Briefly: In our opinion, no speculative positions in gold, silver and mining stocks are justified from the risk/reward point of view. We will likely have another trading opportunity shortly.
Gold broke below the previous 2016 high in today’s pre-market trading and silver also moved higher – will this uptrend continue for much longer?
In our opinion a short-term upswing here is quite possible, however, we think that such an upswing would be followed by an even bigger decline. Let’s jump right into charts to see how gold performed after similar breakouts (charts courtesy of http://stockcharts.com).
There were quite a few cases when gold moved to or a bit above its previous local high before sliding to new lows – we marked these cases with red ellipses on the above chart. So, gold’s breakout is not a “game changer” – it’s still something that was seen right after initial tops and before major plunges. Consequently, the next big move is still likely to be down.
However, gold has broken higher (also in terms of daily closing prices) and since the move before consolidation was volatile, we can expect a volatile rally also in this case. Please note that based on the previous marked patterns, gold can reverse any day or continue to move even higher. How high?
The $1,284 and $1,328 levels are the next possible targets. Again, the rally could end for example today based on the Non Farm Payroll report – if the numbers come out much better than expected, so we are far from saying that this is a rally that’s worth betting on. What we are saying is that the short-term outlook (for the next week or so) is rather unclear at this time. Things could become clear later today or (more likely) after today’s close as we’ll have the weekly closing prices and if gold ends up declining significantly, it will serve as a strong bearish confirmation. Still, at this time, the situation is rather unclear.
The long-term silver chart shows that the trend remains down.
The short-term chart, however, shows that silver moved to the declining resistance line yesterday and since silver moved higher in today’s pre-market trading, we have an unconfirmed breakout – also above the 20-day moving average. The short-term outlook is not bullish because of that, but it’s not bearish enough to justify an open position at this time. Silver could rally even to $16.25 or so and that would still not invalidate the bearish signals from the long-term chart, so the overall trend would not change, but at the same time the risk of such a rally happening is too significant at this time to have a position against it.
As far as mining stocks are concerned, we saw a breakout above the previous highs. The breakout was not significant in intra-day terms (only a few cents above the previous high) but it was significant in the case of daily closing prices. The volume was not huge (not bigger than what we saw during the previous daily declines), but it was big enough to make the breakout believable. Consequently, miners too could rally further (temporarily) before the next big slide.
One thing that points to a turnaround in precious metals is the situation in the euro, which often moves in tune with metals and miners. The rally in the former (and a decline in the USD Index, of which the EUR/USD pair is the biggest component) is likely the reason behind yesterday’s upswing in gold. In the case of the euro, this upswing was just a verification of a breakdown and the outlook remains bearish. That’s a good reason for gold to decline shortly (and an argument against opening a long position in precious metals here).
Summing up, based on yesterday’s price moves and the volume that corresponded the move higher in mining stocks, the short-term outlook for the precious metals market became rather unclear (there was no change in the medium-term outlook, though). Gold broke higher (in terms of both daily closing prices and in intra-day terms) and while it still appears to be topping, at this time we can’t rule out a sharp, temporary upswing to $1,328 or so. Consequently, we think that the risk to reward ratio does not favor any positions at this. It seems that it’s justified to wait and re-enter the short position (or open a long one if we get much more bullish signs, but this doesn’t appear likely) in more favorable conditions (preferably at higher prices after seeing a major daily reversal).
As always, we will keep you – our subscribers – updated.
To summarize:
Trading capital (our opinion): No positions
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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