Briefly: In our opinion, short (full) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold and silver moved a bit higher yesterday, but miners didn’t manage to do so – despite their initial move higher, they ultimately closed lower, once again below the 50-day moving average, which is once again serving as strong resistance. Is the rally already over?
It could very well be the case, but we still can’t rule out another day or a few days of higher prices before the major move – to the downside – continues. We continue to think that it’s the big move that we should be focusing on – not the daily up- and downswings, as in the case of the bigger move, the profit potential is bigger and the risk is smaller because there are more factors that can impact the market in the medium term (and that we can analyze).
Let’s take a look at what changed yesterday (charts courtesy of http://stockcharts.com).
Gold moved less than $5 higher, which is not particularly bullish, particularly that there was no new intra-day high. This year’s price action in gold may seem bullish at the first sight but once we consider what happened (the Chinese stock market plunged so bad that it had to be closed earlier this week and tensions increased in the Middle East), we see that gold is not performing that well.
We can say a similar thing about silver – the reaction in the case of the white metal was next to none and Monday’s reversal has bearish implications.
Please note that silver closed below the 20-day moving average, so yesterday’s 13-cent move higher didn’t change anything.
Gold stocks have actually managed to decline despite a move higher in gold, which suggests that we are not at the beginning of a major January rally, as miners are not outperforming.
Miners once again attempted to move above the 50-day moving average but ultimately closed below it. Consequently, the outlook remains bearish.
All in all, practically nothing changed in the precious metals market yesterday, so we can summarize the situation exactly as we summarized it yesterday:
Summing up, even though a lot happened in gold and mining stocks yesterday, it turns out that little changed in these markets. The situation deteriorated in silver, though. Overall, there are either none or bearish implications of yesterday’s session as far as the medium term is concerned. The very short term outlook (the next few days) remains unclear.
In our opinion, we are in a similar situation to what we saw in mid-August 2014, in mid-June this year, or in the final part of 2012. If the major move that is going to follow is to the downside, then a daily or relatively small upswing is not that relevant - it’s most important not to miss the big move and thus the speculative short position seems to be justified from the risk/reward perspective. It seems that the current speculative short position in the precious metals sector will prove very profitable in the following weeks even if this will not be the case for the next few days. After all, our target of $960 in gold is well below the current market price and if the analogy to the 2013 slide is indeed in place, then we will likely not have to wait long before this level is reached.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (full) 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: $973; stop-loss: $1,107, initial target price for the DGLD ETN: $117.70; stop-loss for the DGLD ETN $81.84
- Silver: initial target price: $12.13; stop-loss: $14.83, initial target price for the DSLV ETN: $101.84; stop-loss for DSLV ETN $57.49
- Mining stocks (price levels for the GDX ETF): initial target price: $10.23; stop-loss: $15.47, initial target price for the DUST ETF: $31.90; stop-loss for the DUST ETF $10.61
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: $15.23; stop-loss: $21.13
- JDST ETF: initial target price: $52.99; stop-loss: $21.59
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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 sings 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 always, we'll keep you - our subscribers - updated should our views on the market change. We will continue to send out Gold & Silver Trading Alerts on each trading day and we will send additional Alerts whenever appropriate.
The trading position presented above is the netted version of positions based on subjective signals (opinion) from your Editor, and the Tools and Indicators.
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
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