Briefly: In our opinion, short (half) speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view. In other words, we think that taking profits off the table for half of the position is justified from the risk/reward point of view.
Gold ended the week below $1,060 breaking visibly below the previous low and the USD Index closed the week at 100.07, which is a bit above the previous 2015 high. Given the above, will we see even more declines in gold and more rallies in the USD Index shortly?
In short, this is very likely to be the case in the coming weeks and months, but the chance for this taking place in the following days just declined (from about 75% - 80% to 65% or so). Let’s take a look at the charts and see why (charts courtesy of http://stockcharts.com).
Gold declined almost $15 on Friday and is now well below the previous 2015 lows – it’s clear that the previous breakdowns resulted in the continuation of the decline.
The decline took place on significant volume, which is a bearish sign.
However, not all is bearish on the above chart.
The RSI indicator is once again below 30 and there was only 1 situation in the recent past similar to what we see right now (in the RSI – a move well below 30, then a small move back above it and then another slide below 30) – what happened between late September 2014 and early October 2014. Back then this was right before a local bottom. Interestingly, that was not the final bottom for the medium-term decline, but the corrective upswing that followed was big enough to significantly decrease the profits from a short position (if one had a short position back then that is). We could be in a similar situation right now as well.
Overall, the above picture deteriorated, but only a little as the move lower in gold is accompanied by a bullish sign.
From the long-term perspective, we see that gold moved to the upper part of our first target area. Precisely, gold moved insignificantly below the 2010 low (in terms daily closing prices) and then moved back up. The local bottom could be in, even though that’s far from being certain. The RSI indicator doesn’t suggest an imminent rally – then again, this is the version of the RSI that focuses on medium-term moves and nothing has indeed changed from this perspective.
The above Dow to gold ratio chart features a major breakout above the previous high and this has important bullish implications for the ratio for the medium term (not necessarily for the next several days) and the opposite is the case for gold (bearish for the medium term, but not necessarily for the short term).
Meanwhile, the gold to bonds ratio continues to slide lower and the implications remain unchanged – they are bearish for the medium term.
As you can see above, not much changed in the silver market, and the medium term implications are bearish as silver is after 3 weekly closes below the previous lowest close of the year.
On a short-term basis, we see that silver moved lower and broke below its previous low – silver closed below the previous lowest daily close. Silver closed only 1 cent lower, but still, it happened. This is a weak (because of the tiny size of the move) bearish sign for the short term.
From the long-term perspective, nothing important happened in gold stocks – the decline continues at its previous pace. Moreover, the sell signal from the Stochastic indicator remains in play and continues to have bearish implications for the following weeks.
On the above short-term chart we see that mining stocks moved lower in the final part of last week, but the decline wasn’t accompanied by big volume. It’s not bearish as it was quite normal to expect the volume to be lower as many traders and investors were not active in the U.S. markets due to Thanksgiving.
Still, we need to note that gold moved visibly lower (and below the previous lows) while mining stocks didn’t. Miners are acting strong and this is not a one-day event, which is an important bullish observation with short-term implications.
All in all, it seems that miners “don’t want to” decline significantly before another corrective upswing.
The important thing here is the situation in the USD Index. If we had similar implications from all markets, the short-term outlook for the USD would not matter that much – but with bearish sings from the gold market and bullish signs from mining stocks, we need to keep the outlook for the USD Index in mind. We usually discuss the situation in the currency markets in our Forex Trading Alerts, but since the situation in the USD Index is so important for the precious metals market right now, we will discuss its outlook also in this alert.
As far as the medium- and long-term outlook is concerned, the situation is bullish – even very bullish. The USD Index consolidated after a major breakout and seems to be starting another powerful rally. The USD Index could rally all the way up to the 118 level as that’s what would make the pre-consolidation and post-consolidation rallies similar (note the green lines on the above chart). The bullish outlook for the USD index has bearish implications for the medium term for the precious metals market.
Unfortunately, the short-term outlook is not as clear. The USD Index broke a little above the previous high (in terms of the daily closing prices), but the breakout is not confirmed. Will the USD confirm the breakout and rally further? Eventually or within the next several weeks – very likely, but it’s unclear whether this happens in the next several days. The USD’s cyclical turning point is here and given the current rally, the implications are bearish.
On the other hand, as we saw on the previous long-term chart, the USD is already after a sizable consolidation and it’s likely to move higher, so it could be the case that we will see a breakout shortly.
If we see a breakout, how high can the USD rally before correcting? It’s likely to rally to about 102 as that’s where we have the 61.8% Fibonacci retracement of the entire 2001 – 2008 slide.
How low can the USD Index go if it doesn’t manage to hold its recent gains? Probably to 98 or so (July and August highs).
All in all, the medium- and long-term outlook for the USD Index is bullish but the short-term outlook is rather unclear. We think that the odds for the continuation of the rally are about 65%, which is considerably less than we would want the odds to be to open a speculative position.
Summing up, the lack of clarity regarding the next short-term move in the USD Index makes the short-term outlook for the precious metals market rather unclear for the short term as well. In the previous weeks we wrote that we expected the USD Index to move at least to the 100 level – and it did, but since it’s already there, the situation is no longer clearly bullish for the short term.
With decreased clarity regarding the currency market, the odds for the continuation of the decline in the precious metals sector also decrease. Consequently, the risk increases and the risk to reward ratio becomes less favorable (especially that the majority of the move that we wanted to profit on is already behind us – as a reminder, we entered the current short position when gold was trading at about $1,150) and the question is if the current short position is still justified.
The full position is certainly no longer justified and the question remains if it’s justified to keep half of the position intact or to close the position and take all profits off the table.
After giving this a lot of thought, we decided to keep half of the current short position intact. We are also changing the “initial target levels” to “exit / profit-take order’, which means that reaching any of these levels automatically exits the entire position, without an additional confirmation. For instance, if gold moves to $1,012 or lower, this will automatically close the position in gold, silver and mining stocks regardless of the prices of the latter.
The cyclical turning point in the USD Index and the miners’ strength are bullish phenomena, but they could result in higher PM and mining stock prices in a few days, and if the USD moves to 102 or so in the next few days, gold could drop another $50 or so. Gold’s breakdown and the USD’s breakout (the USD is above 100 in today’s pre-market trading) are much more important, and bearish.
To summarize the current trade so far:
On Aug. 24, 2015 (1,154.40, 14.76, 116.21) we entered a small short position (half of the regular one). On Aug. 25, 2015 (1,140.30, 14.66, 111.17) we doubled the size of the position. On Nov. 30, 2015 (prices on Nov. 27, 2015 - we are updating this before the market’s open on Nov 30, 2015: 1,056.10, 14.07, 107.48) we once again adjusted the size of the position by cutting it in half. Half of the position remains open.
The outcome of the first part of the trade (Aug. 24 – Aug. 25) was 1.24%, 0.68%, 4.53% (average: 2.15%). The outcome of the second part of the trade (Aug. 25 – Nov. 30) was 7.97%, 4.19%, 3.43% (average: 5.20%). The outcome of the third part of the trade (Nov 30 - … ) remains to be seen.
Overall, the current short position has further increased the profitability of our short-term calls. A little more than a year of previous trades can be summarized using the chart below:
You will find details regarding previous transactions on our performance page.
We might issue another alert shortly if the situation changes and we believe that exiting the entire position is justified from the risk / reward perspective.
To be clear – we think that this is an interim bottom and not the final bottom for this medium-term decline in the precious metals sector, and we think that after a corrective upswing another big (probably final) slide lower will take place.
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): Short position (half) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and exit / profit-take orders (! – this means that reaching them does automatically close the position):
- Gold: exit / profit-take level: $1,012; stop-loss: $1,103, exit / profit-take level for the DGLD ETN: $109.27; stop loss for the DGLD ETN $85.51
- Silver: exit / profit-take level: $12.60; stop-loss: $14.73, exit / profit-take level for the DSLV ETN: $96.67; stop loss for DSLV ETN $61.00
- Mining stocks (price levels for the GDX ETF): exit / profit-take level: $11.57; stop-loss: $14.73, exit / profit-take level for the DUST ETF: $26.61; stop loss for the DUST ETF $15.49
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: exit / profit-take level: $16.27; stop-loss: $20.73
- JDST ETF: exit / profit-take level: $46.47; stop-loss: $26.04
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
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