Gold & Silver Trading Alert: Dow to Gold Ratio’s Major Breakout

tools spotlight

Briefly: In our opinion, no trading positions in gold, silver and mining stocks are justified from the risk/reward perspective.

Gold moved lower last week and closed at new December lows. However, that’s not the key thing that happened – the price moves in gold, silver and mining stocks are important, but sometimes the key ratios provide signals that are just as important. The Dow to gold ratio is one of the key ones (showing the relative performance of the general stock market and gold) and it just broke above its 2015 high. What does imply for the following weeks?

In short, it confirms that the gold market is likely to decline in the coming weeks / months. Let’s take a closer look at the chart(charts courtesy of http://stockcharts.com).

INDU:GOLD - Dow to gold ratio chart

For many months we’ve been featuring (whenever it was discussed) the red area above the 20 level as the probable target for the ratio and we now have a very good technical confirmation that this level will indeed be seen. Why would the ratio move higher? Because of the breakout. There is no meaningful resistance until the 20 – 20.59 range and without anything else to stop the rally, the above becomes a natural target. The 2007 top and the 38.2% Fibonacci retracement are both very important resistance levels (the retracement is based on a major move – the 2001 – 2011 decline), so even if the rally doesn’t end once the ratio moves to the target area, the latter is still likely to trigger a bigger correction.

What does it mean for gold? It means that gold is likely to move much lower in the medium term (it doesn’t have any implications for the next several days, though) as the ratio moves in the opposite way to gold.

Long-term Gold price chart - Gold spot price

Gold itself could still rally in the short term based on the turning point that is just around the corner and based on the rally that we saw in 2013 after gold broke below its 300-day moving average (based on several factors, such as the performance of silver, the current decline appears to be similar to what happened in 2013).

Short-term Gold price chart - Gold spot price

Gold broke below the 61.8% Fibonacci retracement and managed to close below it on Friday, but that’s just one daily close below it, so the breakdown is not yet confirmed. Besides, we already saw analogous breakdowns that were quickly invalidated and thus it seems that it’s too early to say that the breakdown is confirmed – especially that gold declined on relatively low volume.

Short-term Silver price chart - Silver spot price

GDX - Market Vectors Gold Miners - Gold mining stocks

Silver and mining stocks don’t confirm gold’s breakdown – both remain visibly above their November lows.

In the December 8 Gold & Silver Trading Alert, we wrote the following:

The sell signals from the Stochastic indicator seen above 80 usually corresponded to local tops, so the current position of the indicator suggests that the top is close to being in, but not yet in.

The Stochastic indicator in silver is already above 80, but it has not flashed a sell signal yet, so the above remains up-to-date and so do the implications coming from the silver to gold ratio.

SILVER:GOLD - Silver to Gold ratio chart

Quoting the December 8 Gold & Silver Trading Alert:

There is a very effective technique confirming the tops that you can see on the above chart. The technique is looking at RSI’s (based on the ratio) performance and viewing moves back below the 70 level as a strong sell signal. Naturally, for the RSI to move above 70, it first has to rally above it. The indicator moved to 68 based on yesterday’s closing prices. Again – “almost”.

Summing up, the short-term outlook remains rather unclear and the medium-term outlook remains bearish. The breakout in the Dow to gold ratio confirms the bearish outlook for the medium term, but it doesn’t say anything about the short term, so it still seems that we could indeed see higher prices right before the interest rate announcement. If we see some bearish confirmations along the way, it will create a great trading opportunity. As always, we will keep you – our subscribers – informed.

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): No positions (in other words: cash and/or positions from our other alerts)

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.

=====

Latest Free Trading Alerts:

The Fed is widely expected to hike interest rate this week. What does it imply for the gold market?

Will the Fed Hike Push Gold Down or Up?

S&P 500 index trades close to its new record high following breakout above 2,250 mark. Will the uptrend accelerate towards 2,300?

Stock Trading Alert: New Record Highs As Investors' Sentiment Further Improves

=====

Hand-picked precious-metals-related links:

In Chats, Silver ‘Mafia’ Traders Flexed Muscle, Drew Blades

India's top gold import bank suspends bullion dealers accounts

Market Insanity Reaches Record Highs As Investors Flock Into The Biggest Bubble In History

=====