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.
Mining stocks continue to underperform gold and silver to a great extent and it’s not the first time that we’re seeing something like that. What followed previously was quite interesting, to say the least, and it seems that this scenario is confirmed by more than just the above analogy.
However, before moving to mining stocks, let’s take a look at what happened in gold (charts courtesy of http://stockcharts.com).
Gold ended Friday’s session more or less where it had been when we published our Friday’s alert and that’s where it’s trading at the moment of writing these words (precisely $2 below Friday’s levels), so generally what we wrote on Friday remains up-to-date.
The upper rising support line (the more important one, based on the daily closing prices) is currently at about $1,275 – about $10 above the current gold price and consequently no breakout was seen or is likely to be seen. Therefore, today’s upswing didn’t change the technical picture for the yellow metal.
Let’s discuss what would happen and change if gold did indeed break out above $1,275 and verify this breakout. It would then be likely to rally to about $1,300 – its next resistance level. However, whether the above would change the outlook is a different matter – it would depend for instance on whether mining stocks would show outperformance instead of the current continuous underperformance and on other factors, including the situation in the USD Index.
As far as silver and it’s upswing are concerned, the situation is rather similar – the white metal moved higher, but not above levels that could change anything technically and our previous comments remain up-to-date:
Again, based on the USD Index and its downside potential, it could be the case that gold, silver and mining stocks move even higher this week before forming the major top.
How high could they rally? In the case of the yellow metal, the very short-term upside targets are the recent intra-day high at $1,265 and the upper rising resistance line at about $1,270. In the case of silver, the very short-term upside targets are the 50-day moving average and the final of the classic Fibonacci retracement levels: $17.44 and $17.52, respectively. In case of the GDX ETF, the upside target is the previous May high and the 200-day moving average just several cents below $24.
Silver didn’t move above or even to the mentioned trading range, so nothing really changed regarding the outlook. The declining volume during silver’s upswing suggests that the move is not the market’s true direction, but rather a correction within a bigger downtrend.
Best confirmation comes once again from the mining stocks. Both proxies: HUI and GDX continue to show underperformance. Even though gold and silver moved above their recent highs, miners were barely higher and the volume that accompanied the move higher was small.
Do you recall when mining stocks were underperforming for a long time to a very high extent? If you answered “shortly before the 2013 plunge”, you were correct. The implications are bearish.
On the above long-term HUI Index chart, you can see that gold stocks closed the week below the rising support / resistance line despite rising prices of gold and silver – that’s a profound sign of underperformance and a strong bearish signal.
The above chart also shows huge underperformance of gold stocks relative to gold in the second half of 2012 and in early 2013. The August 2012 rally may seem like an exception, but it really isn’t as gold stocks only moved to their previous lows (in terms of weekly closing prices) as gold moved relatively close to its previous highs. What followed was a huge decline in the entire precious metals sector.
The longer the underperformance remains in place, the more similar the current situation will become to the pre-2013-slide performance. The implications are already bearish, though.
The same goes for the situation in the palladium market. It moved higher last week, but not back above the previously broken rising support line, which now turned into resistance. Consequently, last week’s upswing was simply a corrective, post-breakdown upswing, which is likely to be followed (as there was no invalidation of the breakdown) by a sizable slide.
Summing up, the outlook for the precious metals market remains bearish. We remain to be in a situation where there are pennies to the upside (literally in silver and mining stocks) and dollars to the downside.
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 initial target price levels / profit-take orders:
- Gold: exit-profit-take level: $1,063; stop-loss: $1,317; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $44.57
- Silver: initial target price: $13.12; stop-loss: $19.22; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $17.93
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; 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 initial target prices:
- GDXJ ETF: initial target price: $14.13; stop-loss: $45.31
- JDST ETF: initial target price: $417.04; 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
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 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, Gold & Silver Fund Manager
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