Briefly: In our opinion, speculative short positions (150% of the full position) in gold and silver and small (50% of the full position) short position in mining stocks are justified from the risk/reward point of view.
Gold moved higher on Friday after weak employment numbers were released, but it didn’t move above its previous high, so the question is how one should interpret gold’s behavior. Is the rally confirming the bullish nature of the news and is the outlook bullish, or is the reaction too weak to confirm the bullishness and instead invalidates it?
We think the truth is much closer to the latter approach. Fundamentally, the outlook improved as payroll statistics lowered the odds for a rate increase in June. There is now almost zero chance (in the market’s opinion) for a rate hike in June. Still, gold didn’t move to new highs and neither did silver or mining stocks, which indicates that the precious metals market is likely not ready to move much higher yet.
Let’s take a closer look (charts courtesy of http://stockcharts.com).
Overall, gold declined about $5 last week. That’s not much per se, but that’s a lot given the improved fundamental outlook based on Friday’s statistics. Consequently, our last week’s comments remain up-to-date:
Gold is now a bit above the declining trend channel, but all previous similar attempts to break out were invalidated, so we don’t view this breakout as important – at least not yet. Moreover, gold didn’t move above the 38.2% Fibonacci retracement based on the entire bull market, so all in all not much changed.
On the short-term chart we see that gold moved to almost $1,300 on Friday, but finally closed below $1,290. There was no breakout above the previous highs and the sell signal from the Stochastic indicator remains up-to-date.
From the Japanese yen perspective, nothing changed either, so what we wrote last week remains up-to-date:
Gold recently moved back to the declining resistance line and declined after reaching it. The breakdowns below the declining and rising support lines seem to be confirmed and the implications are bearish.
Not much changed in the case of silver’s outlook either. Silver invalidated the breakout above the 2015 high and the implications remain bearish.
We can say the same about the implications of the RSI indicator which is now moving lower after touching the 70 level. We saw the same thing in 2012 and higher prices have never been seen again since then.
The silver to gold ratio continues to provide us with bearish implications as well. The RSI remains below 70 after breaking above it – similar situations preceded significant declines and one is likely already underway.
On the above short-term SLV ETF chart, we see that silver barely moved on Friday. In fact, it appears like the move higher was nothing more than just a pause after the initial part of the decline. Our previous comments regarding the Thursday reversal remain up-to-date:
The reversal took place exactly on the turning point, which is bearish because otherwise there would be a remote risk that we would see a move higher as the previous short-term move was a decline. Now – after an intra-day move higher, it’s likely that what could have happened based on the turning point, has likely already happened. Consequently, the decline can now continue.
The HUI Index moved lower last week, just as gold did and just as gold it didn’t break below the previous high and it didn’t break above the most recent high either. All in all, the implications of the above chart are similar to those of the gold chart – not much changed:
(…) since gold stocks didn’t break back below the 2015 high the technical situation didn’t change that much. (…) Once that happens, we’ll likely increase the size of the short position in mining stocks. We will most likely wait for the daily close, but if something else convinces us that increasing the position in the miners is a good idea, we’ll let you know.
What is likely preventing gold and gold stocks from moving below their previous highs? The USD Index that hasn’t moved above its previous low yet.
As you can see on the first chart, the USD Index remains below the blue line, which represents the April low (in terms of closing prices). As we wrote many times in the past, the precious metals market tends to react particularly strongly to breakouts in the USD Index, so without a short-term breakout (as traders seem to be rather short-term oriented) it’s no wonder that we are not seeing breakdowns in gold or mining stocks yet.
Does it matter? Not really, because, as you can see on the lower of the above charts, the key – long-term – breakdowns were invalidated and the implications are very bullish for the following weeks – the lack of the short-term breakout is really of little meaning (compared to the above) even if it is being viewed as important by some market participants.
Before summarizing, let’s take a look at the True Seasonal patterns (as a reminder, these patterns take into account both the regular seasonality and the effect of the expiration of derivatives).
The first days of May were positive and that’s it as far as positive implications are concerned. Gold moved a bit higher in the past few days (correcting the previous decline), which was in tune with the above pattern. However, now the implications are beginning to be bearish – on both a short-term (mid-May slide) and medium-term basis (decline in June). The above is yet another reason that makes a move lower in the precious metals sector likely.
Summing up, the outlook for the USD Index remains bullish and the outlook for the precious metals sector remains bearish despite Friday’s move higher in gold and mining stocks (the rally in silver was barely visible). It still seems better to wait for the mining stocks to close back below their 2015 high before increasing the size of the short position. At the same time, we think that keeping the current position intact remains to be justified also based on the fact that neither gold nor mining stocks moved above their previous highs despite a bullish piece of information that was released on Friday.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short positions (150% of the full position) in gold and silver and small (50% of the full position) short position in 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: $1,317, initial target price for the DGLD ETN: $89.05; stop-loss for the DGLD ETN $46.25
- Silver: initial target price: $12.13; stop-loss: $18.17, initial target price for the DSLV ETN: $61.16; stop-loss for the DSLV ETN $26.34
- Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.47, initial target price for the DUST ETF: $4.27; stop-loss for the DUST ETF $1.16 (the price for DUST is dependent not only on the prices of mining stocks themselves, but also on the way mining stocks decline and the real price that DUST will achieve will likely be much higher than this target, but the conservative pricing models don’t take - and generally can’t take - the above into account).
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: $39.43
- JDST ETF: initial target price: $5.78; stop-loss: $1.60
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, Gold & Silver Fund Manager
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