Briefly: In our opinion, regular (100% of the full position) speculative long positions in gold, silver and mining stocks are justified from the risk/reward perspective.
As it is quite often said (but just as often forgotten when things get volatile), no market can move up or down in a straight line. There have to be corrections along the way as some traders cash in their profits, others get scared out of their positions etc. The question is – where (at what price) is such a reversal likely to take place. Focusing on news and fundamental analysis alone will not provide you with an answer here, simply because the markets are not logical in the short term, but emotional (it is also the case in the medium term, but to a smaller extent). Consequently, we need to apply technical tools to determine what is the most likely level at which the price will reverse. One of the most useful tools in doing that are the Fibonacci retracements. Out of those retracements, there are 3 classic ones that are very useful for precious metals, currencies and other markets: 38.2%, 50%, and 61.8%. The reason we are writing about the above is that the important 61.8% retracement was just reached in many important markets and the implications are also important. Let’s take a look at the charts for more details (charts courtesy of http://stockcharts.com).
The above chart shows the Japanese yen, which has been moving in tune with gold, especially this year. The decline in yen started when it reached the 38.2% Fibonacci retracement based on the long-term decline (thus confirming the usefulness of the Fibonacci retracements on this market) and it now reached a 61.8% retracement, without a bigger correction since the decline started. This makes a temporary upswing here very likely. Since yen and gold moved in tune, the above also has bullish implications for gold in the short run.
While we’re discussing the Japanese currency, let’s also look at the Japanese stock market, which has been moving in the opposite way to gold.
We saw a breakout in the value of Nikkei 225, but it never moved back to the previously broken declining line and we haven’t seen a bigger correction since the rally started in June. With the 61.8% retracement being reached, it’s quite likely that the Nikkei will correct, and thus a short-term rally in gold seems rather likely.
Gold moved to its 61.8% Fibonacci retracement ($1,172) as well and it even attempted to break below it on Thursday. The breakdown was not successful as, at the moment of writing these words, gold is already back above $1,175. Invalidations of breakdowns are bullish phenomena and this one doesn’t appear to be much different.
Besides, mining stocks once again refused to move below previous lows.
Gold stocks and silver stocks remain below their previous lows and also within the trading channel – there was no breakout, despite a move lower in gold. The strength of the miners is also a bullish sign for the short term (and only for the short term).
Moreover, the USD Index could still correct in the short term and what we wrote about it yesterday, remains up-to-date:
The USD Index moved higher, but the daily rally didn’t change anything. The correction that we’ve seen recently is still quite small and it doesn’t appear to be enough to cool down the traders’ emotions. Please note that the rally that we saw in October was smaller than the November one and it was followed by a much more significant corrective downswing than what we’ve seen so far. Consequently, it would be natural to expect the corrective downswing to be equal or bigger than what we saw in late October and early November.
Moreover, the last several trading days formed a bearish head-and-shoulders pattern in the USD Index. The implications are bearish and the target – based on the size of the head – is at about 99.50. Still the other support levels suggest that the bottom will be formed higher, so we are not viewing 99.50 as our official prediction, even though it also could stop the decline once it is seen.
Summing up, even though the medium-term trend in the precious metals market remains down (as multiple bearish indications for the medium term remain in place), it appears that a combination of bullish factors (support levels were reached in gold once again, silver and mining stocks showed strength; a long-term resistance level was almost reached in the USD; the 61.8% Fibonacci retracements were reached in the Japanese yen and Nikkei) makes the short-term outlook bullish. It appears that we will see an upswing in the precious metals sector within a week or so.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (supplementary part of the portfolio; our opinion): Long 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: initial target price: $1,237; stop-loss: $1,157, initial target price for the UGLD ETN: $10.48; stop-loss for the UGLD ETN $8.62
- Silver: initial target price: $17.27; stop-loss: $15.67, initial target price for the USLV ETN: $15.04; stop-loss for the USLV ETN $11.22
- Mining stocks (price levels for the GDX ETF): initial target price: $23.27; stop-loss: $18.87, initial target price for the NUGT ETF: $10.74; stop-loss for the NUGT ETF $5.78
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: $38.17; stop-loss: $30.94
- JNUG ETF: initial target price: $8.88; stop-loss: $4.78
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
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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