Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are adjusting the stop-loss levels, though, so in a way we are locking-in most of the profits from the current position and, at the same time, keeping a chance of increasing them.
Gold, silver and mining stocks plunged yesterday and they declined sharply once again in today’s pre-market trading. The volume was huge and the moves were significant. It was a great time to be short and the double short position that we had mentioned before these moves is already very profitable. Is it a good idea to cash out and take profits off the table? Let’s take a look at the charts and find the answer (charts courtesy of http://stockcharts.com).
In yesterday’s alert, we wrote the following:
What’s next? The cyclical turning point is at hand, so we might not see many more daily upswings in the near future. The closest resistance is at the previous October high, about an index point above Wednesday’s close. Consequently, we are quite likely to see another sharp upswing, but it also seems likely that the USD Index will at least pause after reaching its previous high, at or close to the turning point.
We indeed saw a sharp upswing in the USD Index yesterday and also in today’s pre-market trading. Today, the USD Index moved to 86.74, which is very close to its early-October high of 86.87. We could see a pause or another decline from here, especially that the cyclical turning point is at hand. The situation in the currency market is very interesting at this time (especially in the USD/JPY pair) but that’s something that we will discuss in today’s Forex Trading Alert. Let’s move to metals.
Has the outlook become bullish for the precious metals sector based on the above? Not necessarily.
Yesterday, we wrote the following about the above chart:
From the long-term perspective we see that this month’s rally was in fact a corrective upswing that took gold to combination of strong resistance lines. It was a breather that we expected to see and as it’s already been seen, so we can now expect the decline to continue. Perhaps the next big slide is already underway.
The big slide is already underway and profits from the short positions have become even bigger. However, could they grow even further before the decline is over? Yes, and the reason for that is that in today’s pre-market trading gold moved below the 2013 low of $1,179.40. The breakdown is not confirmed at this time, but this price level is so visible and profound, and closely-watched , that perhaps even an unconfirmed breakdown could trigger further selling, and thus declines. At the moment of writing these words gold is at $1,164 after moving to $1,161 and correcting a bit. There has been no invalidation of the breakdown.
Our yesterday’s comments on the short-term gold chart remain up-to-date today:
The short-term gold chart shows that the decline is indeed underway. That’s another expected development. Gold confirmed the breakdown below the short-term rising support line just a few days ago and based on this action, i.a., we decided to open short positions [and double them before yesterday’s session] and they are already profitable. The volume that accompanied yesterday’s decline was very significant, which serves as a bearish confirmation.
Please note that the RSI indicator is not oversold, so gold can very well fall further. How low can gold go initially? At least to the previous October low, but we think that the final bottom will be much lower.
Moving on to the silver market, let’s stat by quoting yesterday’s alert:
(…) it was no wonder that it hadn’t declined much yesterday. The reason is the proximity of the rising long-term support line.
Silver remains “strong” as it’s right at this line. We don’t think this is a real sign of strength of the white metal. When silver finally gives in and breaks this level, it’s likely to catch up with gold and miners and decline sharply. Please note that once this support is taken out there will be no other support to stop the decline until the white metal moves below $15.
Is silver still a great investment when one takes a few years into account? We think so.
Can silver plunge very low before it starts another powerful rally regardless of its favorable fundamental situation? Yes, it can.
Silver broke below the rising support line and it indeed quickly caught up with gold and miners by declining sharply. Silver closed at $17.08 on Wednesday, and the above comments were based on this price. At this moment silver is trading at $15.90 – more than a dollar lower. The intra-day low is (so far) $15.61.
What’s next?
As we mentioned yesterday, silver doesn’t have any meaningful support until it moves below $15, so another volatile slide should not surprise us. The $16 level might seem important from the psychological point of view as it’s a round number, but there’s not much more that we can say about it – it’s not really that strong a support.
Please note that the situation developed as expected also from the cyclical point of view.
In the Oct. 27 alert we wrote the following:
Silver could still rally to the declining resistance line, but given gold’s breakdown it could (it’s more likely based on gold’s confirmed breakdown) also be the case the cyclical turning point has already worked and silver’s decline last week was partially based on it.
Please note that at the previous 3 turning points local tops were seen slightly before the turning point. Consequently, the odds are that the local top is already behind us also at this time.
The local top had indeed already been formed and silver plunged soon after the turning point.
Miners plunged significantly as well.
Both indices: HUI and XAU moved sharply lower yesterday. If they repeat yesterday’s decline, they will reach our initial target levels. Just a few weeks ago some would call 150 in the HUI Index “unthinkable.” It will quite likely be a reality today or in the next few days. The miners’ recent performance suggests further declines especially that there were no big declines in the general stock market.
There is no significant support that could stop the decline before the 2008 lows, so it’s likely that these levels will be reached. Moreover, gold stocks and silver stocks could move even lower without a bigger correction (that’s a bit unclear at this time, though).
Summing up, the situation in the precious metals market was bearish and metals and miners were likely to decline – and they did. Will they decline further based on gold’s major breakdown (after all, gold didn’t break down from more than a yearly consolidation pattern to decline $20) or will the resistance and turning point in the USD Index trigger a bigger upswing in the precious metals sector?
As always, there are no sure bets in any market, but we think that the short-term resistance in the USD Index (given the metal’s negative correlation with the U.S. dollar) is much less important than the breakdown in silver and (given today’s pre-market moves) in gold. The critical support in gold and silver was broken and they are likely to decline significantly now. They could still turn around and rally today or in the coming days, but they could also continue their decline and if they do, they could drop fast and far – and it would be a waste not to take advantage of this move.
Consequently, we think that instead of closing the short positions, we will “almost close them”. By this we mean moving the stop-loss orders much lower. In this way, if gold, silver and mining stocks rebound, the short positions will be automatically closed and substantial profits will be secured anyway. If metals and miners continue to slide, we plan to continue to move the stop-loss order lower and thus make the substantial profits from the current short positions even bigger. Please note that by entering a new stop-loss order, you are effectively making sure that the current trade is profitable no matter what the market does.
We will update the target prices for gold, silver and mining stocks in the alert that will be posted Monday.
We will continue to monitor the situation and report to you – our subscribers - accordingly.
To summarize:
Trading capital (our opinion):
It seems that having speculative (full) short positions in gold, silver and mining stocks is a good idea:
- Gold: stop-loss: $1,194, stop loss for the DGLD ETF $78.53
- Silver: stop-loss: $16.76, stop loss for DSLV ETF $69.31
- Mining stocks (price levels for the GDX ETF): stop-loss: $18.92, stop loss for the DUST ETF $35.25
In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:
- GDXJ: stop-loss: $27.47
- JDST: stop-loss: $24.33
Long-term capital (our opinion): No positions
Insurance capital (our opinion): Full position
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.
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 automated tools (SP Indicators and the upcoming self-similarity-based tool).
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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