Gold & Silver Trading Alert: Gold Breaks Lower but Silver Holds

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Briefly: In our opinion, full (150% of the regular full position) speculative short positions in gold, silver and mining stocks are justified from the risk/reward perspective. This position was originally featured on Jan. 12, 2017 at 3:49PM.

We previously wrote that the situation in the precious metals sector was bearish (bullish in the case of the USD Index). Yesterday, gold broke below its short-term rising support line, which seems to confirm the above. Still, silver didn’t follow gold as it hovers above the $18 level. What are the implications?

In short, silver’s reluctance to move lower so far doesn’t seem to have any meaningful implications. Gold’s sister metal tends to provide fake signals every now and then (in particular fake breakouts) and they should be confirmed by other parts of the precious metals market before one views them as important. Miners have been underperforming and declining for some time now and gold just declined. This is the opposite of a confirmation of silver’s supposed strength. Besides, is there any good – yet temporary – reason for silver to be relatively strong? Yes, there are at least two such reasons.

The first reason is that it can be viewed as something that happens in the final parts of a given upswing. Based on what’s happening in the USD Index and the potential size of the upcoming rally in it, it seems that we are on a verge of a major move lower in the precious metals sector. It is only natural for silver to outperform right before the slide’s start.

The second reason could be the stock market. Silver could have been holding up rather well in the past few days as stocks moved higher during that time (silver is more connected to the stock market than gold is due to its industrial uses).

As far as changes seen on the charts are concerned, we would like to discuss two charts today: gold and mining stocks.

Let’s start with the former (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

In addition to what we wrote previously about gold (in short: it reached a combination of strong resistance levels and was likely to reverse), we can say that gold has now broken below its rising support line, which serves as a bearish sign for the short term. The volume is an important factor when discussing breakouts and breakdowns and it was both relatively big and significant enough to confirm the move. In other words, it’s likely to be followed by additional declines.

Moreover, the sell signal from the Stochastic indicator is now more visible, which translates into its credibility and thus strength.

GDX - Market Vectors Gold Miners - Gold mining stocks

The sell signal in the case of the Stochastic for the GDX ETF is also more visible and thus stronger. Moreover, GDX just broke below the “flag pattern” in terms of the daily closing prices making it more of a triple top pattern than a flag. No matter how one chooses to call it, a close below the lowest close of a 2-week consolidation is a bearish phenomenon.

GDX could pause around the $22 and then the $21 level, but it will probably (this will depend on what happens in other markets as well, but that seems probable right now) not be a good idea to adjust the speculative positions based on that. If the move in the USD Index is going to be as sharp as it is likely to be, then any pauses or consolidations in the precious metals sector (and especially in miners which have been underperforming) are likely to be temporary.

Summing up, the breakdown in gold seems to confirm that the move to the February high in gold meant the rally’s end just as the USD’s temporary breakdown below 99 and its invalidation has likely marked the end of the decline in the U.S. dollar. The long-term analogy to 2002 and 2003 in the USD Index remains in place and the outlook for the following weeks remains bearish for the precious metals market.

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

To summarize:

Trading capital (supplementary part of the portfolio; our opinion): Short positions (150% of the full position) in gold, silver and mining stocks are justified from the risk/reward perspective with the following stop-loss orders and initial target price levels / profit-take orders:

Gold: exit-profit-take level: $1,063; stop-loss: $1,273; initial target price for the DGLD ETN: $81.88; stop-loss for the DGLD ETN $48.17
Silver: initial target price: $13.12; stop-loss: $18.67; initial target price for the DSLV ETN: $46.18; stop-loss for the DSLV ETN $19.87
Mining stocks (price levels for the GDX ETF): initial target price: $9.34; stop-loss: $26.34; initial target price for the DUST ETF: $143.56; stop-loss for the DUST ETF $21.37

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: $45.31
JDST ETF: initial target price: $104.26; stop-loss: $10.78

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

Please note that the in the trading section we describe the situation for the day that the alert is posted. In other words, it we are writing about a speculative position, it means that it is up-to-date on the day it was posted. We are also featuring the initial target prices, so that you can decide whether keeping a position on a given day is something that is in tune with your approach (some moves are too small for medium-term traders and some might appear too big for day-traders).

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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