Gold & Silver Trading Alert: Gold Declines but Miners Don’t

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

The precious metals moved lower yesterday, but mining stocks closed a bit higher. There were times in the past, when such action heralded higher prices. Is this the case also this time?

In short, it’s unlikely in our opinion. Miners had a good reason to show some strength in the form of higher main stock indices’ values, so it’s no wonder that they haven’t declined significantly yet.

Let’s take a closer look (charts courtesy of http://stockcharts.com).

Short-term Gold price chart - Gold spot price

Gold moved lower and it continues to decline in tune with the pace of decline that we saw during the previous downswings. It’s in the lower part of the declining trend described by the green lines. This is an important observation, because gold is approaching a few support lines, especially the one based on the January, May and August tops. The fact that gold is closer to the lower of the green lines means that it could move temporarily higher (for instance, based on reaching a support level) and it would not invalidate even the short-term trend.

All in all, the trend remains bearish, but unless gold breaks below $1,115, we could see some temporary moves higher. We don’t think that these moves would be significant, though (not above $1,160) – that is if the counter-trend upswing does indeed materialize, which seems doubtful. The medium-term trend seems much clearer and much more worth betting on.

What about the mining stocks’ move higher?

GDX - Market Vectors Gold Miners - Gold mining stocks

Not much. Miners moved higher by only a few cents and the fact that they formed a reversal candlestick is not really relevant, because the accompanying volume was low (in both absolute and relative terms). It seems that the miners’ pause was a reaction to the general stock market’s rally – not a show of true strength of the precious metals sector.

All in all, little changed yesterday and basically everything that we wrote in yesterday’s extensive alert remains up-to-date. Since nothing changed, we can summarize today’s alert in the same way as we summarized yesterday’s issue:

Summing up, the decline in the precious metals sector continues and there are multiple signs that point to the continuation of the decline – if not immediately, then shortly. Moreover, it seems likely that the corrective upswing is already over. It seems that the next big move will be to the downside and being positioned to take advantage of it remains justified from the risk/reward point of view. It seems likely that the current short position will further increase our profitability.

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

To summarize:

Trading capital (our opinion): Short position (full) position in gold, silver and mining stocks is justified from the risk/reward perspective with the following stop-loss orders and initial (! – this means that reaching them doesn’t automatically close the position) target prices:

Gold: initial target price: $1,050; stop-loss: $1,223, initial target price for the DGLD ETN: $98.37; stop loss for the DGLD ETN $62.34
Silver: initial target price: $12.60; stop-loss: $16.73, initial target price for the DSLV ETN: $96.67; stop loss for DSLV ETN $40.28
Mining stocks (price levels for the GDX ETF): initial target price: $11.57; stop-loss: $18.13, initial target price for the DUST ETF: $26.61; stop loss for the DUST ETF $9.22

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: $16.27; stop-loss: $25.23
JDST ETF: initial target price: $46.47; stop-loss: $15.58

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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