Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view. We will likely have another trading opportunity shortly.
Gold rallied last week after comments from the ECB triggered turmoil in the currency markets, but wasn’t able to soar much higher and finally closed the week about $9 lower than a week ago. Is the rally over?
In short, that’s quite possible, but – as we wrote previously – it’s still too early to say that gold is already after the final top for this rally. There are many signs that point to lower prices, but there are some that point to higher values, which makes us wait for a better risk/reward situation before entering the next trade.
Let’s take a closer look at the charts (charts courtesy of http://stockcharts.com).
In the previous alerts we wrote the following:
Given the current economic problems of the Eurozone, ECB had little choice other than to stimulate the economy further (given the current mainstream way of thinking about economic policies). At the same time if they didn’t want the euro to plunge, so they simply said something that is not really binding, but they made it appear as such. What’s next? The market will likely realize that today’s rally in the euro based on the “it’s over” comments is overdone and then the move will be at least corrected (likely cancelled, but not necessarily right away).
We didn’t have to wait much longer for the above to prove true. By declining $22 on Friday, gold practically erased the Thursday rally. Did the situation become much clearer because of that? No, because the volume that we saw on Friday was not very significant, and we would like to see this kind of confirmation at a major top.
In Friday’s alert, we wrote the following:
We have already written about the possibility that gold could even move to $1,328 or so (thus correcting 38.2% of the decline that started in 2011) before declining once again and nothing has changed in that regard. The thing that we would like to focus on is the volume. On a daily basis, yesterday’s volume is a bullish thing, but if we consider the bigger picture, the implications are bearish for the medium term.
The only 2 times that we saw as big a volume as we’re seeing now was right before the 2011 top and right before the mid-2008 top. In both cases, sharp and huge declines followed in the following weeks. In the latter case, gold declined to new lows and in the former case, gold formed an all-time nominal high. While the implications are not for the very short term, they are important and bearish.
The implications continue to be bearish. The sell signal from the Stochastic indicator was very insignificantly invalidated and we expect to see another one relatively soon, especially that analogous signals were not invalidated in other markets/ratios.
Gold moved to the lower of our target levels for this rally – slightly above $1,286, which is the 38.2% Fibonacci retracement level based on the entire bull market. This increases the chance that the top is already in, but again – we haven’t seen enough bearish confirmations to open a position at this time.
From the non-USD perspective, gold actually (despite bullish comments from the ECB) declined last week after invalidating the breakout above the 2015 high. That’s a quite bearish piece of news as it shows that gold is not responding to positive signals – or at least that the reaction was not sustainable. Gold in non-USD terms should have soared last week – but it didn’t, which is a bearish sign for the medium term.
As we wrote earlier, the sell signal from the Stochastic indicator was not invalidated in all cases – comparing performance of gold to the one of the general stock market, we see that the sell signal remains in place. The implications are bearish.
The situation in silver didn’t change much as it declined by just several cents on Friday. The short-term picture for silver is not the most important one, though – the long-term one is.
The long-term silver chart continues to favor lower prices in the following weeks, although it doesn’t have very short-term implications.
Moving back to the short term – the cyclical turning point for silver is just around the corner, and since the previous move was to the upside, we can expect an important reversal just any day now.
Before moving to mining stocks, let’s take a look at the gold to oil ratio. A few weeks ago we commented on this chart by saying that the rally is unsustainable and that the ratio (and gold as well) are very likely to reverse and move lower. The move lower has been clearly seen in case of the ratio, but we have yet to see the big slide in gold. Back in 1999 we had to wait several more months, but gold indeed moved to new – and final – lows. The implications are bearish for the medium term.
The most important thing visible on the above chart for the HUI Index (proxy for gold stocks) is the clear sell signal from the Stochastic indicator. This signal is something that confirmed tops multiple times in the previous years and the efficiency of these signals has been remarkable. The implications are of a medium-term nature, though.
On a short-term basis, we see that mining stocks are clearly below the rising support line once again, however, the move lower took place on volume that was not huge, and the decline was smaller than the one seen in gold (compared to the previous day’s gain), so the short-term outlook didn’t deteriorate substantially based on Friday’s action.
The medium-term outlook is clearly bearish based on the juniors to general stock market ratio. The sell signal from the Stochastic indicator is clearly visible in this case and the value of the Rate of Change indicator confirms the sell signal. Still, the implications are of medium-term nature, so we could still see a move higher in the very short term.
Finally, let’s take a look at the USD Index. The US dollar moved sharply lower last week and based on the above technical picture, we could see some additional small move to the downside (to the rising support line and the Fibonacci retracement at about 95.6 - 95.8) that would very likely – based on the cyclical turning point – be followed by a reversal and a rally.
The likely impact on the precious metals market is rather unclear (but more likely bullish) for the short term and bearish for the medium term.
Summing up, the outlook for the precious metals sector remains rather unclear for the short term, but bearish for the medium term. Gold moved to one of the target levels, which means that the top could already be behind us, but on the other hand there are some factors that suggest that the rally will continue for a few more days and will be followed by a reversal at that time (based on the situation in the USD Index for instance). Consequently, it seems that it’s justified to wait and re-enter the short position (or open a long one if we get much more bullish signs, but this doesn’t appear likely) in more favorable conditions (preferably at higher prices after seeing a major daily reversal). It seems that we will see those confirmations relatively soon.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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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