Gold & Silver Trading Alert: Gold Breaks Lower, but Miners Don’t

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

Gold declined visibly this week, but silver and mining stocks didn’t show the same kind of weakness. In fact, the latter didn’t move below their previous November low. What can we infer from the above?

In short, that the move lower in gold is less reliable than it appears at the first sight. In the previous alert, we discussed that the move may be artificial and temporary, and this still appears likely. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Short-term US Dollar price chart - USD

On the above short-term chart, the outlook for the USD Index is bullish as it moved above the previous resistance levels, verified the breakout and on Wednesday, it moved to new highs.

However, the potential for further appreciation is rather limited in the very near term, based on the long-term chart.

Long-term US Dollar price chart - USD

As you can see above, the USD Index is about to encounter a very important resistance – the 61.8% Fibonacci retracement level based on the entire 2001 – 2008 decline. That’s a very important retracement based on a very important decline. It’s quite likely to stop a rally if the market gets too overbought on a short-term basis, and it seems this is the case right now.

Back in 1999, when the USD Index rallied in a similar fashion, it did so without a major decline, but still, it didn’t rally in a straight line. There were corrections along the way (small, but still) and the first time the USD Index moved above the rising red line, it then corrected back below it before the rally resumed. We now have the USD Index visibly above the rising red line, but we have yet to see a move back below it. A decline to 100 or so would serve as a correction similar to what we saw previously and thus it appears quite likely.

Wednesday’s intra-day high was 101.96 and the 61.8% Fibonacci retracement is at 102.13 – very close to where the USD Index moved. Consequently, the upside potential for the USD Index in the short term is very limited.

Short-term Gold price chart - Gold spot price

The USD Index was very close to reaching its 61.8% Fibonacci retracement and we can say the same about gold. The yellow metal moved very quickly from over $1,330 below $1,190 and it seems that a corrective upswing is just around the corner.

Several weeks ago, we discussed the temporary downside targets for gold and we focused on the 38.2%, 50% and 61.8% Fibonacci retracements. We wrote that depending on how they were reached, they were more or less likely to trigger a corrective upswing. The decline that took gold to about $1,180 was very sharp and – based on the situation in the USD Index – may be overdone. It does seem likely that a corrective upswing will be seen either shortly or after gold moves to the 61.8% Fibonacci retracement ($1,172).

Short-term Silver price chart - Silver spot price

Silver is already in our target area, so betting on further declines here doesn’t appear to be justified – the white metal is likely to rebound shortly (as the 61.8% Fibonacci retracement has been broken insignificantly and the breakdown was not confirmed) or after a decline to $15.75 or so (June low and the declining dashed support line). Either way, the potential size of the decline in the short term appears to be rather limited.

Does the above mean that the decline in silver is entirely over? No – it simply means that a pause or corrective upswing is quite likely to be seen in the short term, after which the big decline (probably bigger than what we saw recently) is likely to resume.

GDX - Market Vectors Gold Miners - Gold mining stocks

Mining stocks provide us with bullish indications for the short term as they didn’t move to new intra-day lows, even though gold moved visibly lower. Moreover, the GDX ETF didn’t break below the lower border of the declining trend channel. Consequently, from the technical point of view, a short-term rebound is not only possible, but somewhat likely.

Summing up, very little changed based on yesterday’s session and it still seems that a corrective upswing in the precious metals sector will be seen along with a corrective downswing in the USD Index. These moves are not likely to be very significant (with the exception of silver’s very temporary upswing that we are likely to see right before the top), so we are not opening long positions here. It seems likely, however, that the above would create a good opportunity to re-enter speculative short positions and further increase our profits.

On a very short-term basis, the USD Index could move a little higher and metals and miners could move a little lower, but it’s unlikely that a bigger decline will be seen without a prior corrective upswing.

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

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.

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