Gold & Silver Trading Alert: Gold at the Key Retracement

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Briefly: In our opinion speculative short positions (full) in gold and mining stocks are currently justified from the risk/reward point of view.

Gold moved to the first of the key Fibonacci retracements based on the entire 2011 – 2015 decline. What are the implications?

In short, the implications are bearish and given that the analogy to the price pattern seen in 1982 that we described on Tuesday remains in place – we can expect a major turnaround shortly.

The yearly high at 1980 was $850 and the yearly low in 1982 was $296.25. The entire size of the decline was therefore $553.75 and 38.2% thereof is $211.53. Adding that to the low provides us with the retracement value: $507.78. The high of 1983 formed at $511.50 – just $4 away from the retracement.

What would the corresponding numbers be at this time? Let’s take a closer look at gold’s chart (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

The 38.2% Fibonacci retracement based on the entire 2011 – 2015 decline is $1,378. Gold’s yesterday’s intra-day high was $1,377.50, so the retracement was practically reached. That’s a huge (and bearish) deal even without the analogy to the self-similar pattern of 1982/1983. Technically, as long as gold remains below this level, this year’s rally – as significant as it seems – is just a correction within a decline.

There’s not much more for us to report today as metals didn’t move after we published yesterday’s alert (so today’s alert is short, but this week’s alerts remain up-to-date and we encourage you to read them if you haven’t had the chance to do so previously), but the above move and the level that was just reached is profound information.

Summing up, the long-term potential for the precious metals market remains great, but it also appears that this rally is already at or moving close to its end. Gold reaching it’s key 38.2% Fibonacci retracement level is bearish on its own and it’s even more bearish when we take into account the analogy to what happened in 1982 and 1983. Moreover, the extreme reading in the Gold Miners Bullish Percent Index and silver’s price performance show extreme optimism among precious metals investors (plus gold is making the headlines) and these are the times when one should be fearful, not extremely optimistic. No market can move in a straight line and gold is no exception. The similarity between the current situation and the very similar price pattern from 1982 points to lower precious metals prices in the coming months as well.

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

To summarize:

Trading capital (our opinion): Short positions (full position) in gold 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: $1,006; stop-loss: $1,423, initial target price for the DGLD ETN: $86.30; stop-loss for the DGLD ETN $44.35
Silver: No position at this time
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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