Briefly: In our opinion, full speculative short positions in gold, silver and mining stocks are justified from the risk/reward point of view.
Gold, silver and mining stocks moved initially higher as the USD Index plunged to new lows, but finally they reversed and declined before the session was over. The decline was particularly visible in mining stocks. Is the top in?
In our opinion, this is most likely the case. Let’s take a look at the details (charts courtesy of http://stockcharts.com).
The USD Index declined to the declining red support line, which quite likely ends the current slide lower. If the USD rallies from here – and it is likely to do so – then the breakout above the mentioned red line will be simply confirmed and the USD will be ready to soar to new highs.
The implications of the above are bearish for the precious metals market.
The situation in the gold market didn’t change much from the long-term perspective and our previous comments remain up-to-date:
Gold moved visibly above the 60-week moving average – more or less as high as was the case in early 2015, when gold topped about $100 higher. This was the biggest move above this moving average, so it seems that the room for further rallies from here is also limited. Naturally, the above assumes that gold remains in a medium-term downtrend, which is most likely the case since we haven’t seen enough confirmations that the bottom is indeed in.
The RSI indicator also suggests a turnaround.
In yesterday’s alert we wrote the following:
Gold moved higher after the breakout (despite an intra-day move lower, which only served as a verification of the breakout) and it seems that it will move even higher as no major resistance level was reached on Friday. The RSI remains extremely overbought, suggesting that the turnaround will be seen shortly, but gold itself didn’t move to a resistance level just yet. The next target for gold is created by the October 2015 high ($1,190) and the $1,200 level, being a round number, is a quite likely resistance as well. All in all, it seems that gold’s rally will be stopped about $15 - $25 higher, which is in tune with what we wrote while describing gold’s long-term chart.
Both targets were reached yesterday – on an intraday basis, gold moved a bit above $1,200 and it closed 40 cents below $1,190. The top is either in or very close to being in.
Gold’s intra-day turnaround and a decline despite the weakness in the USD Index confirm that the top is very likely already in.
In yesterday’s alert we wrote the following on silver:
Silver moved temporarily above the mentioned level (to $15.48) and it declined and closed below it (at $15.32) shortly thereafter. Consequently, the top may already be in.
We saw a similar kind of performance once again yesterday. Despite an intra-day attempt to move higher, silver reversed and ended the session lower than the previous day’s close. The implications are bearish.
As far as gold stocks are concerned, we previously wrote the following:
The HUI Index rallied to 157.27 and then declined 5 index points, thus forming a quite visible reversal. It seems that mining stocks are suggesting that this rally may be over very soon or that it is already over.
The HUI Index declined further and ended the session well below the 150 level – the breakout above it was just invalidated. This is yet another bearish signal that we just saw – perhaps the most bearish one. Gold stocks moved up right after the session was opened, which allowed to get good prices for the short positions and the HUI was still above the opening price when we sent out the second alert in which we wrote about doubling the size of the short position (gold was at about $1,198 and silver was at about $14.45 at that time).
Summing up, the situation in the precious metals market deteriorated based on yesterday’s price action in gold, silver, mining stocks and the USD Index. The latter seems to have bottomed, but the most important thing is that the precious metals sector declined even despite a move lower in the USD. Gold stocks invalidated their move above the 2008 low and overall the outlook became even more bearish. Consequently, we think that full speculative short positions are currently justified from the risk/reward perspective.
We have updated the price target for the GDX and GDXJ ETFs based on the updated calculation of these targets derived from the 80 target for the HUI Index.
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: $1,242, initial target price for the DGLD ETN: $100.97; stop-loss for the DGLD ETN $56.67
- Silver: initial target price: $12.13; stop-loss: $15.82, initial target price for the DSLV ETN: $80.81; stop-loss for DSLV ETN $44.87
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $18.91, initial target price for the DUST ETF: $17.31; stop-loss for the DUST ETF $5.05
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: $24.33
- JDST ETF: initial target price: $36.46; stop-loss: $12.39
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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