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. This position was originally featured on Jan. 12, 2017 at 3:49PM.
And so it happened – the breakout in the USD Index was indeed verified and precious metals traders are beginning to wake up to the fact that the U.S. currency is likely to move higher. Most traders don’t pay attention to the big picture and they are not analyzing trends that take more than a year to form, so it may take some time before the price trends accelerate. For now, most people most likely think that we saw a short-term breakout and that it’s important only for the following several days. The long-term USD Index chart, however, shows that the implications are much more important and might be significant for the following months, not only days and weeks. Let’s take a closer look at the USD Index chart (charts courtesy of http://stockcharts.com).
The USD Index closed above the declining red resistance line for the third consecutive day and it moved back to this line in the meantime. The breakout is now confirmed and the implications are indeed bullish.
In the previous alerts, we wrote that the precious metals traders had probably not believed the USD’s bullish potential and viewed its reversal and subsequent upswings as something not worth acting on. We wrote that it was likely to change and that the metals’ reaction was likely to be delayed. We are finally beginning to see this reaction.
Gold moved to $1,246 on an intra-day basis, but finally moved back below $1,230 later in the day. We saw a visible reversal along with a sell signal in the Stochastic indicator, which is a bearish combination.
Another thing that shows that the PM sector is reacting to the situation in the USD Index is the decline in mining stocks.
The decline is not huge yet (it’s not tiny either – miners declined more than 2.5%), but the volume that accompanied it was quite significant on a relative basis. In fact, that was the highest volume that we’ve seen so far this month. What are the implications? That the next big downswing may have just started.
Naturally, if the USD Index pauses, a pause in metals and miners would be natural, but the key point here is that the decline in mining stocks is likely starting, just like the rally in the USD Index – regardless of whether we see another pause within the next few days or not.
The Stochastic indicator hasn’t flashed a sell signal yet, but the RSI indicator has – it appears that we will get a confirmation from the former shortly, possibly based on today’s session.
Summing up, the bearish signals that we discussed this week remain in place as the USD Index has just confirmed its short-term breakout. Based on the metals’ and miners’ reaction, it seems that the precious metals investors are starting to realize that the outlook for the USD Index is bullish. As more and more investors realize the USD’s potential, the currency will appreciate and the opposite is likely to be the case with the precious metals sector.
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: $1,263; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.47
- Silver: initial target price: $13.12; stop-loss: $18.07; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $22.24
- 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: $104.26; stop-loss: $10.78
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.
=====
Latest Free Trading Alerts:
Last week, the British government published a white paper setting out its plan for leaving the European Union. What can we learn from this publication?
The important shift in global policy towards a more active role of fiscal policy is unfolding. We invite you to read our today’s article about the Great Fiscal Rotation and find out how it will affect the gold market.
Great Fiscal Rotation and Gold
=====
Hand-picked precious-metals-related links:
PRECIOUS-Strong U.S. data topples gold from three-month highs
PRECIOUS-Gold retreats as Trump tax pledge lifts dollar
Mali's estimated gold reserves climb to 822 T - mines ministry
=====
In other news:
Dollar hits 10-day high before Trump-Abe meeting
Oil prices rise on strong Chinese imports, OPEC-led production cuts
Friday Morning Briefing: Trump's Mexican wall just got $9.6 billion more expensive
OPEC has pulled off one of its 'deepest' production cuts
=====
Thank you.
Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager
Gold & Silver Trading Alerts
Forex Trading Alerts
Oil Investment Updates
Oil Trading Alerts
