Gold & Silver Trading Alert: Gold Declines with Falling USD

tools spotlight

March 13, 2015, 7:32 AM

Briefly: In our opinion speculative short positions (full) in gold, silver and mining stocks are justified from the risk/reward perspective. We are keeping the stop-loss levels at their current levels, which means that we are effectively keeping some gains locked in and at the same time we’re allowing the profits to increase.

The USD Index soared this week and the precious metals sector declined. Just as the USD’s rally seemed excessive and it pulled back a bit yesterday and just when it seemed that metals and miners would rally based on it… They declined a bit. What are the implications?

The implications are that the link between the USD Index and the precious metals sector is not as clear as it was several months ago and just because the USD Index may decline in the coming weeks, it doesn’t mean that the potential size of the decline in the precious metals market will be small. Metals and miners won’t have to bottom if the USD Index tops (it could be the case, but it’s not a sure bet). Consequently, it seems best to focus on the precious metals market and related ratios in order to determine what’s going to happen in the following days and weeks. Let’s take a look at the charts (charts courtesy of http://stockcharts.com).

Long-term Gold price chart - Gold spot price

From the long-term point of view, there were no changes based on yesterday’s session. Our previous comments remain up-to-date:

(…) we clearly see a move below the 2013 lows and the proximity of both the 2014 lows (in terms of price) and the long-term cyclical turning point (in terms of time). The implications of the former are that we can expect to see some kind of corrective upswing, but also a sharp slide when these lows are broken, and the implications of the latter are that the above is likely to take place quite soon (a few weeks or months away).

On a short-term basis we also saw more of the same. Gold didn’t rally – it moved back and forth and finally closed a little lower than on Wednesday. Overall little changed and our previous comments remain up-to-date:

The lower border of the declining trend channel was reached, so we would not be surprised to see a corrective upswing soon (perhaps to the $1,180 level or so). However, just like it was the case in the final part of February, the move higher doesn’t have to happen and betting against the trend is usually a bad idea as the surprises will be in the trend’s direction. At this time it seems that keeping the current positions intact is still justified from the risk/reward perspective (it’s unlikely that they would become unprofitable – after all, we opened them about $150 higher).

The next interim target for gold is at about $1,120 and the final one is at about the $1,000 level.

Short-term Gold price chart - Gold spot price

Yesterday, we wrote that the Dow to gold ratio pulled back after the recent breakout, but didn’t invalidate it. Consequently, the ratio was still likely to move visibly higher and gold visibly lower. The ratio moved higher yesterday – the breakout seems to have been verified and the implications for gold are bearish.

Once again, nothing changed in the case of silver (and the outlook remains bearish), so let’s move to the situation in mining stocks.

INDU:GOLD - Dow to gold ratio chart

We previously commented on silver stocks in the following way:

Silver miners broke below their 2014 lows, which is a major bearish development. The breakdown is not confirmed („the dam is not broken“), but the first and most important step was just made („there’s a crack in the concrete“). Will other parts of the precious metals sector follow? Most likely, even if that doesn’t happen right away.

Silver miners rallied on Wednesday, but is this really a bullish development? Not really. The move only took silver stocks to the previously broken low – not above it. Consequently, there was no invalidation. If silver miners continue to move lower, we will have a confirmed breakdown. If silver stocks move higher, the breakdown will be invalidated and we will have bullish implications (and likely a short-term rally in the following days). Which is more likely? The former, as we are after a breakdown and in a downtrend. The more important thing here is that even if we see some strength, it’s not likely to be very significant.

While we would prefer to see silver miners at lower levels to say this, technically, the breakdown was just verified. There is still a possibility that this breakdown will be invalidated, but it doesn’t seem likely. Again, even if this is the case, the following rally would not likely be large.

Global X Silver Miners - SIL long-term

In the case of the GDX ETF, we saw a move higher initially and then a decline before the end of the session that resulted in a lower closing price. The important thing here is that the general stock market moved visibly higher yesterday, so we would’ve expected miners to soar if it had indeed been a major bottom on Wednesday. It didn’t happen, so the odds are that we are just seeing a pause within a downtrend.

Overall, yesterday’s session didn’t change much and we can summarize the current situation in the same way as we did yesterday:

Summing up, the precious metals sector moved much lower on Friday and it seems that it was another step in the current true direction of the market. We are likely to see a small corrective upswing here, but it doesn’t seem that we will see a more visible correction until we see gold close to its 2014 low. Gold stocks are now once again underperforming gold, which serves as a confirmation that the correction is over and the decline will now continue.

Even though the size of the profits on the current short position may suggest that’s it’s worth taking them off the table (we opened the short position on Jan. 23 when gold was at about $1,300), it seems that the risk/reward ratio still favors keeping the position open as it doesn’t seem that the decline is over. Even though gold has already fallen significantly, it’s still likely to decline even more in the coming weeks and it is this outlook that makes us think that the short position remains justified at this time.

As always, we’ll keep you – our subscribers – informed.

To summarize:

Trading capital (our opinion): Short positions (full) in gold, silver and mining stocks with the following stop-loss orders and initial (!) target prices:

Gold: initial target level: $1,135; stop-loss: $1,234, initial target level for the DGLD ETN: $85.48; stop loss for the DGLD ETN $65.45
Silver: initial target level: $15.10; stop-loss: $17.23, initial target level for the DSLV ETN: $74.05; stop loss for DSLV ETN $48.36
Mining stocks (price levels for the GDX ETN): initial target level: $17.13; stop-loss: $21.17, initial target level for the DUST ETN: $23.49; stop loss for the DUST ETN $11.35

In case one wants to bet on lower junior mining stocks' prices, here are the stop-loss details and initial target prices:

GDXJ: initial target level: $22.13; stop-loss: $27.38
JDST: initial target level: $14.58; stop-loss: $7.10

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.

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 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.

=====

Latest Free Trading Alerts:

Earlier today, the Commerce Department showed that retail sales fell 0.6% in the previous month, which was the third consecutive monthly decline. Additionally, core retail sales (without automobiles, gasoline and food) were flat following a 0.1% decline in January. Thanks to these disappointing numbers the USD Index declined from a fresh 2015 high, slipping under the barrier of 100. How did this drop affect the euro?

Forex Trading Alert: USD Index Climbs to 100!

=====

Hand-picked precious-metals-related links:

Apple Watch Could Make Gold Cool Again

BNP: Gold price will average in triple digits next year

The Mechanics Of The Chinese Gold Market

Not another groundhog year for metals – Wrathall

=====

In other news:

The Dollar Hasn’t Appreciated This Fast Since Its Peak in 1985

Russia Cuts Main Rate to 14% as Inflation Eases Amid Slump

China just subtly told Wall Street to mind its own business