Gold & Silver Trading Alert: Brexit and Its Implications

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Briefly: In our opinion no speculative short positions are currently justified from the risk/reward point of view, but orders for opening short positions at higher prices are justified.

The unlikely outcome of the Brexit vote turned out to be true and as the global risk increased (most importantly, the perception of risk), gold rallied in overnight trading. What’s next?

In order to better understand the implications of any event its best to see if something similar has already been done in the past. Of course, no 2 days, years or events are exactly the same, but they can be similar enough to draw some conclusions. For instance, despite many years that passed between Napoleon’s charge for Russia and the subsequent failure due to cold, this was repeated during World War 2 and the result was also repeated due to the same reason.

There was no Brexit vote in the recent history except the current one, so it may seem that gold’s rally is an unprecedented event. But it isn’t. There were 2 similar events in Europe in the last few years.

The first vote took place on March 16, 2014 and it was about the separation of the Crimea from Ukraine and its annexation by Russia. The majority voted for separation. This was supposed to be an event that triggers military conflicts, escalates tensions etc. – overall it was supposed to make gold soar in the upcoming months.

The second vote took place in Greece on July 5, 2015 and Greeks voted against austerity measures and the international bailout. This was supposed to tear the European Union apart – Greece was supposedly forced to leave and other indebted countries were to follow. Gold was supposed to rally substantially based on that.

Now, what really happened? The Crimean Peninsula was annexed and nothing major happened on a global basis. Greece finally adopted the austerity measures after all and the EU remained intact.

More importantly, what happened to the gold price (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

In both cases gold rallied initially during the day when the results were released. More importantly, gold declined substantially in the weeks that followed. The declines started either later during the first day after the vote or on the second day after the vote.

Why was this the case? Gold demand was driven by anxiety and uncertainty. Whatever the outcome of a vote is, it generally decreases uncertainty. Regarding the current vote, maximum uncertainty and anxiety could have been reached right after the vote, but it could be the case that it will be reached today once the entire world has a chance to take action based on the outcome.

Consequently, using history as a guide, we can expect that the top will be formed today or that it was already formed in overnight trading.

But wait, didn’t a lot change? After all people voted for leaving the EU. Yes, they did vote for leaving the EU yesterday. However, that’s not something that can be carried out in one day. It will take a long time before the UK really leaves the EU and a lot can happen in the meantime.

Leaving the EU is not a financially beneficial decision for the UK (despite direct savings) and there is a lot political pressure for the EU to stay intact. Now, if the vast majority of people voted for leaving, not much could be done with it (except some extreme measures that unite people – such as the threat of war), but since the outcome of the Brexit vote was close to being a tie, the UK authorities can simply wait for a better moment (when due to some reasons more people want the UK to stay in the EU) and announce another vote. We’re not saying that this is very likely, but something like that shouldn’t be ruled out and at this time it appears that the market is certain that Brexit is final.

So, what’s likely to happen? The UK shocked the world with the unlikely outcome of the vote and the anxiety caused gold to rally. A large part of the rally was already erased right after the initial overnight bubble and it could be the case that the rally is already over. However, it could also be the case that we’ll see an additional upswing later today. Either way, gold is likely to decline in the coming weeks – as far as improbable it may sound (exactly the same was the case with the Crimean and Greek votes – it sounded very unlikely for gold to decline at that time – and it did).

With the unclear situation today, it appears that entering a short position in gold and silver, but with a higher entry price (higher than the current price) is a justified from the risk / reward perspective. We are also moving the stop-loss level in the case of mining stocks (closing at open and re-opening later would be a day-trading bet). If we get an additional rally, we will re-enter the short positions at higher levels than the levels at which we closed the previous short positions.

As always, we will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Short positions (full position) in gold, silver, and mining stocks are justified from the risk/reward perspective with the following entry prices, stop-loss orders and initial target price levels:

Gold: entry price: $1,378 initial target price: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: entry price: $18.26 initial target price: $12.13; stop-loss: $18.67, initial target price for the DSLV ETN: $65.88; stop-loss for the DSLV ETN $24.16
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $30.77, initial target price for the DUST ETF: $47.90; stop-loss for the DUST ETF $3.62

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: $50.70
JDST ETF: initial target price: $61.74; stop-loss: $1.97

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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