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

In our previous alert we wrote that after the week’s end we’d have more details to comment on even if the price didn’t change much and that’s exactly the case. The weekly closing prices are usually significant even if they don’t change much at the first sight.

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

Let’s start with gold’s long-term chart. Gold declined only $3.40 last week (which doesn’t change much on its own) but the level at which it stayed and the fact that it stayed there for yet another week are significant.

Gold moved to $1,079.20 and then rallied back up, thus creating a bullish weekly reversal candlestick. More importantly, gold moved temporarily below the 50% Fibonacci retracement based on the entire bull market and then invalidated this breakdown, which has bullish implications.

On the other hand, gold has been moving back and forth for several days now and as you can see on the following chart that’s a quite a significant and visible consolidation.

The breakdown below 3 out of 4 of the declining support lines (which are now resistance lines) is now more than confirmed. During each attempt to move much higher, gold was stopped by the lowest of these lines. The implications are bearish.

There was no breakdown below the 4th line despite intra-day attempts, but the confirmation of a breakdown below 3 lines is more important, in our opinion, than gold’s ability not to decline below the lowest line.

The size of gold’s consolidation has neutral implications – the consolidation is big enough to be a flag pattern within a decline, but at the same time we have to keep in mind that the previous bottoms took similarly long to be completed.

Overall the above chart has rather neutral implications.

Silver’s long-term chart has the same implications as the long-term gold chart. At the same time we have 2 weekly reversals, but we also have yet another weekly close below the important support, which is now resistance.

The overall implications for the short term are rather unclear and they are bearish for the medium term.

The short-term chart actually has bearish implications based on Friday’s action (taking into account the action in silver and miners). Silver moved to its 20-day moving average, which marked local tops in the previous months and it’s been performing rather well compared to gold and mining stocks.

Miners have not shown strength in the past several days despite a major daily reversal in late July.

Miners are usually lagging and silver is usually outperforming at local tops. Consequently, the recent price action in both markets has bearish implications.

We can see an additional bearish sign on the above chart in the form of the relatively low volume during a daily upswing. The volume was not extremely low, so the implications are not very bearish, but still, if this was a short-term rally, we should have seen a confirmation from volume, not a moderately bearish sign.

From the long-term point of view, the situation deteriorated.

The reason is that the HUI Index closed the week below the 2003 low. We previously wrote that the invalidation of this breakdown is an important bullish factor, and now we have seen something opposite.

On the bullish side, we see that the fact that miners hasn’t rallied yet is not necessarily bearish, as they didn’t rally immediately after the previous similar bottom as well. The HUI Index is extremely oversold at this time, which continues to make a corrective upswing a likely possibility.

Overall, the situation in mining stocks deteriorated recently.

What didn’t change recently is the overall bearishness in the mainstream media. We can read a lot about how and why gold is a bad investment (after reading in the same places how great of an investment gold was when it was topping in 2011…) and this suggests that we will see a more visible corrective upswing sooner rather than later. Even though we don’t see it directly on the charts, the strength of the above sentiment-based signal is significant and that’s the main reason we are not entirely closing our speculative long positions at this time.

Summing up, from the medium-term perspective nothing changed in the precious metals market recently as the situation was and still is bearish, but from the short-term perspective the situation has deteriorated. We have seen several bearish signs that make the situation less favorable for keeping long positions than was the case only recently. The HUI Index closed the week below the 2013 low, and miners did not show real strength, while silver outperformed reaching its 20-day moving average. That’s what we saw previously when local tops were formed. The precious metals market is still oversold on a short-term basis and the situation still seems bullish for the short term (and we think that taking profits off the table and closing our previous short position when silver moved to $14.33 was a good idea), but it’s not as bullish as it was just a few days ago and not as bullish as it was when we decided to open the speculative long positions.

While – based on the bearishness in the mainstream media – it doesn’t seem that closing the speculative long positions entirely is a good idea, it does seem that only half of the regular size of the position is currently justified from the risk/reward point of view. In other words, it seems that decreasing the size of the current long position in the precious metals sector is a good idea at this time.

We will keep you – our subscribers – updated.

To summarize:

Trading capital (our opinion): Long position (half) 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: $1,130; stop-loss: $1,063, initial target price for the UGLD ETN: $9.24; stop loss for the UGLD ETN $7.69
• Silver: initial target price: $15.20; stop-loss: $14.12, initial target price for the USLV ETN: $14.40; stop loss for USLV ETN $11.51
• Mining stocks (price levels for the GDX ETN): initial target price: $15.87; stop-loss: $12.77, initial target price for the NUGT ETN: $5.17; stop loss for the NUGT ETN $2.70

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: initial target price: $21.78; stop-loss: $17.67
• JNUG: initial target price: $12.01; stop-loss: $6.39

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 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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Thank you.

Sincerely,
Przemyslaw Radomski, CFA
Founder, Editor-in-chief

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