price for the UGLD ETN: $11.68; stop-loss for the UGLD ETN $10.56
- Silver: initial target price: $16.86; stop-loss: $15.94; initial target price for the USLV ETN: $10.68; stop-loss for the USLV ETN $9.12
- Mining stocks (price levels for the GDX ETF): initial target price: $23.78; stop-loss: $21.96; initial target price for the NUGT ETF: $29.78; stop-loss for the NUGT ETF $23.98
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: $34.78; stop-loss: $31.96
- JNUG ETF: initial target price: $16.88 stop-loss: $13.18
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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